<PAGE>
As filed with the Securities and Exchange Commission on July 18, 2000
Registration No. 333-32934
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
AMENDMENT No. 3
to
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------
LIFEF/X, INC.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C> <C>
Nevada 7370 84-1385529
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
Lucille S. Salhany
153 Needham Street, Building One
Newton, Massachusetts 02464
Tel: (617) 964-4200
Fax: (617) 964-4233
(Name, Address, Telephone Number and Facsimile Number of Agent For Service of
Process)
--------------------
Copies of all communications to:
<TABLE>
<CAPTION>
<S> <C>
DAVID C. FISCHER, ESQ. ANDREW H. SEIDEN, ESQ.
Loeb & Loeb LLP Loeb & Loeb LLP
345 Park Avenue 10100 Santa Monica Boulevard, Suite 2100
New York, New York 10154-0037 Los Angeles, California 90067
Tel: (212) 407-4000 Tel: (310) 282-2000
Fax: (212) 407-4990 Fax: (310) 282-2192
</TABLE>
--------------------
Approximate Date of Proposed Sale to the Public: As soon as possible after the
Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
We amend this Registration Statement on any date or dates as may be necessary to
delay its effective date until we file a further amendment which specifically
states that this Registration Statement will become effective as provided in
Section 8(a) of the Securities Act or until this Registration Statement becomes
effective on a date the Securities and Exchange Commission, acting under Section
8(a), may determine.
<PAGE>
Preliminary Prospectus - Subject to Completion
July __, 2000
11,182,602 Shares
LIFEF/X, INC.
Common Stock
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
<S> <C>
The Offering: Trading Market:
Our common stock is quoted on the OTC Bulletin Board under
11,182,602 shares of our common stock are being offered by the symbol ''LEFX''
selling securityholders.
================================================================================================================================
See "Risk Factors" beginning on page 4.
---------------------------------------------------------------------------------------------------------------------------------
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved the
securities or determined that this prospectus is complete or accurate. Any representation to the contrary is a criminal
offense.
----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The date of this prospectus is July__, 2000
<PAGE>
-------------------
Table of Contents
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary .................................................................................. 1
Risk Factors ........................................................................................ 4
Forward-looking Statements .......................................................................... 5
Market Price for the Common Stock ................................................................... 6
Dividend Policy ..................................................................................... 6
Capitalization ...................................................................................... 7
Management's Discussion and Analysis or Plan of Operation ........................................... 8
Business ............................................................................................ 15
Management .......................................................................................... 20
Security Ownership of Certain Beneficial Owners and Management ...................................... 27
Certain Relationships and Related Transactions ...................................................... 29
Description of Securities ........................................................................... 32
Plan of Distribution ................................................................................ 33
Selling Securityholders ............................................................................. 36
Shares Eligible for Future Sale ..................................................................... 44
Legal Matters ....................................................................................... 44
Experts ............................................................................................. 44
Changes in Registrant's Certifying Accountants ...................................................... 44
Additional Information .............................................................................. 45
Index to Consolidated Financial Statements ......................................................... F-1
</TABLE>
<PAGE>
Prospectus Summary
You should read this entire prospectus and our consolidated financial
statements and related notes carefully. Unless the context requires otherwise,
'we,' 'us', 'our' and similar terms, as well as references to Lifef/x, refer to
Lifef/x, Inc. and Lifef/x, Inc.'s subsidiary, Lifef/x Networks, Inc.
. Our Company
Our Lifef/x technology enables computers to produce highly lifelike computer
representations of speaking human faces and to send and receive them over the
Internet using telephone connections found on virtually all personal computers
currently sold for home use. If we successfully develop our Lifef/x technology,
computer users will be able to create and view realistic images animated to
simulate a human face pronouncing words at the same time the computer produces
sounds that resemble those words in human language. These images, which we call
Standins, can be made from ordinary photographs.
Our products are in research and development. We have not yet released any of
these products, and we have no revenue to date, other than revenue related to
discontinued operations we have sold.
We believe we can provide software to give computer users a means for
distinctive, personalized communications.
Our primary focus is to commercialize the Lifef/x technology for Internet
applications, including:
. electronic commerce
. e-mail
. chatrooms
. distance learning
. bill presentment
. electronic direct mail
. training
. product support
. human resources
. supply chain software, and
. PC gaming.
The Lifef/x technology enables the creation of interactive virtual humans as:
. individual sales help
. guides
1
<PAGE>
. corporate spokespersons
. teachers
. entertainers
. game characters
. personal human characters
. advertising personalities, and
. call center representatives
In addition to our core business, we intend to explore other applications
for our technology, including applications in the entertainment industry.
. Secondary Offering
The securityholders identified on pages 36 through 43 are selling the
11,182,602 shares of common stock offered by this prospectus; we will receive
none of the proceeds of the offering.
. Stock Sale Restrictions
Our current shareholders have agreed to limitations on their right to sell
common stock until June 12, 2001. Over 90% of the outstanding shares of our
common stock are subject to these restrictions.
When this registration statement becomes effective, 10% of the restricted
shares will be released from the agreed restrictions. On each three month
anniversary of the date this registration statement becomes effective, an
additional 10% of the restricted shares will be released. On June 12, 2001, all
of the remaining restricted shares will be released. Once sold in compliance
with these restrictions, shares become freely tradeable without restriction.
Transfer of any shares acquired on exercise of options will be restricted by
substantially identical transfer restrictions, except that shares that an
employee may purchase under vested options are added to shares the employee owns
in determining the 10% of shares released for sale on each three month
anniversary.
. Corporate Information
We were incorporated as Fin Sports U.S.A., Inc. in Nevada on June 18, 1987.
We changed our name to Lifef/x, Inc. after completing a merger with Pacific
Title/Mirage, Inc. on December 14, 1999. Our corporate offices are located at
153 Needham Street, Building One, Newton, Massachusetts 02464. Our telephone
number at that location is (617) 964-4200, and our facsimile number is (617)
964-4233. The URL for our Web site is http://www.lifefx.com.
2
<PAGE>
Summary Financial Information
in thousands, except share and per share data
The following table provides summary financial data for Lifef/x that is
derived from our financial statements. For accounting purposes Pac Title/Mirage
was considered to have acquired Fin Sports' subsidiary, so the financial
statements presented below and elsewhere in this prospectus are those of Pac
Title/Mirage, not Fin Sports. The financial information below should be read in
connection with ''Management's Discussion and Analysis or Plan of Operation''
and the consolidated financial statements and related notes and other financial
information included in other portions of this prospectus.
The weighted average shares do not include any common stock equivalents,
because doing so would be anti-dilutive. See the consolidated financial
statements and related notes elsewhere in this prospectus for the determination
of shares used in computing basic and diluted net loss per share. Information
for 1997 includes only the period from the inception of Pac Title/Mirage on June
1, 1997 through December 31, 1997.
<TABLE>
<CAPTION>
Years Ended December 31, Three Months Ended March 31
----------------------------------- ------------------------------
1997 1998 1999 1999 2000
-------- -------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data: unaudited unaudited
Revenue ................................ $ -- $ -- $ -- $ -- $ --
Loss from continuing operations ........ $ (658) $ (1,444) $ (14,065) $ (373) $ (1,726)
Loss on discontinued operation ......... $ (370) $ (4,061) $ (18,552) $(20,552) $ --
Net loss ............................... $ (1,028) $ (5,505) $ (32,617) $(20,925) $ (1,726)
Net loss per common share on
a basic and diluted basis:
Continuing operations ................ $ (1.88) $ (4.12) $ (11.08) $ (1.07) $ (.09)
Discontinued operation ............... $ (1.06) $ (11.60) $ (14.61) $ (58.70) $ --
-------- -------- ---------- -------- -----------
$ (2.94) $ (15.72) $ (25.69) $ (59.77) $ (.09)
======== ======== ========== ======== ===========
Weighted average......................... 350,107 350,107 1,269,824 350,107 19,000,127
common shares outstanding .............. ======== ======== ========== ======== ===========
As of December 31, As of March 31,
------------------------------------------- ---------------
1997 1998 1999 2000
------ ------- ------- ---------
unaudited
<S> <C> <C> <C> <C>
Balance Sheet Data
Working capital (deficiency) ........... $ 110 $(4,571) $ 6,559 $13,981
Total assets ........................... $7,686 $ 8,144 $21,473 $16,156
Total liabilities ...................... $ 713 $ 6,671 $10,820 $ 1,920
Shareholders' equity ................... $6,972 $ 1,473 $10,653 $14,235
</TABLE>
3
<PAGE>
Risk Factors
You should carefully consider the risks described below before making an
investment in Lifef/x. The risks and uncertainties described below are not the
only ones facing Lifef/x, and there may be additional risks that we do not
presently know of or that we consider immaterial. All of these risks may impair
our business operations. If any of the following risks actually occurs, our
business, financial condition or results of operations could be materially
adversely affected. In such case, the trading price of our common stock could
decline, and you may lose all or part of your investment.
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.
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.
4
<PAGE>
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.
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.
Future sales of our common stock registered for public sale by this registration
statement or issued when employees exercise stock options could cause our stock
price to plummet, adversely affecting our ability to raise funds in new stock
offerings.
Prior to this offering, very few of our shares could be sold on the public
market. After this offering, approximately 2,200,000 shares may be sold on the
public market. If demand to purchase our shares is weak, our stock price could
plummet.
Forward-Looking Statements
Certain statements in this prospectus that are not related to historical
results, including statements regarding our business strategy and objectives and
future financial position, are forward-looking statements within the meaning of
the federal securities laws. Although we believe that the assumptions on which
these forward-looking statements are based are reasonable, we cannot assure that
they will prove to be accurate. Actual results could be substantially different
from those discussed in the forward-looking statements, due to a variety of
factors, including unforeseen changes in regulatory policies, competition from
other similar businesses, market factors and general economic conditions. All
forward-looking statements contained in this prospectus are qualified in their
entirety by this statement.
5
<PAGE>
Market Price for Common Stock
Our common stock was approved for trading on the OTC Bulletin Board under the
symbol ''FNSP'' on August 23, 1999 and commenced trading on December 15, 1999.
Our symbol was changed to ''LEFX'' on December 16, 1999. The high and low sales
prices of the common stock as reported on the OTC Bulletin Board for the time
periods indicated are set forth on the table below. Sales prices do not reflect
any commission or discount.
<TABLE>
<CAPTION>
Price Range
---------------------
High Low
--------- ---------
<S> <C> <C>
Fiscal Year Ended December 31, 1999
December 15, 1999 to December 31, 1999 ................................................ 23 12 7/16
Fiscal Year Ending December 31, 2000
January 1, 2000 to March 31, 2000 ..................................................... 32 13
April 1, 2000 to July 12, 2000 ........................................................ 32 14
</TABLE>
As of July 3, 2000, there were 19,207,401 shares of our common stock
outstanding and approximately 796 shareholders of record.
Dividend Policy
We have not paid any cash or stock dividends on our common stock since our
incorporation and anticipate that, for the foreseeable future, any earnings will
be retained for use in our business.
6
<PAGE>
Capitalization
The following table sets forth Lifef/x's debt and equity capitalization as of
March 31, 2000 on a historical basis and excludes 27,951,312 shares reserved for
issuance upon the exercise of stock warrants and 5,529,375 shares reserved for
issuance upon the exercise of stock options at March 31, 2000. The information
in the table should be read together with ''Management's Discussion and Analysis
or Plan of Operation'' and the consolidated financial statements and notes
included elsewhere in this prospectus.
<TABLE>
<CAPTION>
As of
March 31,
2000
------
unaudited
<S> <C>
Short-term debt ............................................................................. $ --
Long-term debt .............................................................................. $ --
Shareholders' equity:
Common stock, $.001 par value; 100,000,000 shares authorized;
19,010,946 shares issued and outstanding ............................................... $ 19,011
Additional paid-in capital ............................................................... 57,071,258
Deferred compensation related to stock options ........................................... (1,979,279)
Accumulated deficit ...................................................................... (40,875,513)
------------
Total shareholders' equity ............................................................ 14,235,477
------------
Total capitalization ........................................................................ $ 14,235,477
============
</TABLE>
7
<PAGE>
Management's Discussion and Analysis or Plan of Operation
The following discussion should be read along with the ''Summary Financial
Information'' and the consolidated financial statements and the related notes
appearing elsewhere in this prospectus.
Background -- Merger Transaction and Sale of Non-Lifef/x Technology Assets
On December 14, 1999, Fin Sports acquired all of the outstanding capital stock
of Pac Title/Mirage as a result of the merger of a newly-formed subsidiary of
Fin Sports into Pac Title/Mirage, which was the surviving corporation. Fin
Sports was formed in 1987 and was involved in the manufacture and marketing of
sports equipment. From September 1993 until the December 14, 1999 merger, Fin
Sports had no active business operations.
Since the shareholders of Pac Title/Mirage received the majority voting
interest in the combined company, Pac Title/Mirage is the acquiring enterprise
for financial reporting purposes, and the financial statements presented are
those of Pac Title/Mirage, not Fin Sports. Following the merger, Fin Sports'
name was changed to Lifef/x, Inc., and the name of its wholly owned subsidiary
was changed from Pac Title/Mirage to Lifef/x Networks, Inc. Lifef/x Networks,
Inc. is a wholly-owned subsidiary of Lifef/x, Inc.
Pac Title/Mirage was formed in 1997 as the combination of the Lifef/x
technology, contributed by Mirage Technologies LP, and an optical 2D and
restoration business acquired from Pacific Title and Art Studio, a post
production company founded in 1918. From Pac Title/Mirage's inception until the
merger, Pac Title/Mirage operated primarily as a visual effects company
providing services to the U.S. film and television entertainment industry. Its
operations consisted of four activities: Lifef/x technology development; optical
2D effects and film restoration; film scanning and recording services; and
digital effects. Because of the combined effects of unfavorable market
conditions in the film entertainment industry and continued operating losses,
the digital effects division was closed in early 1999. The Lifef/x technology
development is continuing as the primary business of Lifef/x.
Pac Title/Mirage incurred losses from its inception. Safeguard Scientifics,
Inc. , which owned approximately 49% of Pac Title/Mirage, loaned Pac
Title/Mirage significant amounts to support the operations of the business and
to finance capital expenditures. In March 1999, Pac Title/Mirage's Board of
Directors decided to concentrate Pac Title/Mirage's efforts on Lifef/x
development, with primary emphasis on Internet applications, and initiated steps
to dispose of the remaining non-Lifef/x operations, to reduce cash outflows from
the non-Lifef/x operations and reduce or eliminate Pac Title/Mirage's bank debt.
Therefore, the non-Lifef/x operations have been reflected as a discontinued
operation in the accompanying consolidated financial statements for all periods
presented.
Pac Title/Mirage needed additional capital for its technology development. Pac
Title/Mirage believed that investors interested in providing the needed capital
required that Pac Title/Mirage become a publicly traded entity and that none of
the proceeds of their investment would be used for non-Lifef/x operations. Pac
Title/Mirage also desired to gain access to the public equity markets and to
provide liquidity for its existing shareholders at a reasonable cost. See
"Liquidity and Capital Resources" later in this section.
Fin Sports, while publicly traded, had no business operations and no assets.
Fin Sports sought a private operating company as a merger partner to increase
shareholder value.
Pac Title/Mirage and Fin Sports were introduced to each other by MG
Securities, which acted as a broker in the private placement. The transaction
was negotiated at arm's length. After four months of negotiations, Pac
Title/Mirage and Fin Sports agreed that the pre-private placement shareholders
of Fin Sports would receive approximately 9% of post-merger Lifef/x common stock
outstanding immediately after completion of the merger, subject to dilution on
exercise of warrants and options.
In March 2000, Lifef/x sold its remaining non-Lifef/x operations, which
consisted of optical 2D film restoration and scanning and recording services, to
PTM Productions, Inc. PTM Productions, Inc. is owned by the pre-merger
Pac Title/Mirage shareholders. This sale is more fully described under "Certain
Relationships and Related
8
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Transactions" later in this prospectus. The sale included a transfer of all
liabilities associated with the discontinued operation, including all debt. As a
result, Lifef/x is debt-free, other than accounts payable and accrued expenses.
In addition, Safeguard has fully indemnified Lifef/x against all liabilities
associated with the discontinued operation. See note 1 to the accompanying
consolidated financial statements.
Plan of Operation
As of March 31, 2000, we had approximately $15.4 million of cash on hand. Our
operating plan anticipates that we will not generate significant revenue until
2001 and will require additional funding in 2001.
Our leading product is the Lifef/x Standin, a highly lifelike generic or
personalized computer representation of a human face, animated to appear to
pronounce words at the same time the computer produces sounds that resemble
those words in human language. Standins can be made from photographs taken with
digital cameras, from print photographs scanned into a format that can be
displayed on a computer monitor, and from our proprietary motion capture system.
The Lifef/x technology enables the computer to reproduce an image of a face
from a set of computer instructions, as opposed to the computer's reproducing a
scanned photograph of a face. The Lifef/x technique animates computer images
far more realistically than existing computer animation methods available for
consumer PCs.
During the next twelve months, we plan to continue Lifef/x technology
development, particularly to generate release versions of Standins and the
software used to create and run them and to reduce the cost and time required
for Lifef/x to produce Standins. We also will launch our product marketing and
distribution efforts.
These activities will require that we add managerial, technical, marketing and
support personnel and expand and upgrade our computer hardware infrastructure.
We currently have 36 employees. We intend to expand our workforce to
approximately 60 within the next 12 months. We intend to make approximately
$1,000,000 in additional equipment acquisition and other capital expenditures in
the next 12 months. We do not expect to acquire or dispose of any operating
facilities.
Research and Development
We intend to make substantial progress on the following development tasks
within the next 12 months:
. improve the efficiency of our software that plays the Standins, to reduce
computer loading time of Standins transmitted over the Internet;
. complete the software that will allow our Standins to operate in popular e-
mail programs;
. create additional software for consumers and professionals to direct a
Standin's performance;
. improve the software that synchronizes the Standin's lips with what it is
saying; and
. automate production of the Standins.
Marketing and Distribution
We anticipate initially distributing, free of charge, 5,000,000 sets of
Standins and software applications that create and view the Standins'
performances. We intend these initial product sets to be used in e-mail, to
enable the
9
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user to replace or accompany written text with messages spoken by Standins. The
first Standins that we plan to distribute will be generic faces. Subsequently,
we plan to sell to consumer users their own personalized Standins created from
their photographs of themselves and a variety of more sophisticated Standins for
commercial use, described in "Business - Products under Development."
Except for distributing the free product sets, our plan does not provide for
signficant marketing or advertising expenses in 2000 or 2001. We expect those
receiving e-mailed Standins who lack the applications needed to view and hear
them will download the necessary software from our Web site, resulting in rapid
proliferation of our products. The costs of producing the free product sets are
included in our cash expenditure forecasts for 2000 and 2001.
Results of Operations
Quarter Ended March 31, 2000 Compared to Quarter Ended March 31, 1999
Revenue--All of our products are currently in planning or research and
development. There has been no revenue from the Lifef/x technology through
March 31, 2000, and we do not expect any revenue until 2001.
General and administrative expenses--General and administrative expenses were
$1,242,970 for the quarter ended March 31, 2000 compared to $53,919 for the
quarter ended March 31, 1999. This increase in 2000 is primarily due to the
following items:
(1) In December 1999, Lifef/x recorded deferred stock compensation of
$2,928,689 on stock options issued to an officer. This amount is
being amortized over the options' two year vesting period. The
related expense recorded in the quarter ended March 31, 2000 and
included in general and administrative expenses was $292,869. See
note 6 to the consolidated financial statements.
(2) Administrative salaries and wages increased by $209,000 for the
quarter ended March 31, 2000 over the comparable period last year, as
a result of the increased number of employees.
(3) Professional services were $510,000 higher than the same period of
1999 due to significant legal and professional expenses relating to
the registration of Lifef/x common stock and other filings, plus
general corporate matters relating to corporate organization.
Research and development expenses--Research and development expenses were
$677,717 for the quarter ended March 31, 2000 compared to $311,948 for the
quarter ended March 31, 1999, an increase of $365,769. Research and development
consists of costs related to Lifef/x development activities. Salaries and wages,
related personnel benefits and outside consultants expenses for the Lifef/x
development personnel included in research and development were $494,000 for the
quarter ended March 31, 2000, compared to $179,000 for the quarter ended March
31, 1999, an increase of $315,000. This reflects increased full-time research
and development personnel and consulting staff, primarily at Lifef/x's Boston
office, over the comparable period of last year.
Lifef/x has an exclusive, world-wide, perpetual license agreement with
UniServices for the modeling technology that is used in Lifef/x development.
Annual license and development fees paid under the agreement included in
research and development costs were $112,500 for the quarter ended March 31,
2000 and $125,000 for the quarter ended March 31, 1999.
Results for the quarter ended March 31, 2000 include interest income of
$209,353 from proceeds of the private offering that are being held in highly
liquid short-term investments.
10
<PAGE>
Discontinued operation--In March 1999, Pac Title/Mirage's Board of Directors
decided to concentrate on Lifef/x development and initiated steps to dispose of
non-Lifef/x operations. Results from this discontinued operation for the
quarter ended March 31, 1999 consist of the following:
(1) An operating loss on discontinued operation prior to the March
31, 1999 measurement date of $3,002,332 that includes a
$1,400,000 impairment loss on long-lived assets, and
(2) a provision for a $17,549,874 loss on disposal of discontinued
operation for an $11,949,874 reserve for estimated operating
losses on discontinued operation from March 31, 1999 through the
estimated remaining disposal period and an estimated loss on
disposal of $5,600,000.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Revenue--All of our products are currently in planning or research and
development. There has been no revenue from the Lifef/x technology through
December 31, 1999, and we do not expect any revenue until 2001.
General and administrative expenses--General and administrative expenses of
$1,493,590 for the year ended December 31, 1999 represented an increase of
$1,311,648, or 721%, over the prior year. The majority of the increase in 1999
over 1998 is related to the following:
(1) In 1999, Lifef/x recorded deferred stock compensation of
$2,928,689 on stock options issued to an officer. This amount is
being amortized over the options' two year vesting period. The
related expense recorded in 1999 and included in general and
administrative expenses was $656,541. See note 6 to the
consolidated financial statements.
(2) 1999 includes $507,511 of accrued severance expense for a former
executive. In addition, occupancy costs increased approximately
$42,000 in 1999 over 1998, because Pac Title/Mirage occupied its
new facility for only a portion of 1998.
Research and development expenses--Research and development expenses increased
by $551,491, or 46%, to $1,754,253 for the year ended December 31, 1999 from
$1,202,762 for the year ended December 31, 1998. Salaries and related personnel
benefits of the Lifef/x development personnel have historically been the major
portion of our research and development cost. Personnel costs included in
research and development were $1,145,167 for the year ended December 31, 1999
compared to $640,660 for the year ended December 31, 1998, an increase of
$504,507. Lifef/x has an exclusive, world-wide, perpetual license agreement with
UniServices for the modeling technology that is used in Lifef/x development.
Annual license and development fees under the agreement included in research and
development costs were approximately $500,000 for each of the years ended
December 31, 1999 and 1998.
Interest expense--On December 30, 1999, Safeguard exchanged $14,086,837 of Pac
Title/Mirage debt and related accrued interest owed to Safeguard for warrants to
buy 3,997,500 shares of Lifef/x common stock at an exercise price of $.01 per
share. In addition, Safeguard received warrants to purchase 5,862,500 shares of
Lifef/x common stock at an exercise price of $6.00 per share. The $23,389,176
value assigned to the warrants, less the $14,086,837 of debt and accrued
interest converted, or $9,302,339, was recorded as additional paid-in capital
and as interest expense in the year ended December 31, 1999.
In addition, Lifef/x recorded interest expense of $1,462,383 during the year
ended December 31, 1999. This amount represents the fair value of 10,375,000
warrants to purchase Pac Title/Mirage common stock issued to Safeguard in
relation to $9.5 million of loans made by Safeguard to Pac Title/Mirage in 1999.
Discontinued operation--In March 1999, Pac Title/Mirage's Board of Directors
decided to concentrate on Lifef/x development and initiated steps to dispose of
non-Lifef/x operations. Results from this discontinued operation for the year
ended December 31, 1999 consist of the following: (1) An operating loss on
discontinued operation prior
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to the March 31, 1999 measurement date of $3,002,332 that includes a $1,400,000
impairment loss on long-lived assets, and (2) a provision for a $15,549,874 loss
on disposal of discontinued operation for a $7,449,874 reserve for operating
losses on discontinued operation from March 31, 1999 until December 31, 1999 and
a provision for estimated losses for the remaining disposal period of $2,500,000
and estimated loss on disposal of $5,600,000.
Year Ended December 31, 1998 Compared to the Seven Month Period From June 1,
1997 through December 31, 1997
General and administrative expenses--General and administrative expenses
amounted to $181,942 for the year ended December 31, 1998 compared to $18,705
for the seven month period ended December 31, 1997. Expenses in 1998 were
greater due to increased occupancy costs and because the results for 1998
reflect a full year of expenses, while 1997 represents only a partial year for
the start-up of the operations.
Research and development expenses--Research and development expenses amounted
to $1,202,762 for the year ended December 31, 1998 compared to $624,900 for the
period from June 1, 1997 through December 31, 1997. License and development fees
under the license agreement with UniServices included in research and
development costs were $500,000 for the year ended December 31, 1998 and $85,000
for the seven month period ended December 31, 1997. The period ended December
31, 1997 includes only two months of expense for license and development fees,
as the term of the UniServices license and development agreement commenced
November 1, 1997.
Discontinued operation--The loss on discontinued operation for the year ended
December 31, 1998 was $4,060,980. This amount includes a write-off of $1.1
million of goodwill attributable to Pac Title/Mirage's digital division's
activities. The period ended December 31, 1997 reflects a loss on discontinued
operation of $369,658, which relates to the partial period from June 1, 1997 to
December 31, 1997.
Liquidity and Capital Resources
Since inception, we have financed our operations from private sales of
convertible preferred and common stock, loans from shareholders, bank loans and
lease financing.
Net cash used in operating activities was $929,000 for the three months ended
March 31, 2000. This use was primarily due to the $1.7 million net loss for the
period, partially offset by non-cash expense of $293,000 relating to stock
options and a $699,000 increase in accounts payable and accrued liabilities.
Net cash used in operating activities was $11.0 million in 1999, $551,000 in
1998 and $1.1 million in the period ended December 31, 1997. The net cash used
in operating activities in 1999 was primarily due to the net loss for the
period, primarily from the discontinued operation that used $9.1 million of cash
in operating activities compared to $1.9 million used by continuing operations
of Lifef/x. Net cash used in operating activities in 1998 represented a use of
$1.3 million due to the loss on continuing operations partially offset by
$700,000 in net cash provided by operating activities of the discontinued
operation. Net cash used in operating activities in the period ended December
31, 1997 consisted of $500,000 used by continuing operations and $600,000 used
by the discontinued operation.
Net cash used in investing activities was $338,000 for the three months ended
March 31, 2000, $1.2 million in 1999, $2.6 million in 1998 and $16.0 million in
the period ended December 31, 1997. The net cash used in the three months ended
March 31, 2000, and the years 1999 and 1998, represents purchases of plant and
equipment. The net cash used in investing activities in the period ended
December 31, 1997 consisted of $15.5 million for the acquisition of Pacific
Title and Art Studio and $500,000 for purchases of plant and equipment.
Net cash provided by financing activities for the three months ended March 31,
2000 was $8.9 million. This primarily represents the receipt of proceeds of $9.1
million from the sale of stock through the private placement that were held in
escrow at December 31, 1999. Net cash provided by financing activities was
$19.9 million in 1999, $3.2 million in 1998 and $17.1 million in the period
ended December 31, 1997.
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The net cash provided by financing activities in 1999 primarily represented
$12.3 million in loans provided by Safeguard and $7.2 million of net proceeds
received from the private placement. Net cash provided by financing activities
in 1998 primarily consisted of $3.2 million of loans from Safeguard. Net cash
provided by financing activities in the period ended December 31, 1997 primarily
consisted of $8.8 million in bank borrowings, $8 million in proceeds from the
sale of preferred and common stock and $600,000 in loans from Safeguard.
In the December 1999 offering, Lifef/x raised $18 million from a sale to
investors of 6,000,000 units at $3.00 per unit, each unit consisting of: (i) one
share of common stock and (ii) a warrant to purchase .01 share of common stock
at $7.50 per share, exercisable within 18 months after purchase. The private
placement was fully subscribed, and we have received all funds. The first
portion of the private placement closed in December 1999, and the second portion
closed in February 2000.
At December 31, 1999, only a portion of the $18 million was actually received
by us. Of this amount, $9,051,000 of escrow funds and cash from stock
subscriptions had been received by the escrow agent but had not yet been
transferred to us. This amount was carried as restricted cash in the
accompanying consolidated financial statements at December 31, 1999. Subsequent
to year end, these funds in escrow were released to us. Offering costs of the
private placement amounted to $1,395,000, resulting in net proceeds of
$16,605,000 from the offering. These net proceeds, less funds for current
operations, have been, and will continue to be, invested in highly liquid short-
term investments.
The purpose of the private placement was to fund continuing Lifef/x technology
development, product marketing and distribution, acquisition of management and
support resources and construction of the infrastructure to facilitate future
growth. A significant portion of our expenses are allocated to developing the
technology to produce our photographic-quality computer representations of human
faces, which we call Standins, and the enabling software for users to animate
and view the Standins. Also, we will develop improved systems for low cost
image capture and the mass production of Standins. We are and will continue to
be engaged in discussions with suppliers of voice and lip synch technologies, as
well as artificial intelligence. We intend to pursue relationships with channels
that will aid in the sale and implementation of our products, including Web site
builders and integrators of customer relationship management systems.
The proceeds from the private placement should fund development and operations
through the first quarter of 2001. Our plan does not provide for signficant
marketing or advertising expenses in 2000 or 2001 because we will be
distributing free generic Standins and free software to build brand awareness as
discussed in "Plan of Operation" and "Business -- Marketing and Distribution".
The costs of producing the free Standins and the free copies of the software
used to animate and view the Standins are included in our cash expenditure
forecasts for 2000 and 2001.
As of March 31, 2000, we had approximately $15.4 million of cash on hand. Our
operating plan anticipates that we will not generate significant revenue until
2001 and that we will require additional funding in 2001.
Quantitative and Qualitative Disclosure about Market Risks
The SEC's rule related to market risk disclosure requires that we describe and
quantify our potential losses from market risk sensitive instruments
attributable to reasonably possible market changes. Market risk sensitive
instruments include all financial or commodity instruments and other financial
instruments that are sensitive to future changes in interest rates, currency
exchange rates, commodity prices and other market factors. We are not exposed to
market risks from changes in foreign currency exchange rates, commodity prices
or other market factors. We do not hold derivative financial instruments nor do
we hold securities for trading or speculative purposes. At December 31, 1999 we
had $7.2 million of bank debt obligations included in net liabilities of
discontinued operation at variable interest rates. None of this debt is an
ongoing obligation of Lifef/x because all of this debt was assumed by PTM
Productions, Inc., the buyer of our discontinued operation, on March 20, 2000.
Proceeds from the private placement in December 1999 have been invested in
highly liquid short-term investments.
Inflation
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We do not believe that inflation has had any material effect on our business
over the past two years.
Year 2000 Issues
The Year 2000 computer problem refers to the potential for system and
processing failure of date-related data as a result of computer-controlled
systems using two digits rather than four digits to define the applicable year.
For example, computer programs that have time-sensitive software may recognize a
date represented as ''00'' as the year 1900 rather than the Year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations including a temporary inability to process transactions, send
invoices or engage in similar normal business activities. To date, we have not
experienced any Year 2000 issues with any of our internal systems or services,
and we do not expect to experience any.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, ''Accounting for Derivative Instruments
and Hedging Activities', which is effective for fiscal years beginning after
June 15, 2000. It 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 Statement of Financial Accounting Standards No. 133 will have a
material impact on our consolidated financial statements as we currently do not
hold any derivative financial instruments.
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Business
We are a development stage company focused on producing software that enables
personal computers to animate computer representations of speaking human faces
extremely realistically. We intend our products to be used initially on the
Internet, but may expand their uses to include the entertainment industry. Our
software is based, in part, on a modeling technology that is licensed from
UniServices under an exclusive, world-wide, perpetual license agreement.
Our Strategy and Value Proposition
Our initial goal will be to achieve the rapid and widespread distribution of
our software to personalize communication via the Internet. We anticipate
distributing our system initially for use in e-mail, enabling the sender to
replace or accompany written text with messages spoken by generic Standins.
Later, personalized Standins made from a photograph of the user's face will be
able to repeat the user's spoken message in the user's voice.
E-mail is the most widely adopted Internet application. 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. E-mail has increased in volume and improved in
functionality, and these trends are expected to continue. We expect the Lifef/x
technology to provide significant additional value, by permitting individuals to
send e-mails accompanied by Standins intended to represent, or stand in for, the
sender of the e-mail.
As the Web continues to evolve, we expect that many businesses and content
providers will seek to use interactive audio, video, and other multi-media
content to enrich and differentiate their Web sites. We believe that a
substantial opportunity exists to furnish software solutions and content
services to provide compelling, interactive, animated content through
photographic-quality images that can be sent and received over the Internet
using telephone connections found on virtually all personal computers currently
sold for home use. We envision Web sites substituting Lifef/x Standins for
individuals and a multitude of corporate and public representatives. A list of
possible uses appears in "Prospectus Summary -- Our Company."
Growth of the Internet
The Internet has grown rapidly in recent years. This growth has been driven by
the development of the World Wide Web, the proliferation of multimedia PCs and
the emergence of compelling Web-based content and commercial applications. Both
consumers and businesses increasingly rely on the Internet to access and share
information. According to Internet industry analyst International Data
Corporation, 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. International Data
Corporation projects that this user base will grow to 319 million by 2002.
We believe that the growth in the Internet market represents a significant
opportunity for us as a unique provider of products and services that enhance a
Web user's experience.
All references in this prospectus to industry, financial and statistical
information are based on trade articles, industry reports and other sources that
we believe to be reliable but that we have not independently verified.
Lifef/x Technology
The Lifef/x technology was originally developed for accurate modeling of soft
biological tissues that undergo large variable changes in size and shape. The
technology from which the Lifef/x technology is derived was originally developed
in medical research intended to enable surgeons to direct surgery by robots by
instructing the robots over telephone lines. The Lifef/x technology is based on
continuum modeling techniques, which are mathematical tools that represent
properties of solids, such as human or animal tissue, down to the microscopic
level, or to the
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cellular level in the case of biological tissues. Large complex structures are
broken down into smaller components with geometrical shapes described by nodes
and surfaces.
Movement or animation of a human face model is achieved by applying a set of
mathematical equations that mimic the changes associated with biological muscle
movement. The mathematical equations can replicate such properties as skin
elasticity, electrical impedance, thermal capacity, conductivity and optical
properties. By beginning with the exact representation of biological tissues and
then computing the interaction between structures, such as force generated by
muscles, skin elasticity and bone geometry, our technology can animate a
computer-representation of a human face to closely resemble a video of a
speaking human face.
In our Internet consumer products, Standins will speak the words typed or
spoken by the sender of the message. While the images produced by our Internet
products may not be as sharp as the film entertainment prototypes we previously
produced, the images can be sent very quickly over the Internet using telephone
connections found on virtually all personal computers presently sold for home
use.
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. Lifef/x is developing two principal types of Standins:
Consumer and Professional.
Consumer Standins. Our lead consumer product is the Standin, a realistic
generic or personalized computer representation of a human face that can be
animated to appear to pronounce words at the same time the computer produces
sounds that resemble those words in human language. Standins can be made from
images taken by digital cameras or print photographs scanned into a format that
can be displayed on a computer monitor. The consumer Standin will be animated
and viewed using the Lifef/x Genesis Player and Lifef/x Director Software.
Professional Standins. Professional Standins can mimic the nuances of an
individual's facial movements and expressions captured by our proprietary motion
capture system. Like the consumer Standin, the Professional Standin will be
animated and viewed using the Lifef/x Genesis Player and Lifef/x Director
Software.
Lifef/x Genesis Player. The Lifef/x Genesis Player is the software device
used to view performances of generic or personalized Standins and Professional
Standins on computers.
Lifef/x Director. Our Lifef/x Director software will enable the user to add
four basic emotions - happy, sad, angry and surprised - and simple motions to
the generic or personalized Standins.
Lifef/x Creator Software. Our Lifef/x Creator software will be an advanced
tool for the more advanced consumer user and lower level professional user to
program up to 25 emotions into the Standins. Lifef/x Creator will have a user-
friendly graphical interface with variable intensity controls for emotions and
movements.
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 to program a
practically unlimited range of emotional responses.
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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Test Results and Continuing Development
We developed the Lifef/x technology used in our Standins in our work on motion
picture industry projects over the past three years. The initial Standins we
created with our proprietary high-resolution motion capture systems were too
complex for online and real-time applications.
Recent technology improvements include:
. enhancing the performance, reliability and accuracy of our high-
resolution motion capture systems;
. successfully testing our ability to create a Standin from a single
photograph; and
. developing and testing a prototype Lifef/x Player, demonstrating that the
player can display faces on a PC and can be integrated into Web pages and
that the Lifef/x Standins can be made to speak correctly from text
converted to a synthetic voice using a text-to-speech program.
We are sufficiently close to completing the tasks described in "Plan of
Operation" that we expect shortly to release our first version of the Lifef/x
Player V1.0 to our quality assurance team for testing. We plan to ship the
Lifef/x Player V1.0 by the end of the year.
Future Enhancements
We plan to develop a full model of the human body, including animation of
muscle groups that are responsible for expressions or motion. For example, a
future Standin may be able to shrug its shoulders. Having already developed the
generic human face now used as the basis for Lifef/x Standins, we plan to add
generic necks, torsos, arms and legs.
Marketing and Distribution
We plan to market to the user in a number of ways:
. Initial free distribution of generic Standins, the Lifef/x Genesis Player,
and the Lifef/x Director;
. Co-marketing with complementary software developers, such as text-to-speech
software; and
. Referrals to our Web site through traditional advertising and links to
software distribution Web sites.
Late in 2000, we intend to distribute, free of charge, 5,000,000 sets of
software, each of which will include a generic Standin, the Lifef/x Genesis
Player software and the Lifef/x Director software. We believe the initial users
of these sets will e-mail Standins to others who, if they lack the software
necessary to view and hear the Standins, will download it from our Web site. We
expect this program to disseminate the software widely and build an installed
base of consumer users that will be attractive to potential corporate users.
All of our products have been designed so that users will be unable to modify
the software or use it for other purposes. Since the free software cannot be
copied from one computer to another and will only be available at Lifef/x-
approved Web sites, we will be able to terminate the free software program at
our discretion.
Revenue Model
We expect to receive revenue both from unit sales and monthly or other
recurring fees. As noted, we will distribute 5,000,000 sets of software
containing a generic Standin with the Lifef/x Genesis Player and Director
software for free. After this initial free distribution, we will sell
personalized Standins and additional generic Standins at competitive prices.
We intend to continue the free distribution of Lifef/x Genesis Players and
Lifef/x Director software indefinitely.
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We believe that consumer users will be repeat buyers because they will want
multiple Standins for different occasions, to express different moods, or as
their appearances change with age, style, etc.
The bulk of our revenue will come from commercial Web-sites. We will charge
monthly fees to commercial sites that use Standins on their Web pages. We will
be able to control unauthorized use of Standins on Web sites, because a Standin
cannot operate on a Web-site unless enabled by Lifef/x.
Our Competition
The market for computer-animated characters is new, and we expect it to be
competitive. The principal competitive products in the computer-animated
realistic human face market include Haptek, Avatarme, Graphco and Digimask.
Microsoft V-Chat 2.0, Microsoft Agent, 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 and Radical Mail are creating computer-
animated characters that are not necessarily patterned on photographic quality
human faces.
In addition, other competitors may be developing computer-animated realistic
human face characters or other computer-animated characters of which we are not
aware.
Computer-generated characters that are being, or may be, offered by the
competition have varying levels of detail and complexity. Some competitors'
characters are non-human characters and some are cartoon-like. Some competitors
are using animation techniques that require the transmission of a large amount
of data, which results in very lengthy software downloads and requires fast
computers and large data storage capacity.
Because of the automation that is inherent in our facial animation process,
our technology produces a more realistic image having more natural movements
than images produced by computer graphics utilized by our competitors, which are
based on artistic modeling techniques rather than soft biological tissue
modeling techniques.
Our Technology Differentiator
Parts of the Lifef/x technology use a finite element modeling system licensed
from UniServices. Finite element modeling consists of creating a representation
of an object that may be complex in shape, may be made of a number of sub-
components, and may vary over different regions. The representation is then
divided into numerous small pieces - like a 3D puzzle - having simpler shapes
and properties that can be handled mathematically using relatively limited
computer resources. The behavior, motion, deformation to stress and similar
characteristics of the complex object can then be determined from the individual
responses of the assembled pieces to replicate the behavior of the whole object.
Our Lifef/x technology has enabled us to develop proprietary techniques for
generating accurate reproduction of expressions and tissue wrinkling. Unique
because of the richness of the data it uses, our technology allows us to create
mathematical models of human facial changes and expressions that are
automatically animated.
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 expensive
to enforce. We do not own all of the Lifef/x technology. We have an exclusive,
worldwide, perpetual license from UniServices to use its continuum modeling
technology in applications for the entertainment industry and, so long as we
continue to pay the development fees described below,
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in all other communication applications, excluding professional medical,
engineering and scientific applications. The license requires license fees and
development payments to be made to the licensor.
Total license fees under the UniServices license agreement equal $1,000,000.
Remaining unpaid license fees due UniServices are approximately $100,000, which
are scheduled to be paid in full by August 2000. Development fees for the first
5 years, from November 1, 1997 through October 31, 2002, equal $150,000 per
year, payable monthly in advance. The development fee for development services
after October 31, 2002 and for continuation of exclusivity for all uses outside
the entertainment industry, other than for professional medical, engineering and
scientific applications, will be $200,000 per year, plus inflation adjustments
after 2002 of the lesser of the increase in the Consumer Price Index as compared
to October 31, 2002 or 12% per year. We have the right at our option to cancel
the license at any time after November 2002.
We have filed three patent applications in the United States and other
countries specifically covering image capturing and creation. Two patents have
been issued (''Rapid High Resolution Image Capture System'', U.S. Patent #
5,999,209 and "Apparatus and Method for Representation of Expression In a Tissue
Like System", U.S. Patent # 6,064,390) and one application is pending. We plan
to apply for other patents in the future. UniServices has not patented the
source code licensed to Lifef/x.
Our Employees
Our executive officers are based in the Boston, Massachusetts metropolitan
area. We currently have a team of 26 employees in the Boston, Massachusetts area
and ten employees in Los Angeles, California. We intend to expand the Boston
workforce significantly in 2000 and have leased expanded facilities in the
Boston, Massachusetts area.
Properties
We have leased approximately 2,000 square feet of research and development
space in the greater Los Angeles area under a two year lease with renewal
options. In addition, we have leased approximately 10,000 square feet of
administrative and research and development space in the greater Boston area
under a five year lease at a monthly rent of approximately $25,000. We believe
these facilities are adequate for our intended purposes.
Legal Proceedings
We are not involved in any claims or legal proceedings that may have a
significant effect on our financial position, nor have we been involved in any
legal proceedings that have had or may have a significant effect on our
financial position.
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Management
Directors, Executive Officers and Key Employees
The following table sets forth the names and ages of all of our directors,
executive officers and key employees as of July 12, 2000. All directors will
serve until the next annual meeting of shareholders or until their earlier
death, retirement, resignation or removal. Executive officers serve at the
discretion of the board of directors, and are appointed to serve until the first
board of directors meeting following the annual meeting of shareholders.
<TABLE>
<CAPTION>
Name Age Position
-------------------------- --- --------------------------------------------
<S> <C> <C>
Lucille S. Salhany............... 53 Chief Executive Officer, Co-President and Director
Michael Rosenblatt............... 49 Chairman and Co-President
Richard A. Guttendorf, Jr. ...... 58 Chief Financial Officer, Secretary and Director
Ian Hunter....................... 47 Director
Robert Verratti.................. 56 Director
Stephen J. Andriole.............. 50 Director
Nancy Hawthorne.................. 49 Director
Dr. Leslie G. Selbovitz.......... 52 Director
Serge Lafontaine................. 50 Lifef/x Networks, Inc.'s Chief Technology Officer
Paul Charette.................... 37 Lifef/x Networks, Inc.'s Vice President and
Co-Director of Research and Development
Mark Sagar....................... 34 Lifef/x Networks, Inc.'s Vice President and
Co-Director of Research and Development
Keith Waters..................... 38 Lifef/x Networks, Inc.'s Senior Technology
Officer
</TABLE>
Background and Experience
Lucille S. Salhany. Ms. Salhany became Chief Executive Officer, Co-President
and a director of Lifef/x on December 14, 1999. Ms. Salhany was President of JH
Media, Ltd. an advisory company with offices in Boston and Los Angeles from 1997
until December 1999. From 1994 through 1997, Ms. Salhany was President and CEO
of the United Paramount Network. Previously Ms. Salhany was Chairman of the FOX
Broadcasting Company, Chairman of Twentieth Television and a member of the FOX,
Inc. Board of Directors. Ms. Salhany guided the networks' expansion from four to
seven nights of programming and was instrumental in FOX's acquisition of the
broadcast rights to the NFL. Prior to that Ms. Salhany was President, Paramount
Domestic Television. Ms. Salhany serves on the Boards of Directors of Compaq
Computer Corporation, B.R.A. Corporation of Boston, Emerson College and iMedium,
Inc.
Michael Rosenblatt. Mr. Rosenblatt became Co-President and Chairman of
Lifef/x on December 14, 1999. Mr. Rosenblatt served as Vice Chairman and
director of Pac Title/Mirage from October 1998 until the merger and served as
Co-President and director of Pac Title/Mirage from 1997 to October 1998. Since
1995 he has been President of Mirage Technologies, Inc., the general partner of
Mirage Technologies L.P. which, together with Safeguard and Robert Verratti,
formed Pac Title/Mirage in October 1997. In 1974 Mr. Rosenblatt also founded
Atlantic Entertainment Group, Inc., which became one of the largest privately
held motion picture production and distribution companies in the United States.
Mr. Rosenblatt is also a member of the Executive Branch of the Motion Picture
Academy of Arts and Science.
Richard A. Guttendorf, Jr. Mr. Guttendorf became Chief Financial Officer,
Secretary and a director of Lifef/x on December 14, 1999. He serves on our
audit committee. 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. , a leading manufacturer of
short haul, laser optic wireless communications equipment. Prior to Laser
Communications, Inc., he was Chief Financial Officer of
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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 on December 14, 1999.
He serves as chairperson of our compensation committee. Dr. Hunter has been a
consultant to Lifef/x since January 4, 2000. Dr. Hunter was Director of Research
and Development of Pac Title/Mirage from October 1997 until the merger. Dr.
Hunter has been a Professor of Mechanical Engineering and Bio-Engineering at the
Massachusetts Institute of Technology since 1994.
Robert Verratti. Mr. Verratti became a director of Lifef/x on December 14,
1999. He serves on our compensation committee. Mr. Verratti served as Chief
Executive Officer and Chairman of the Board of Pac Title/Mirage from 1997 to
October 1998. Since 1980, Mr. Verratti has been the President of Charlestown
Investments, Ltd., a company specializing in investments in companies in
turnaround or undervalued situations. Mr. Verratti is also a venture partner and
consultant to the Chairman of Safeguard and TL Ventures. Mr. Verratti serves on
the boards of directors of Webvision, Inc., and Lockstream.com.
Dr. Stephen J. Andriole. Dr. Andriole became a director of Lifef/x on March
15, 2000. Since October 1997, Dr. Andriole has been Senior Vice President and
Chief Technology Officer of Safeguard Scientifics, Inc., where he is responsible
for the overall strategic vision of Safeguard through the identification of
technology and market trends. From March 1995 to October 1997, Dr. Andriole was
Chief Technology Officer and Senior Vice President for Technology Strategy at
CIGNA Corporation. Dr. Andriole serves on the boards of directors of US Data;
aligne, Inc.; iMedium, Inc.; Integrated Visions, Inc.; the Ben Franklin
Technology Center of Southeastern Pennsylvania; Broadreach Consulting, Inc.; and
STORM Systems.
Nancy Hawthorne. Ms. Hawthorne became a director of Lifef/x on May 24, 2000.
Ms. Hawthorne has been a private investor since 1997. She serves as chairperson
of our audit committee. Until 1996, Ms. Hawthorne was Chief Financial Officer
of Continental Cablevision, Inc., a cable television system operator. From 1996
to 1997, Ms. Hawthorne was Senior Vice President of MediaOne, the surviving
company of the merger of Continental Cablevision, Inc. and US West. Ms.
Hawthorne is Chairperson of the board of directors of World Clinic, Inc. and
serves on the boards of directors of Avid Technology, Peroni Corporation, New
England Zenith Fund and CGU.
Dr. Leslie G. Selbovitz. Dr. Selbovitz became a director of Lifef/x on July
6, 2000. He serves on our audit commitee. Since August 1998, Dr. Selbovitz has
been Senior Vice President for Medical Affairs and Chief Medical Officer at
Newton-Wellesley Hospital. He also is Associate Clinical Professor of Medicine
at Tufts University School of Medicine, and serves on the Executive Committee of
Partners HealthCare System, Inc. From 1990 to 1998, Dr. Selbovitz was Medical
Director for Quality, Utilization and Risk Management at Baystate Medical
Center. Dr. Selbovitz received his M.D. degree from the University of Rochester
in 1975, and his Bachelor of Arts degree from Cornell University in 1971.
Dr. Serge Lafontaine. Dr. Lafontaine became the Chief Technology Officer of
Lifef/x on December 14, 1999. From October 1997 until the merger, he was Co-
Director of Research of Pac Title/Mirage and Assistant Director of Research of
Mirage. Dr. Lafontaine has been a post-doctoral fellow in mechanical engineering
at the Massachusetts Institute of Technology since 1999, and was previously a
post-doctoral associate in mechanical engineering at the Massachusetts Institute
of Technology 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 the Massachusetts Institute of Technology.
Dr. Paul Charette. Dr. Charette became the Vice President and Co-Director of
Research and Development of Lifef/x Networks, Inc. on December 14, 1999. From
October 1997 until the merger, he was Co-Director of Research and Development of
Pac Title/Mirage. From 1994 to 1997, Dr. Charette held post-doctoral fellowships
at the Massachusetts Institute of Technology, in the department of mechanical
engineering and at the University of Auckland, New Zealand, in the department of
engineering science. Dr. Charette received his doctorate degree from
21
<PAGE>
McGill University in 1994, where he worked under Dr. Ian Hunter, and received
his Bachelors degree in electrical engineering from McGill University in 1986.
Dr. Mark Sagar. Dr. Sagar became Vice President and Co-Director of Research
and Development of Lifef/x Networks, Inc. on December 14, 1999. From October
1997 until the merger, he was Co-Director of Research and Development of Pac
Title/Mirage. Dr. Sagar has been a post-doctoral fellow at Dr. Ian Hunter's
laboratory at the Massachusetts Institute of Technology since 1996. From 1992
through 1996, Dr. Sagar was a member of Professor Peter Hunter's bio-engineering
group at the University of Auckland, where he developed an anatomically accurate
computer model of the human eye combining visual and mechanical realism for use
in robotic eye surgery and developed a new methodology and software for the
creation of complex solid based virtual anatomy for bio-engineering virtual
environments. These methods were used to create a virtual model of the heart.
Dr. Sagar received a doctorate degree from the University of Auckland in 1996
and a bachelor of science degree in Physics and Mathematics from the University
of Auckland in 1987.
Dr. Keith Waters. Dr. Waters has been Senior Technical Officer of Lifef/x
Networks, Inc. since December 14, 1999. From 1998 to December 1999, Dr. Waters
was a member of the technical staff at Compaq Computer Corporation's Cambridge
Research Laboratory, where he developed FaceWorks, a Windows-based multimedia
authoring tool for synthetic faces, in 1997. Dr. Waters was a member of the
technical staff at Digital Equipment Corporation from 1991 to 1998, where he
developed DECface, a real-time synthetic face that used a software text-to-
speech engine. Dr. Waters received a Ph.D. in computer graphics from Middlesex
University in London, England. Dr. Waters is on the editorial boards of the
Graphics and Image Processing Journal and the Computer Graphics and
Visualization Journal.
22
<PAGE>
Executive Compensation
The following information is furnished for the named persons for the years
ended December 31, 1999 and December 31, 1998, and is based upon the Executive
Officers of Lifef/x and its operating predecessor, Pac Title/Mirage.
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term Compensation Awards
-------------------------------------------
Restricted Securities
Stock Underlying All Other
Annual Compensation Awards Options/SAR (#) Compensation
------------------------ ---------- --------------- ------------
Name and Principal Position Year Salary ($) Bonus ($)
-------------------------------- ---- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Lucille S. Salhany ............... 1999 30,769(1) -- -- 1,952,459 --
Chief Executive Officer, 1998 -- -- -- -- --
Co-President and Director
Michael Rosenblatt ............... 1999 73,769(2) -- -- 1,911,511 --
Chairman of the Board, 1998 51,000 -- -- -- --
Co-President and Director
Richard A. Guttendorf, Jr. ....... 1999 -- (3) -- -- -- --
Chief Financial Officer, 1998 -- (3) -- -- -- --
Secretary and Director
Robert Verratti ...................
Chairman and CEO of 1998 150,631 -- -- -- --
PacTitle/Mirage
</TABLE>
(1) Covers the period for December 1999, the month of the merger.
(2) Represents $50,000 paid through Pac Title/Mirage and $23,769 for December
1999, the month of the merger.
(3) Mr. Guttendorf is a Vice President of Safeguard Scientifics, Inc. and is
compensated by that entity for his services, including services provided to
Lifef/x.
1999 Option Grants: 1999 Long-Term Incentive Plan
Pac Title/Mirage had a stock option plan which provided for the grant to Pac
Title/Mirage employees of incentive stock options and for the grant of
nonstatutory stock options, stock awards or restricted stock to Pac Title/Mirage
employees, directors and consultants. On December 14, 1999, this stock option
plan was terminated and Lifef/x adopted the Lifef/x, Inc. 1999 Long-Term
Incentive Plan with terms substantially similar to those of the Pac Title/Mirage
option plan. The Lifef/x 1999 option plan reserves up to 10,539,944 shares of
Lifef/x common stock for issuance under the Lifef/x plan. 5,010,569 of the
shares reserved for issuance under the Lifef/x Plan require shareholder approval
of the modifications to the Lifef/x plan approved by the board on March 14, 2000
and July 6, 2000. Following the adoption of the Lifef/x plan, Lifef/x assumed
the obligations of outstanding options granted to Pac Title/Mirage employees
under the Pac Title/Mirage option plan. Options to purchase 5,773,398 shares
have been granted under the Lifef/x 1999 option plan. The grant of options for
244,023 shares is subject to shareholder approval of the Lifef/x 1999 option
plan modifications.
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<PAGE>
These outstanding option obligations included an option grant to Lucille
Salhany, the Chief Executive Officer, Co-President and a director of Lifef/x,
for 1,952,459 shares of common stock, after adjusting for the conversion from
Pac Title/Mirage shares to Lifef/x common stock shares. The options are
exercisable at $1.50 per share, as adjusted. 20% of the options vested at the
date of grant and the balance of the options vest on a quarterly basis over two
years.
For financial reporting purposes, Lifef/x has recorded deferred stock
compensation of $2,928,689 during the year ended December 31, 1999, representing
the difference between the exercise price, $1.50, and the fair value of
Lifef/x's common stock on the grant date of $3.00. This amount is being
amortized by a charge to operations over the two year vesting period, which
resulted in amortization expense of $656,541 for the year ended December 31,
1999 and $292,869 for the three months ended March 31, 2000. In addition,
Lifef/x recognized $25,950 of compensation expense for options granted to a non-
employee, representing the fair value of the options on the grant date.
In addition, as part of the merger, Lifef/x granted options to various
employees, which vest over time. Under the Lifef/x 1999 option plan, the strike
price for nonstatutory stock option grants must be at least 85% of fair market
value on the grant date and the strike price for incentive stock options must be
the fair market value on the grant date. Outstanding options under the Lifef/x
1999 option plan vest over periods established by the Compensation Committee and
expire on or before the tenth anniversary of the grant date, but terminate early
under some circumstances as provided in the Lifef/x 1999 option plan.
The following table presents information concerning individual grants of stock
options made during 1999 to each of the executive officers and directors of
Lifef/x.
Option/SAR Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Number of Percent of Market
Securities Total Options/ Value on
Underlying SARs Granted Exercise Date of
Options/SARs To Employees Price Grant Expiration
Granted (#) in Fiscal Year ($/Share) ($/Share) Date
------------- --------------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Lucille S. Salhany ............... 1,952,459 40.8% $1.50 $3.00 12/09/2009
Michael Rosenblatt ............... 1,911,511 39.9% $3.00 $3.00 12/14/2009
Richard A. Guttendorf, Jr. ........ -- -- -- -- --
</TABLE>
In 1998 Mr. Verratti was granted options to acquire 174,999 shares at $.91 per
share. This per share price is adjusted for the conversion of Pac Title/Mirage
shares to Lifef/x shares in the December 14, 1999 merger. No options were
exercised by officers in 1998, 1999 or 2000.
24
<PAGE>
Aggregated Option/SAR Exercises in Last Fiscal Year
and FY-End Option/SAR Values
<TABLE>
<CAPTION>
Number of Securities
Shares Underlying Unexercised Value of Unexercised
Acquired on Value Options/SARs at In-the-Money
Exercise (#) Realized December 31, 1999 (#) Options/SARs at
Name Exercisable Unexercisable Exercisable Unexercisable December 31, 1999 (#)(1)
-------------------------------- ------------ ------------- ----------- ------------- ------------------------
<S> <C> <C> <C> <C> <C> <C>
Lucille S. Salhany . -- -- 437,694 1,514,765 $7,878,492 $27,265,770
Michael Rosenblatt . -- -- 234,295 1,677,216 $3,865,868 $27,674,064
Richard A. Guttendorf, Jr. . -- -- -- -- -- --
</TABLE>
---------------------------
(1) Market value of underlying securities at December 31, 1999 ($19.50 per
share), less the exercise price. The values in the last two columns have not
been, and may never be, realized by the officers. Actual gains, if any, on
option exercises will depend on the value of Lifef/x's common stock on the
date of exercise.
Employment Agreements
Summary of Lucille Salhany's Employment Agreement
Ms. Salhany serves as our Chief Executive Officer and Co-President under an
employment agreement with a term of two years which commenced on December 1,
1999. Under the terms of her employment, Ms. Salhany's annual base compensation
is $400,000. She is entitled to annual consideration for a bonus based on her
personal performance and the performance of Lifef/x. Ms. Salhany has the option
to purchase 1,952,459 shares of Lifef/x common stock under Lifef/x's 1999 option
plan. Ms. Salhany's right to purchase twenty percent of these shares vested on
grant and her right to purchase the balance will vest in equal quarterly
installments over a two year period until fully vested. If Ms. Salhany's
employment terminates due to her death, permanent disability or for other good
cause, as further described in the agreement, she would receive accrued but
unpaid base salary and vacation. If Ms. Salhany's employment is terminated by
Lifef/x for any other reason she would receive as severance compensation her
full base salary for the unexpired period of the term of her employment, in
addition to accrued but unpaid salary and vacation.
Summary of Michael Rosenblatt's Employment Agreement
Mr. Rosenblatt serves as our Chairman of the Board of Directors and as Co-
President under an employment agreement with a term of two years which commenced
on December 1, 1999. Under the terms of his employment, Mr.Rosenblatt's annual
base compensation is $335,000. He is entitled to annual consideration for a
bonus based on his personal performance and the performance of Lifef/x. Mr.
Rosenblatt has the option to purchase 1,952,459 shares of Lifef/x common stock
under Lifef/x's 1999 option plan. Mr. Rosenblatt's right to purchase twenty
percent of these shares vested on grant and his right to purchase the balance
will vest in equal quarterly installments over a two year period until fully
vested. If Mr. Rosenblatt's employment terminates due to his death, permanent
disability or for other good cause, as further described in the agreement, he
would receive accrued but unpaid base salary and vacation. If Mr. Rosenblatt's
employment is terminated by Lifef/x for any other reason, he would receive as
severance compensation his full base salary for the unexpired period of the term
of his employment, in addition to any accrued but unpaid salary and vacation.
Summary of Serge Lafontaine's Employment Agreement
Dr. Lafontaine serves as our Chief Technology Officer under an employment
agreement with a term of two years which commenced on December 1, 1999. Under
the terms of his employment, Dr. Lafontaine's annual base compensation is
$250,000. He is entitled to annual consideration for a bonus based on his
personal performance and the performance of Lifef/x. Dr. Lafontaine has the
option to purchase 400,491 shares of Lifef/x common stock under
25
<PAGE>
Lifef/x's 1999 option plan. Dr. Lafontaine's right to purchase twenty percent of
these shares vested on grant and his right to purchase the balance will vest in
equal quarterly installments over a two year period until fully vested. If Dr.
Lafontaine's employment terminates due to his death, permanent disability for
other good cause, as further described in the agreement, he would receive
receive accrued but unpaid base salary and vacation. If Dr. Lafontaine's
employment is terminated by Lifef/x for any other reason, he would receive as
severance compensation his full base salary for the unexpired period of the term
of his employment, in addition to any accrued but unpaid salary and vacation.
Director Compensation
Each member of the board of directors who is not an employee of Lifef/x or
Safeguard will receive: a one-time appointment grant of an option to purchase
25,000 shares of common stock, which will vest annually over four years; an
annual grant of an option to purchase 4,000 shares of common stock, which will
vest annually over two years; and an annual fee of $8,000. In addition, the
chairmen of our Compensation Committee and Audit Committee will receive an
additional annual fee of $1,000. As of July 12, 2000, no cash compensation had
been paid under this plan. An option to purchase 25,000 shares of our common
stock at an exercise price of $17.95 per share was granted pursuant to this plan
to Nancy Hawthorne on May 24, 2000. An option to purchase 25,000 shares of our
common stock at an exercise price of $17.04 per share was granted pursuant to
this plan to Leslie G. Selbovitz on July 6, 2000.
Limitation on Liability and Indemnification Matters
Our Articles of Incorporation limit the liability of directors to the maximum
extent permitted by Nevada law. In addition, our bylaws require us to indemnify
our directors and officers, and allow us to indemnify our other employees and
agents to the fullest extent permitted by law. At present, there is no pending
litigation or proceeding involving any director, officer, employee or agent
where indemnification will be required or permitted. We are not aware of any
threatened litigation or proceeding that might result in a claim for
indemnification. If Lifef/x permits indemnification for liabilities arising
under the Securities Act to directors, officers or persons controlling Lifef/x
under these provisions, we have been informed that, in the opinion of the
Securities and Exchange Commission, this indemnification is against public
policy as expressed in the Securities Act and is unenforceable.
26
<PAGE>
Security Ownership of Certain Beneficial Owners and Management
The following table lists the beneficial ownership of our common stock by each
of our directors, each of our executive officers and all of our executive
officers and directors as a group as of July 12, 2000 and their percentages of
our total common stock. We are not aware of any other beneficial owner of more
than 5% of the outstanding shares of common stock.
The term beneficial ownership as used in this section, consistent with Rule
13d-3 under the Securities Exchange Act of 1934, is defined as the sole or
shared voting power over or sole or shared investment power over the security.
Each person has sole voting and investment power with respect to his or her
shares of common stock, except as otherwise indicated. Beneficial ownership
consists of a direct interest in the shares of common stock, except as otherwise
indicated. The address of those individuals for which an address is not
otherwise indicated is: 153 Needham Street, Building One, Newton, Massachusetts
02464.
<TABLE>
<CAPTION>
Beneficial Ownership
--------------------------------------------
Number of Percentage
Shares of Total(1)
--------------------- --------------------
<S> <C> <C>
Directors and Officers
Lucille S. Salhany ......................................................... 976,230(2) 4.8%
Michael Rosenblatt ......................................................... 3,156,783(3) 15.8%
Richard A. Guttendorf, Jr. ................................................ 10,000(4) 0.1%
Dr. Ian Hunter ............................................................. 1,774,102 9.2%
Robert Verratti ............................................................ 524,997(5) 2.7%
Dr. Stephen J. Andriole .................................................... 30,000 0.2%
Dr. Leslie G. Selbovitz...................................................... 2,320(6) 0%
Nancy Hawthorne ............................................................ -0- 0%
All Directors and Executive Officers (8 persons) ........................... 6,474,432(7) 31.0%
5% or More Beneficial Ownership
Safeguard Scientifics, Inc. ............................................... 2,364,113(8) 12.3%
435 Devon Park Drive
Wayne, PA 19087
Kingdon Capital Management, LLC ............................................ 1,010,000(9) 5.3%
152 West 57th Street
New York, NY 10019
Duane S. Jenson 1,139,335(10) 5.9%
11787 E. Ft. Union Blvd., #106
Salt Lake City, UT 84121
Serge Lafontaine 1,774,102 9.2%
153 Needham Street, Building One
Newton, MA 02464
</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.
27
<PAGE>
(2) Includes 776,889 shares that Mr. Rosenblatt has the right to acquire within
60 days upon exercise of stock options; 43,750 shares owned by Mirage
Technologies, Inc., a corporation owned by Mr. Rosenblatt; 571,872 shares
owned by Mirage Technologies, LP, a partnership in which Mirage
Technologies, Inc. is the sole general partner; and 33,000 shares held of
record by family trusts. 546,872 of the shares indirectly beneficially
owned by Mr. Rosenblatt are pledged to Safeguard Scientifics, Inc. as
collateral for a loan from Safeguard to Mirage Technologies LP.
(3) Includes 976,230 shares that Ms. Salhany has the right to acquire within 60
days upon exercise of stock options.
(4) Represents shares held by Mr. Guttendorf's wife.
(5) Includes 174,999 shares that Mr. Verratti has the right to acquire within
60 days upon exercise of stock options.
(6) Includes 2,020 shares held jointly by Dr. Selbovitz and his wife, and 300
shares held solely by Dr. Selbovitz's wife.
(7) Includes 1,928,118 shares that all directors and executive officers as a
group have the right to acquire within 60 days.
(8) Subsidiaries of Safeguard Scientifics, Inc. own 2,360,780 Shares of
Lifef/x, and have the right to acquire 3333 shares within 60 days through
the exercise of warrants.
(9) Kingdon Capital Management, LLC ("KCM") manages four entities that own
Lifef/x shares -- Kingdon Associates, Kingdon Family Partnership LP,
Kingdon Partners and M. Kingdon Offshore NV - which together are the record
owners of 1,000,000 shares and have the right to acquire 10,000 shares
within 60 days through exercise of warrants. According to its Schedule 13G
dated May 17, 2000, filed with the SEC, KCM has sole voting and investment
power respecting the 1,000,000 shares beneficially owned by it. KCM has
declined Lifef/x's request for further information regarding beneficial
ownership of these shares.
(10) Includes 567 shares that Mr. Jenson has the right to acquire upon exercise
of warrants.
28
<PAGE>
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
applications for the entertainment industry and a perpetual license to use that
technology for all other communication applications with the exception of
professional medical, engineering and scientific applications. This license for
other uses is exclusive through October 31, 2002 and that exclusivity will be
extended indefinitely as long as Lifef/x continues to pay the applicable
development fee described below.
Total license fees under the UniServices license agreement equal $1,000,000.
Remaining unpaid license fees due UniServices are approximately $16,700 which
are scheduled to be paid in full by August 2000. Development fees for the first
5 years, from November 1, 1997 through October 31, 2002, equal $150,000 per
year, payable monthly in advance. The development fee for development services
after October 31, 2002 and for continuation of exclusivity for all uses outside
the entertainment industry, other than for professional medical, engineering and
scientific applications, will be $200,000 per year, plus inflation adjustments
after 2002 of the lesser of the increase in the Consumer Price Index as compared
to October 31, 2002 or 12% per year. We have the right at our option to cancel
the license at any time after November 2002.
Dr. Ian Hunter, one of our directors, is the brother of Peter Hunter, the
leading developer of the licensed technology at the University of Auckland,
where he is a professor. UniServices acts as a licensing agent for the
University of Auckland in this relationship. Ian Hunter receives none of the
fees paid by Lifef/x to UniServices.
Sale of Assets of Discontinued Operation to Company Owned by Pre-Merger Pac
Title/Mirage Shareholders and Related Indemnification Agreements
On March 20, 2000, we sold all of the assets of our discontinued operation to
PTM Productions, Inc., a newly-organized company that was formed for the
specific purpose of holding these non-Lifef/x assets. PTM Productions, Inc. is
owned by the shareholders that owned Pac Title/Mirage prior to its merger with
Fin Sports U.S.A. Owners of PTM Productions, Inc. are our Chairman and Co-
President Michael Rosenblatt (11.31%), our director Ian Hunter (11.31%),
Safeguard Scientifics (59%), our director Robert Verratti (2%), our Chief
Technology Officer Serge Lafontaine (11.31%), our shareholder Michael MacCloskey
(5.07%) and Mirage Technologies, Inc., a corporation owned by Michael Rosenblatt
(1%). Messrs. Rosenblatt, Hunter, Lafontaine and MacCloskey own their interests
in PTM Productions, Inc. indirectly through Mirage Technologies LP.
The transfer of the non-Lifef/x assets and liabilities to PTM Productions was
done because the operations of PTM Productions, which consist of providing post
production services to the film entertainment industry, is not germane to
Lifef/x operations. The sales price consisted of the buyer's assumption of all
of the liabilities of the discontinued operation. On the date of the sale, the
amount of our liabilities assumed by PTM Productions exceeded the carrying value
of the assets it acquired from us by assuming those liabilities. As part of this
sale, we transferred all of our bank debt to PTM Productions. Safeguard has
agreed to fully indemnify us against all losses and liabilities relating to or
arising from the bank debt and PTM Productions and Safeguard have agreed to
indemnify us for any liability related to the assets purchased and the
liabilities assumed.
The shareholders of PTM Productions, Inc. intend to sell its assets or merge
PTM Productions, Inc. into another entity, and negotiations are ongoing
regarding a potential sale or merger. Proceeds of any sale would be allocated
first to the repayment of bank debt, then to repayment of Safeguard post-
September 30, 1999 loans, with the remainder, if any, to be distributed to the
PTM Productions shareholders. As of March 31, 2000, the liabilities, including
the Safeguard post-September 30, 1999 debt assumed by PTM Productions, exceeded
the assets of our discontinued operation.
29
<PAGE>
Formation of Pac Title/Mirage
Pac Title/Mirage was formed in 1997 as the combination of the Lifef/x
technology contributed by Mirage Technologies LP and the post-production
services business that was acquired from Pacific Title and Art Studio, a post-
production company founded in 1918. In this transaction, Mirage Technologies LP
received $8 million of preferred equity for its technology contribution and
Safeguard received $8 million of preferred and common equity for the $8 million
in cash it contributed.
This $8 million cash, along with approximately $8 million from the proceeds of
bank borrowings, was used to purchase the post-production business in an arms-
length, negotiated transaction from unaffiliated owners of Pacific Title and Art
Studio for $15.5 million.
The owners of Mirage Technologies LP were Michael Rosenblatt, Life F/X
Chairman and Co-President, Dr. Serge Lafontaine, Dr. Ian Hunter, Dr. Ivan Gulas
and Michael MacCloskey. Dr. Serge Lafontaine is the Chief Technology Officer of
Lifef/x Networks, Inc., a wholly-owned subsidiary of Lifef/x, Inc. Dr. Ian
Hunter is a consultant to Lifef/x Networks, Inc. and a director of Lifef/x, Inc.
Dr. Ivan Gulas is also a consultant to Lifef/x Networks, Inc. At the time of
the formation of Pac Title/Mirage in 1997, Michael Rosenblatt and Dr. Ivan Gulas
each owned 25.5% of Mirage Technologies LP, Dr. Ian Hunter and Dr. Serge
Lafontaine each owned 19% and Michael MacCloskey owned 11%.
Dr. Ian Hunter serves as a technical and engineering consultant to Lifef/x
Networks, Inc. under a consulting agreeement with a term of one year which
commenced on January 4, 2000 at compensation of $150,000.
Dr. Ivan Gulas serves as a consultant to Lifef/x Networks, Inc. under a
consulting agreement with a term of three years which commenced on December 13,
1999 at an annual compensation of $200,000.
Subsequent to the formation of Pac Title Mirage, Robert Verratti, an officer
and director, acquired approximately 2% of the common stock from Safeguard in a
cash transaction.
Pac Title/Mirage incurred losses from its inception. Safeguard, which owned
approximately 49% of Pac Title/Mirage, loaned it significant amounts to support
its operations. From the time of Pac Title/Mirage's formation in 1997 until
September 30, 1999, Safeguard loaned it a total of $13,775,000. Safeguard's
consideration for making these loans included warrants to purchase common stock
of Pac Title/Mirage at exercise prices ranging from $1.00 to $2.50 per share.
These warrants were subsequently converted into warrants to purchase common
stock of Lifef/x, Inc. as part of the merger transaction with Fin Sports as more
fully described in "Business."
Subsequent to September 30, 1999, Safeguard made additional loans to Pac
Title/Mirage, but these loans did not include any warrant or other equity
component. These post-September 30 loans from Safeguard, along with bank debt
and other debt related to non-Lifef/x operations, were transferred to PTM
Productions on March 20, 2000. See additional discussion in "Management
Discussion and Analysis or Plan of Operation" and "Description of Securities:
Safeguard Warrants."
Safeguard Administrative Services Agreement
On October 31, 1997, Pac Title/Mirage entered into an administrative services
agreement with Safeguard effective January 1, 1998 that provided for a monthly
fee to Safeguard of 1.5% of net revenues with minimum annual payments of
$100,000 and maximum annual payments of $600,000. This agreement had an initial
term through December 31, 2002 and was to continue thereafter unless terminated
by either party. The agreement was renegotiated to provide for a minimum annual
payment of $50,000 for the year 2000, and then further amended to provide that
the term of the agreement ended on March 31, 2000. The total amount owed to
Safeguard of $535,692 as of December
30
<PAGE>
31, 1999 was one of the liabilities assumed by PTM Productions in its purchase
of the discontinued operation, while the $12,500 which accrued under the
contract from December 31, 1999 to March 31, 2000 will be paid by Lifef/x.
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.
31
<PAGE>
Description of Securities
General
Our authorized capital stock consists of 100,000,000 shares of common stock,
par value $.001 per share.
The following summary descriptions are qualified in their entirety by
reference to our Articles of Incorporation.
Common Stock
The authorized capital stock of Lifef/x consists of 100,000,000 shares of
common stock, $.001 par value per share. All shares have equal voting rights.
Voting rights are not cumulative, and, therefore, the holders of more than 50%
of the common stock could, if they chose to do so, elect all of the Directors.
Upon liquidation, dissolution or winding up of Lifef/x, our assets, after the
payment of our liabilities, will be distributed pro rata to the holders of the
Common Stock. The holders of the common stock do not have preemptive rights to
subscribe for any of our securities and have no right to require us to redeem or
purchase their shares.
Holders of common stock are entitled to share equally in dividends when, as
and if declared by our Board of Directors, out of funds legally available for
the payment of dividends. We have not paid any cash dividends on the common
stock, and it is unlikely that any dividends will be declared in the foreseeable
future.
Warrants
On July 12, 2000, we had 28,001,312 warrants outstanding: (i) 59,056 held by
investors in the private placement, (ii) 27,786,619 held by Safeguard, other
than warrants it received in the private placement, (iii) 4,298 transferred by
Safeguard to the bank, as discussed under "Safeguard Warrants" below, (iv)
100,392 held by service providers, as discussed below (v) 50,000 held by our
independent directors under our Directors' Compensation Plan, and (vi) 25,000
held by Cambridge Technology Partners, our former landlord.
We issued 6,000,000 shares of common stock and warrants for 60,003 shares of
common stock in our private placement. We issued the common stock and warrants
at two closings, which occurred on December 14, 1999 and February 2, 2000. By
December 31, 1999, we or our escrow agent had received over $17,000,000 in
proceeds from the private placement. At the first closing, we issued to
investors 2,983,000 shares of common stock and warrants for 29,830 shares of
common stock. At the second closing we issued to investors 3,017,000 shares of
common stock and warrants for 30,173 shares of common stock. Each unit included
one share of common stock and a warrant that entitled the holder to purchase, at
a price of $7.50 per share, .01 share of common stock for a period of 18 months
from the date of issuance. At the first closing, we also issued (a) warrants to
purchase 100,000 shares of our common stock to MG Securities Group, Inc., the
placement agent in the private placement, and (b) 39,167 shares of common stock
and warrants to purchase 392 shares of common stock to attorneys for legal
services for the private placement.
The exercise price of the warrants will be adjusted in a stock split of, or
stock dividend on, or a subdivision, combination, or recapitalization of the
common stock. In a liquidation, dissolution or winding up of Lifef/x, holders of
the warrants, unless exercised, will not be entitled to participate in our
assets. Holders of the warrants will have no voting, preemptive, liquidation or
other rights of a stockholder, and no dividends will be declared on the
warrants.
Safeguard Warrants
As part of the merger, warrants for 17,587,500 shares of our common stock were
issued to Safeguard for its existing Pac Title/Mirage warrants. The warrants
entitle Safeguard to purchase 5,862,500 shares of our common stock at an
exercise price of $2.50 per share, 5,862,500 shares of common stock at an
exercise price of $5.00 per share, and 5,862,500 shares of common stock at an
exercise price of $6.00 per share. In addition, we issued warrants
32
<PAGE>
for 10,203,417 shares of common stock at an exercise price of $0.01 per share
to Safeguard in exchange for Pac Title/Mirage debt owed to Safeguard. The
warrants have a term of 10 years and are exercisable one year after the merger,
but may be exercised early as explained in the warrants. The exercise prices of
the warrants will be adjusted for a stock split of, or stock dividend on, or a
subdivision, combination, or recapitalization of the common stock. As an
incentive for the bank to consent to the sale of assets to PTM Productions,
Inc., Safeguard transferred to the bank warrants to purchase 4,298 shares of
common stock at an exercise price of $0.01 per share.
Registration Rights
We agreed to file a Registration Statement to register under the Securities
Act all of the common stock issued as part of the Units and the common stock to
be issued on exercise of the warrants issued as part of the Units. This
prospectus is a part of that Registration Statement. We also agreed to include
in the Registration Statement the 11,294,084 shares of common stock issued in
the merger to the pre-merger Pac Title/Mirage shareholders, the 39,167 shares of
common stock issued to service providers for work in the private placement and
100,392 shares of common stock to be issued on exercise of warrants granted to
service providers for work in the private placement. We agreed to pay all
expenses for registration of the securities. In addition, we agreed to comply
with all necessary state securities laws so as to permit the sale of the common
stock by the investors.
We agreed to use our best efforts to cause the registration statement to
become effective on or before May 12, 2000 (within 150 days after the date of
the merger). We also agreed that, if the Registration Statement has not been
declared effective by the close of business on May 12, 2000, we will pay to the
investors from the first closing of the private placement liquidated damages on
a pro rata basis totaling $2,983 per day for each day between May 13, 2000 and
the effective date of the Registration Statement. In addition, we agreed that,
if the Registration Statement has not been declared effective by the close of
business on July 1, 2000, we will pay to the investors from the second closing
of the private placement liquidated damages on a pro rata basis totaling $3,017
per day for each day between July 2, 2000 and the effective date of the
Registration Statement.
In addition, to enable public sale of the 27,790,917 shares of common stock to
be issued to Safeguard on the exercise of the warrants which were issued to
Safeguard, we granted Safeguard the right to require us to prepare registration
statements and file them with the SEC on unlimited occasions if we are eligible
to file our registration statements on Form S-3, or on two occasions if we are
not eligible to file our registration statements on Form S-3.
Nevada Anti-Takeover Provisions
The anti-takeover provisions of Sections 78.411 through 78.445 of the Nevada
Corporation Law apply to Lifef/x. Section 78.438 of the Nevada law prohibits us
from merging with or selling Lifef/x or more than 5% of our assets or stock to
any shareholder who owns or owned more than 10% of any stock or any entity
related to a 10% shareholder for three years after the date on which the
shareholder acquired the Lifef/x shares, unless the transaction is approved by
Lifef/x's Board of Directors. The provisions also prohibit us from completing
any of the transactions described in the preceding sentence with a 10%
shareholder who has held the shares more than three years and its related
entities unless the transaction is approved by our Board of Directors or a
majority of our shares, other than shares owned by that 10% shareholder or any
related entity. These provisions could delay, defer or prevent a change in
control of Lifef/x.
Transfer Agent
Chase Mellon Shareholder Services, L.L.C., 44 Wall Street, 7th floor, New
York, NY, 10005, serves as transfer agent for our common stock.
Plan of Distribution
The selling securityholders may offer shares of common stock from time to time
in one or more transactions in the over-the-counter market, which may involve
brokers or dealers, or in private transactions. We have not entered
33
<PAGE>
into any agreement, arrangement or understanding with brokers or dealers
regarding the shares that may be offered by this prospectus.
Lock-Up/Leak-Out
Until June 12, 2001, which is 18 months following the merger on December 14,
1999, selling securityholders will be restricted in the number of shares they
may sell. None of the selling securityholders may sell any shares prior to the
effectiveness of this registration statement. 10% of each selling
securityholder's shares may be sold following the effectiveness of this
registration statement. On each three month anniversary of the date this
registration statement becomes effective, an additional 10% of each selling
securityholder's shares can be sold without restriction. On June 12, 2001, all
of the selling securityholders' remaining shares will be released from these
restrictions and may be freely sold. Once sold in compliance with these
restrictions, shares become freely tradeable without restriction.
Duane Jenson, Briar Creek Investment LLC and Leonard Burningham, who were pre-
merger shareholders of Fin Sports U.S.A., Inc. and who held 1,614,561 shares of
common stock on December 15, 1999, have agreed to lock up these shares of common
stock until June 12, 2001 under similar restrictions. They may sell up to 15%
of their common stock in each three month period from December 14, 1999 until
the effective date of this registration statement under the following
circumstances: not more than 5,000 shares may be sold in a single transaction;
shares may not be sold for less than $7.50 per share; the shares may only be
sold at a market maker's asking price; and shares permitted to be sold during
one of the three month periods which are not sold during that period may be sold
after that period until the effectiveness of this registration statement, at
which time this right expires. Through July 10, 2000, these shareholders had
sold an aggregate of approximately 276,859 shares of common stock in compliance
with these rules. Following the effectiveness of this registration statement,
each of these shareholders may sell 10% of the shares they hold of record on the
date this registration statement becomes effective. On each three month
anniversary of the date this registration statement becomes effective, an
additional 10% of each of their shares can be sold without restriction. On June
12, 2001, all of their remaining shares will be released from these restrictions
and may be freely sold. Once sold in compliance with these restrictions, shares
become freely tradeable without restriction.
Since certificates for lock-up shares include a statement warning that the
transfer of those shares is restricted by a lock-up/leak-out agreement, those
shares may not be publicly sold. Private sale of those shares in violation of
the lock-up restrictions would give us the right to sue to cancel the sale, for
damages, or both.
Transfer of any shares acquired on exercise of options will be restricted by
substantially identical Lock-Up/Leak-Out provisions, except that shares which an
employee may purchase under options which have vested are added to shares the
employee owns of record in determining the 10% of shares released for sale on
each three month anniversary.
We have the right to waive any of these restrictions where a waiver would be
beneficial to us or would facilitate an orderly trading market for the common
stock.
Our placement agent, MG Securities, will administer the Lock-Up/Leak-Out
provisions on approximately 1,338,000 shares held by Jenson, Burningham and
Briar Creek, former affiliates of Fin Sports. They sold approximately 275,000
shares they owned after the merger under the Lock-Up/Leak-Out provisions
discussed above. These 275,000 shares are no longer restricted.
Our transfer agent will administer the Lock-Up/Leak-Out restrictions for all
shares restricted by the Lock-Up/Leak-Out except those owned by Jenson,
Burningham and Briar Creek, by periodically collecting all certificates from
Lifef/x shareholders which represent locked up shares and, for each certificate,
issuing a replacement certificate for the shares which have been released from
the lock-up provisions and a separate certificate, bearing the appropriate
restrictive legend, for the shares still restricted by the lock-up
provisions.
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<PAGE>
Prior to this offering, only approximately 50,000 registered shares of our
common stock were not restricted by lock-up provisions and approximately
1,600,000 common shares could only be sold in transactions of 5,000 shares or
less at the ask price, of which approximately 275,000 were sold. When this
registration statement becomes effective, a total of approximately 2,200,000
shares may be sold publicly by our shareholders without restriction.
Approximately 1,900,000 additional shares will be released from lock-up
restrictions every three months, with the remaining shares released from the
lock-up on June 12, 2001.
35
<PAGE>
Selling Securityholders
The following table sets forth certain information regarding beneficial
ownership of common stock of each selling securityholder and as adjusted to give
effect to the sale of the common stock offered through this prospectus.
<TABLE>
<CAPTION>
Before Offering After Offering
------------------ --------------
Number of Number of Number of
Shares of Shares of Shares of
Common Stock Common Stock Common Stock
Name of Beneficial Owner Held Being Offered Held
------------------------ ------------------ ------------- --------------
<S> <C> <C> <C>
David Alteneau 10,938 10,938 -0-
Stephen Andriole(1) 30,000 3,612 26,388
Gerald L. Antell 1,684 (3) 1,684 -0-
Judy Antell 1,010 (3) 1,010 -0-
Stuart Antell 1,515 (3) 1,515 -0-
Aspira Capital Management, L.P. 40,400 (3) 40,400 -0-
H. Glenn Bagwell, Jr. 10,100 (3) 10,100 -0-
Adam S. Bain 1,010 (3) 1,010 -0-
Marc Bain 1,010 (3) 1,010 -0-
Phil Berger 6,733 (3) 6,733 -0-
Bergl Nominees Ltd 50,500 (3) 50,500 -0-
The Berkshire Group 10,100 (3) 10,100 -0-
Brad and Mira Bernstein, JTWROS 10,100 (3) 10,100 -0-
Harvey Bernstein 30,300 (3) 30,300 -0-
Michele Beuerlein(2) 7,575 (3) 7,575 -0-
Deirdre Blackburn 12,000 12,000 -0-
Robert A. Blatt 20,200 (3) 20,200 -0-
Michael G. Bolton(4) 20,000 20,000 -0-
Amory Bradley 1,000 1,000 -0-
Lucille Bradley 1,000 1,000 -0-
Stephanie Bradley 1,000 1,000 -0-
Briar Creek Investment, LLC 150,643 150,643 -0-
Leonard W. Burningham(5) 40,400 (3) 40,400 -0-
Leonard Burningham Fin Partnership 105,079 105,079 -0-
Alice G. Burt 13,500 13,500 -0-
James M. Bye 16,834 (3) 16,834 -0-
Matthew Carley 40,400 (3) 40,400 -0-
Sheila Chaifetz 20,200 (3) 20,200 -0-
David Chapman 20,200 (3) 20,200 -0-
Cleveland Charles Cleary 20,200 (3) 20,200 -0-
Thomas Cochran 10,100 (3) 10,100 -0-
</TABLE>
36
<PAGE>
<TABLE>
<S> <C> <C> <C>
Bear Stearns Security Corp. C/F James Conen IRA 21,000 21,000 -0-
Conen Family Investments LLC 21,000 21,000 -0-
William D. Courturie 20,200 (3) 20,200 -0-
Bruce Cowen 40,400 (3) 40,400 -0-
D2JR Capital LLC 10,100 (3) 10,100 -0-
DBA Properties 11,784 (3) 11,784 -0-
DH Blair Investment Banking Group 80,800 (3) 80,800 -0-
Gary Joseph De Decker 80,800 (3) 80,800 -0-
Europa International Inc. 10,100 (3) 10,100 -0-
Excalibur Limited Partnership 168,334 (3) 168,334 -0-
Edward and Kathryn Green Feigeles, JTWROS 40,400 (3) 40,400 -0-
Mark Fischer 25,000 25,000 -0-
Stephanie Fischer 25,000 25,000 -0-
Bradley Fishkin 1,000 1,000 -0-
Carly Fishkin 1,000 1,000 -0-
Elyse Fishkin 1,000 1,000 -0-
Kenneth R. Fishkin 1,000 1,000 -0-
Fixer Ltd 20,200 (3) 20,200 -0-
Fox Family Partnership 80,800 (3) 80,800 -0-
Jeff Frailer 7,070 (3) 7,070 -0-
The Frailer Group 17,170 (3) 17,170 -0-
Thomas Fuchs 20,200 (3) 20,200 -0-
Caroline Gappelberg 40,400 (3) 40,400 -0-
Joseph Giamanco 60,600 (3) 60,600 -0-
Joseph Giamanco, Jr. 60,600 (3) 60,600 -0-
Seth Ginsberg 1,010 (3) 1,010 -0-
Ari Scott Goldman 6,733 6,733 -0-
Rinda Goodrich 1,000 1,000 -0-
Perry Green 40,400 40,400 -0-
Hillary Grinker 400,000 400,000 -0-
Mary A. Guttendorf(6) 10,000 1,204 8,796
Richard A. Guttendorf, Jr. G.R.A.T.(7) 24,000 2,890 21,110
Richard A. Guttendorf III(8) 3,000 361 2,639
John K. Halvey(9) 10,000 10,000 -0-
Trust of Colin L. Halvey dtd 5/27/99(10) 5,000 5,000 -0-
Trust of Grace Ann Halvey dtd 12/19/97(11) 5,000 5,000 -0-
Alex W. Hart and Mary T. Hart 67,000 67,000 -0-
</TABLE>
37
<PAGE>
<TABLE>
<S> <C> <C> <C>
Alex W. Hart Irrevocable Trust 8,000 8,000 -0-
Stan Heifetz 10,100 (3) 10,100 -0-
Helca Trust Reg. Trust Enterprise Incorporated in Liechtenstein, Vadnz 40,400 (3) 40,400 -0-
Jeffrey Henick 20,200 (3) 20,200 -0-
Gary Herman 80,800 (3) 80,800 -0-
Paul Hertz 20,200 (3) 20,200 -0-
Jeanette Himes 20,200 (3) 20,200 -0-
Richard J. Hindlian, as Trustee of the Dornstein Trust, U/I/D dated
12/29/99 6,666 803 5,863
Richard J. Hindlian, as Trustee of the MSR Trust, U/I/D dated
12/29/99(12) 26,664 3,211 23,453
Michael Hirtenstein 40,400 (3) 40,400 -0-
Derek Hompes 40,400 (3) 40,400 -0-
Joseph D. Housepian 20,200 (3) 20,200 -0-
Ian Hunter(13) 1,774,102 213,612 1,560,490
Peter Jacobson 20,200 (3) 20,200 -0-
Pat Jaeckle 15,150 (3) 15,150 -0-
Duane S. Jensen 57,233 (3) 57,233 -0-
Duane Smith Jenson Fin Partnership 1,082,102 1,082,102 -0-
Delbert W. Johnson 50,000 50,000 -0-
Jeri L. Johnson 1999 Trust dtd 5/27/99(14) 7,000 7,000 -0-
Jerry L. Johnson(15) 86,000 86,000 -0-
Jonathan W. Johnson 1999 Trust dtd 5/27/99(16) 7,000 7,000 -0-
M. William Johnson 101,000 (3) 101,000 -0-
Troy W. Johnson 40,400 (3) 40,400 -0-
David Jordan 20,200 (3) 20,200 -0-
Robert Kaplan 20,200 (3) 20,200 -0-
Emmanuel Karavas and Stefanos Kourtis, as Joint Tenants 20,200 (3) 20,200 -0-
Howard Karp 1,684 (3) 1,684 -0-
Howard Kaye Family Fund 20,200 (3) 20,200 -0-
Jeffery Kesner 8,080 (3) 8,080 -0-
David Kestenberg 249,470 (3) 249,470 -0-
Bruce E. and Theresa Kidwell 5,000 5,000 -0-
Kingdon Associates 151,500 (3) 151,500 -0-
Kingdon Family Partnership, LP 40,400 (3) 40,400 -0-
Kingdon Partners 121,200 (3) 121,200 -0-
M. Kingdon Offshore NV 696,900 (3) 696,900 -0-
Tom Konz 40,400 (3) 40,400 -0-
</TABLE>
38
<PAGE>
<TABLE>
<S> <C> <C> <C>
Nicholas Kouzoukas 20,200 (3) 20,200 -0-
Serge Lafontaine(17) 1,774,102 213,612 1,560,490
Thomas D. Lauricella 841 (3) 841 -0-
Leonardo, L.P. 84,840 (3) 84,840 -0-
Seymour Lippman 323,200 (3) 323,200 -0-
David Liptak 70,700 (3) 70,700 -0-
Pasquale J. Livecchi 20,200 (3) 20,200 -0-
Loeb Ventures I LLC(18) 20,200 (3) 20,200 -0-
John D. Loewenberg 50,000 50,000 -0-
Simon Long 128,270 (3) 128,270 -0-
Thomas Lynch(19) 70,000 70,000 -0-
Michael MacCloskey(20) 887,051 887,051 -0-
Arnold Malakoff 10,100 (3) 10,100 -0-
Philip and Stacey Malakoff 10,100 (3) 10,100 -0-
Seymour G. and Miriam G. Mandell, as JTWROS 101,000 (3) 101,000 -0-
Vincent Manngard 40,400 (3) 40,400 -0-
S. Maritz 80,800 (3) 80,800 -0-
Frank Marshall 100,000 100,000 -0-
Jeffrey L. Martin, MD Money Purchase and Profit Sharing Plan 6,734 (3) 6,734 -0-
Sidney Martin (IRA) 6,734 (3) 6,734 -0-
Mark D. Martino 10,100 (3) 10,100 -0-
Dan McKinney 10,000 10,000 -0-
David McLean 5,050 (3) 5,050 -0-
Garrett D. Melby 10,000 10,000 -0-
Richard Messina 10,100 (3) 10,100 -0-
Jack L. Messman(21) 75,000 75,000 -0-
Troy M. Meyen 14,140 (3) 14,140 -0-
MG Securities(22) 100,000(23) 100,000 -0-
Barbara B. Miles 5,000 5,000 -0-
Michael W. Miles. Cust. for Amy Moran Miles 5,000 5,000 -0-
Mirage Technologies, Inc.(24) 43,750 5,268 38,482
Mirage Technologies, L.P.(25) 571,872 68,857 503,015
Mark S. Mitzner 40,400 (3) 40,400 -0-
Greg Moore 3,030 (3) 3,030 -0-
Sharon Moore 20,200 (3) 20,200 -0-
Ivan Moskowitz 3,535 (3) 3,535 -0-
Susan C. Moskowitz 6,060 6,060 -0-
</TABLE>
39
<PAGE>
<TABLE>
<S> <C> <C> <C>
Warren V. Musser(26) 200,000 200,000 -0-
John C. Natale 20,200 (3) 20,200 -0-
Julie Ebers Neff 4,040 (3) 4,040 -0-
William Neff 3,030 (3) 3,030 -0-
Stephen Nicholas 161,600 (3) 161,600 -0-
John Nickolas 30,000 30,000 -0-
Stanley Ostrau 20,200 (3) 20,200 -0-
James A. Ounsworth(27) 90,000 90,000 -0-
Outback Capital Ltd. 43,430 (3) 43,430 -0-
John F. Owens 50,000 50,000 -0-
Preston Paine 20,200 (3) 20,200 -0-
Guy Peterson 40,400 (3) 40,400 -0-
Pete Petrochilos 20,200 (3) 20,200 -0-
Pincor Investments 151,500 (3) 151,500 -0-
Michelle Pujadas 10,000 10,000 -0-
Regent Asset Mgmt LP 40,400 (3) 40,400 -0-
Results Technology 7,070 (3) 7,070 -0-
Jack & Joyce Reynolds Family Trust 20,200 (3) 20,200 -0-
George Rioseco 20,200 (3) 20,200 -0-
Robson & Miller LLP 2,020 (3) 2,020 -0-
Daniel Rosard Trustee u/t/a dated 11/3/99 15,000 15,000 -0-
Steven Rosard and Laurie B. Rosard JT 15,000 15,000 -0-
Michael Rosenblatt(28) 1,731,272 208,455 1,522,817
Jeff Ruland 20,200 (3) 20,200 -0-
Isaac Russo 20,200 (3) 20,200 -0-
Scott Ryan 10,100 (3) 10,100 -0-
Safeguard 99 Capital L.P.(29) 336,666 40,537 296,129
Safeguard 97 Capital L.P.(29) 2,027,365 244,106 1,783,259
Safeguard Scientifics (Delaware), Inc. 82 10 72
Mitchell Saltzberg 1,010 (3) 1,010 -0-
Savage Holdings, Inc.(31) 305,878 (3) 305,878 -0-
Donald Scanlon 40,400 (3) 40,400 -0-
Virginia Schaefer 21,884 (3) 21,884 -0-
Jeffrey Schnipper 20,200 (3) 20,200 -0-
Jane Seidman 10,100 (3) 10,100 -0-
Lee Seidman 30,300 (3) 30,300 -0-
Leslie G. and Lesle Zide-Selbovitz, as JTWROS 2,020 243 1,777
</TABLE>
40
<PAGE>
<TABLE>
<S> <C> <C> <C>
Carl Sempier 70,000 70,000 -0-
Schlomo Sharbat 6,733 (3) 6,733 -0-
Robert Sharkansky 401K Profit Sharing Plan dated 10/14/84 67,165 (3) 67,165 -0-
John T. Sheehan 25,000 25,000 -0-
Joseph M. Shulman IRA FBO Joseph M. Shulman 3,535 (3) 3,535 -0-
Susan C. Shulman 13,130 (3) 13,130 -0-
Benjamin Smith 17,170 (3) 17,170 -0-
E. Barry Smith 12,000 12,000 -0-
Kevin Smith 5,469 5,469 -0-
M. Lazane Smith 100,000 100,000 -0-
SNI Construction Corp. 40,400 (3) 40,400 -0-
Standard Bank Stockbrokers 40,400 (3) 40,400 -0-
Thomas J. Staniforth 20,200 (3) 20,200 -0-
Margot F. and Rica G. Feil Stein, JTWROS 20,200 20,200 -0-
Alan Steinberg 20,200 20,200 -0-
St. George Capital 8,080 (3) 8,080 -0-
Gruntal FBO Arthur Steinberg IRA 60,600 (3) 60,600 -0-
Mitchell D. Steinberg 20,200 (3) 20,200 -0-
Robert Steinberg (IRA Rollover) 20,200 (3) 20,200 -0-
Abbott Stillman 20,200 (3) 20,200 -0-
Robert H. Strouse 70,000 70,000 -0-
Joe P. Sullivan 40,400 (3) 40,400 -0-
Terence C. Sullivan 10,100 (3) 10,100 -0-
Elliott Sumers 20,200 (3) 20,200 -0-
Bob Sunness 20,200 (3) 20,200 -0-
Diane Swiggard 20,494 20,494 -0-
Jorge & Radmila R. Tise Trustees, or their Successors, in trust under 10,100 (3) 10,100 -0-
The Tacky Living Trust, dated October 23, 1998
Robert P. Toppe Jr. 20,200 (3) 20,200 -0-
Gretchen E. Tucker(32) 3,000 361 2639
Renee Typaldos 20,200 (3) 20,200 -0-
Valor Capital Management L.P. 10,100 (3) 10,100 -0-
Robert Verratti(33) 349,998 42,142 307,856
Eli Wachtel 80,800 (3) 80,800 -0-
Geoffrey Waller 750 750 -0-
Jeanne Waller 750 750 -0-
Gerald M. Wilk 15,000 15,000 -0-
</TABLE>
41
<PAGE>
<TABLE>
<S> <C> <C> <C>
Matthew Wilk 5,000 5,000 -0-
Michael T. Wilk 5,000 5,000 -0-
Stephen Wilk 5,000 5,000 -0-
Alan Winters 60,600 (3) 60,600 -0-
Michael T. Yellen 1,010 (3) 1,010 -0-
Alan P. Yonack 10,100 (3) 10,100 -0-
Barry Zelin 10,100 (3) 10,100 -0-
Leonard B. Zelin 40,400 (3) 40,400 -0-
Dennis J. and Maureen Zwaan 5,000 5,000 -0-
Lawrence Zweibel MD PC Profit Sharing Plan 6,734 (3) 6,734 -0-
----------- ---------- ---
TOTALS 18,847,877 11,182,602 7,665,275
=
</TABLE>
(1) Lifef/x Director and Safeguard Senior Vice President and Chief Technology
Officer
(2) Former Partner of Loeb & Loeb LLP, which provides certain legal services
to Lifef/x
(3) Represents shares held plus shares issuable upon exercise of currently
exercisable warrants, exercisable at a per-share price of $7.50. As noted
elsewhere in this prospectus, warrants to purchase a total of 60,003
shares at an exercise price of $7.50 per share were issued to purchasers
of Lifef/x stock in Lifef/x's $18 million private placement in December
1999, of which warrants to purchase 947 shares have been exercised by the
holders, and warrants to purchase a total of 100,392 shares at an exercise
price of $7.50 per share were issued to service providers for services
related to the private placement.
(4) Safeguard Senior Vice President
(5) Former counsel to Fin Sports and father of Branden T. Burningham, Esq.,
legal counsel to Lifef/x
(6) Spouse of Richard A. Guttendorf, Jr., Chief Financial Officer, Secretary
and Director of Lifef/x and Safeguard Vice President
(7) Trust of Chief Financial Officer, Secretary and Director of Lifef/x and
Safeguard Vice President
(8) Son of Richard A. Guttendorf, Jr., Chief Financial Officer, Secretary and
Director of Lifef/x and Safeguard Vice President
(9) Safeguard Senior Vice President
(10) Trust for son of John L. Halvey, Safeguard Senior Vice President
(11) Trust for daughter of John L. Halvey, Safeguard Senior Vice President
(12) Trust for family of Michael Rosenblatt, Lifef/x Chairman and Co-President
(13) Lifef/x Director
(14) Trust for daughter of Jerry L. Johnson, Senior Vice President of Safeguard
(15) Safeguard Senior Vice President
(16) Trust for son of Jerry L. Johnson, Senior Vice President of Safeguard
(17) Lifef/x Networks, Inc. Chief Technology Officer
(18) Investment vehicle of Loeb & Loeb LLP, counsel to Lifef/x with respect to
certain legal matters
42
<PAGE>
(19) President of Comp-U-Com, Inc., a majority-owned subsidiary of Safeguard,
and former director of Pac Title/Mirage
(20) Partner of Mirage Technologies, L.P.
(21) Safeguard Director
(22) Placement agent for the private placement
(23) Represents warrants for stock issuable at an exercise price of $7.50 per
share
(24) Corporation owned by Michael Rosenblatt, Chairman and Co-President of
Lifef/x
(25) Partnership owned by Michael Rosenblatt, Chairman and Co-President of
Lifef/x; Serge Lafontaine, Chief Technology Officer of Lifef/x Networks,
Inc.; Ian Hunter, Director of Lifef/x; and Michael MacCloskey
(26) Safeguard Chairman and CEO and former director of Pac Title/Mirage
(27) Safeguard Chief Counsel
(28) Chairman and Co-President of Lifef/x
(29) Partnership controlled by Safeguard
(30) Represents 333,333 shares held of record and 3,333 shares issuable upon
exercise of warrant currently exercisable at a per share price of $7.50
(31) Consultant to Fin Sports regarding the merger
(32) Daughter of Richard A. Guttendorf, Jr., Chief Financial Officer, Secretary
and Director of Lifef/x and Vice President of Safeguard
(33) Lifef/x Director and Safeguard consultant
43
<PAGE>
Shares Eligible for Future Sale
The market price of our common stock could decline as a result of sales of a
large number of shares of our common stock in the market after this offering, or
the perception that such sales could occur. Such sales also might make it more
difficult for us to sell equity securities in the future at a time and price
that we deem appropriate. After this offering, 19,207,401 shares of common stock
will be outstanding, and no shares will be held as treasury stock. Following
this offering, all of the shares being offered by this prospectus are freely
tradable, if the sale does not violate the Lock-Up/Leak-Out restrictions. Refer
to "Description of Securities-Lock-Up/Leak-Out" elsewhere in this prospectus.
Legal Matters
The validity of the shares of our common stock offered by this prospectus will
be passed upon for Lifef/x by Branden T. Burningham, Salt Lake City, Utah.
Branden T. Burningham is the son of Leonard W. Burningham, Esq. who is one of
the Selling Securityholders, and holds a 12.8% limited partnership interest in
the Leonard W. Burningham Fin Partnership, that owns approximately 105,000
shares of our common stock. Branden T. Burningham provides legal services to
Duane S. Jenson, who is a selling securityholder.
Loeb & Loeb LLP has passed on certain matters related to federal securities
laws for Lifef/x. Partners of Loeb & Loeb LLP own all of the equity interests in
Loeb Ventures I LLC, which owns 20,000 shares of Lifef/x common stock and
warrants to purchase 200 shares of Lifef/x common stock at an exercise price of
$7.50 per share. Loeb Ventures I LLC is a selling securityholder.
Experts
The consolidated financial statements of Lifef/x, Inc. at December 31, 1999
and 1998 and for the years then ended, and for the period June 1, 1997 to
December 31, 1997, and the cumulative period June 1, 1997 through December 31,
1999, included in this prospectus and Registration Statement have been audited
by KPMG LLP, independent certified public accountants, as indicated in their
report, a copy of which is attached to this prospectus, and are included in this
prospectus in reliance upon authority of KPMG LLP as experts in accounting and
auditing.
Changes in Registrant's Certifying Accountants
Mantyla, McReynolds & Associates, Salt Lake City, Utah, served as the
independent public accountants for Fin Sports up until the merger. KPMG served
as the independent public accountants for Pac Title/Mirage. Effective December
14, 1999, the date of the merger, we dismissed Mantyla as our independent
accountants, and engaged KPMG, the then-current independent public accountants
for Pac Title/Mirage, as our new independent accountants. The dismissal of
Mantyla and the retention of KPMG was approved by our Board of Directors.
Prior to the engagement of KPMG, neither we nor anyone on our behalf consulted
with KPMG regarding the application of accounting principles to a specified
transaction, either completed or uncompleted, or type of audit opinion that
might by rendered on Lifef/x's financial statements.
Mantyla audited Fin Sports' financial statements for the years ended December
31, 1997 and 1998. Mantyla's report for the covered periods did not contain an
adverse opinion or a disclaimer of opinion, nor was the report qualified or
modified as to uncertainty, audit scope or accounting principles except as to
Fin Sports' ability to continue as a going concern.
During the period from January 1, 1999 to December 14, 1999 and the years
ended December 31, 1997 and 1998, there were no disagreements with Mantyla on
any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements, if not resolved
to the satisfaction of Mantyla, would have caused Mantyla to refer to the
subject matter of the disagreements in its reports on Fin Sports' financial
statements. In addition, there were no events of these types as described under
Item 304 of Regulation S-B
44
<PAGE>
during the fiscal years ended December 31, 1997 and 1998 and the subsequent
interim periods through December 14, 1999.
Mantyla furnished Fin Sports with a letter dated December 7, 1999 addressed to
the Securities and Exchange Commission stating there were no disagreements
between Mantyla and Fin Sports, whether resolved or not resolved, on any matter
of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure. A copy of Mantyla's letter is incorporated by
reference to Exhibit 16.1 to Form 8-K filed by Lifef/x, Inc. on December 15,
1999.
Additional Information
We have filed with the Commission a registration statement on Form SB-2 under
the Securities Act covering the common stock offered by this prospectus. This
prospectus, which constitutes a part of the registration statement, omits some
of the information described in the registration statement under the rules and
regulations of the Commission. For further information on Lifef/x and the common
stock offered by this prospectus, please refer to the registration statement and
the attached exhibits. Statements contained in this prospectus as to the content
of any contract or other document referred to are not necessarily complete, and
in each instance, reference is made to the copy filed as an exhibit to the
registration statement; each of these statements is qualified in all respects by
that reference. The registration statement and exhibits can be inspected and
copied at the public reference section at the Commission's principal office, 450
5th Street, N.W., Judiciary Plaza, Washington, D.C. 20549, the Commission's
Regional Offices located at the Northwestern Atrium Center, Suite 1400, 500 West
Madison Street, Chicago, Illinois 60661-2511, and 7 World Trade Center, 13th
Floor, New York, New York 10048 and through the Commission's Web site
(http://www.sec.gov). Copies may be obtained from the Commission's principal
office upon payment of the fees prescribed by the Commission.
45
<PAGE>
LIFEF/X, INC.
Index to Consolidated Financial Statements
<TABLE>
<S> <C>
Independent Auditors' Report...................... F-2
Consolidated Balance Sheets....................... F-3
Consolidated Statements of Operations............. F-4
Consolidated Statements of Shareholders' Equity... F-5
Consolidated Statements of Cash Flows............. F-6
Notes to Consolidated Financial Statements........ F-7
</TABLE>
F-1
<PAGE>
Independent Auditors' Report
The Board of Directors
LifeF/X, Inc.
We have audited the accompanying consolidated balance sheets of LifeF/X, Inc. (a
development stage company) and subsidiary (the Company) as of December 31, 1998
and 1999 and the related statements of operations, shareholders' equity and cash
flows for the period from June 1, 1997 (inception) through December 31, 1997 and
for each of the years in the two-year period ended December 31, 1999 and for the
cumulative period June 1, 1997 (inception) through December 31, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of LifeF/X, Inc. (a
development stage company) and subsidiary as of December 31, 1998 and 1999 and
the results of their operations and their cash flows for the period from June 1,
1997 (inception) through December 31, 1997 and for each of the years in the two-
year period ended December 31, 1999 and for the cumulative period June 1, 1997
(inception) through December 31, 1999 in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
Los Angeles, California
February 18, 2000, except for the last
paragraph of note 1(a), note 3 and the
last paragraph of note 4, which are as
of March 20, 2000, and the last paragraph
of note 6, which is as of March 15, 2000.
F-2
<PAGE>
LIFEF/X, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, March 31,
------------------------------- -----------
Assets (note 3) 1998 1999 2000
---------------- ------------- -----------
<S> <C> <C> <C>
(Unaudited)
Current assets:
Cash and cash equivalents $ -- 7,778,040 15,430,917
Restricted cash from stock subscriptions - (note 5) -- 9,051,000 --
Interest receivable -- 17,249 12,442
Prepaid expenses -- 175,000 134,891
------------- ----------- ----------
Total current assets -- 17,021,289 15,578,250
Property, plant and equipment, net -- -- 331,165
Other assets -- -- 246,250
Net assets of discontinued operation - long-term (note 3) 8,143,697 4,451,701 --
------------- ----------- ----------
$ 8,143,697 21,472,990 16,155,665
============= =========== ==========
Liabilities and Shareholders' Equity
Current liabilities:
Short-term notes payable to related party (note 9) $ 1,700,000 -- --
Accounts payable and accrued expenses 284,123 864,123 1,032,178
Accounts payable to PTM Productions, Inc. (note 3) -- -- 565,311
Net liabilities of discontinued operation - current (note 3) 2,586,648 9,598,372 --
------------- ----------- ----------
Total current liabilities 4,570,771 10,462,495 1,597,489
Other long-term liabilities -- 357,250 322,699
Long-term notes payable to related party (note 9) 2,100,000 -- --
------------- ----------- ----------
6,670,771 10,819,745 1,920,188
------------- ----------- ----------
Commitments and contingencies (notes 7 and 12)
Shareholders' equity (notes 2, 5 and 6):
Preferred Stock, $.01 par value. Authorized 20,000,000
shares (note 5):
Series A - issued and outstanding 8,000,000 shares in 1998 -- -- --
and none in 1999
Series B - issued and outstanding 7,680,000 shares in 1998
and none in 1999, stated at liquidation preference 7,996,799 -- --
Common stock, $.001 par value. Authorized 100,000,000
shares; issued and outstanding 18,999,917 shares (1999)
and 19,010,946 shares (2000) -- 18,992 19,011
Common stock, $.01 par value. Authorized 50,000,000 shares;
issued and outstanding 320,100 shares (1998) 3,201 -- --
Additional paid-in capital 6,000 52,635,250 57,071,258
Common stock subscribed (note 5) -- (579,000) --
Deferred compensation related to stock options (note 6) -- (2,272,148) (1,979,279)
Deficit accumulated during development stage (6,533,074) (39,149,849) (40,875,513)
------------- ----------- ----------
Total shareholders' equity 1,472,926 10,653,245 14,235,477
------------- ----------- ----------
$ 8,143,697 21,472,990 16,155,665
============= =========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
LIFEF/X, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Period from Cumulative Cumulative
June 1, 1997 June 1, 1997 Three Months Ended June 1, 1997
(inception) (inception) ---------------------- (inception)
through Years ended December 31, through March 31, through
December 31, ------------------------------ December 31, --------------------- March 31,
1997 1998 1999 1999 1999 2000 2000
-------------- -------------- ------------- --------- --------- ---------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue (notes 1 and 3) $ -- -- -- -- -- -- --
-------------- -------------- ------------- --------- --------- ---------- -----------
Operating costs and expenses:
General and administrative 18,705 181,942 1,493,590 1,694,237 53,919 1,242,970 2,937,207
Research and development 624,900 1,202,762 1,754,253 3,581,915 311,948 677,717 4,259,632
----------- ----------- ----------- --------- --------- ---------- ----------
Total operating costs
and expenses 643,605 1,384,704 3,247,843 5,276,152 365,867 1,920,687 7,196,839
----------- ----------- ----------- --------- --------- ---------- ----------
Loss from operations (643,605) (1,384,704) (3,247,843) (5,276,152) (365,867) (1,920,687) (7,196,839)
Interest expense on borrowings 13,677 58,850 68,453 140,980 6,464 12,274 153,254
Interest expense - warrants
issued in connection with
debt conversion (note 5) -- -- 9,302,339 9,302,339 -- -- 9,302,339
Interest expense - warrants
issued in connection
with loans - (note 9) -- -- 1,462,383 1,462,383 72 -- 1,462,383
Interest income -- -- (17,249) (17,249) -- (209,353) (226,602)
----------- ----------- ----------- ---------- ---------- ---------- ----------
Loss from continuing operations
before income tax expense (657,282) (1,443,554) (14,063,769) (16,164,605) (372,403) (1,723,608) (17,888,213)
Income tax expense (note 8) 800 800 800 2,400 800 2,056 4,456
----------- ----------- ----------- ---------- ---------- ---------- ----------
Loss from continuing operations (658,082) (1,444,354) (14,064,569) (16,167,005) (373,203) (1,725,664) (17,892,669)
Discontinued operation (note 3):
Loss on discontinued operation (369,658) (4,060,980) (3,002,332) (7,432,970) (3,002,332) -- (7,432,970)
Loss on disposal, including
$7,449,874 for operating
losses from measurement date
until December 31, 1999 and
$2,500,000 for losses for the
remaining disposal period -- -- (15,549,874) (15,549,874) (17,549,874) -- (15,549,874)
--------- ----------- ----------- ---------- ---------- ---------- ----------
Net loss $ (1,027,740) (5,505,334) (32,616,775) (39,149,849) (20,925,409) (1,725,664) (40,875,513)
=========== =========== =========== ========== ========== ========== ==========
Net loss per common share on a
basic and diluted basis:
Continuing operations $ (1.88) (4.12) (11.08) (1.07) (0.09)
Discontinued operation (1.06) (11.60) (14.61) (58.70) --
----------- ----------- ----------- ---------- ----------
$ (2.94) (15.72) (25.69) (59.77) (0.09)
=========== =========== =========== ========== ==========
Weighted average common
shares outstanding 350,107 350,107 1,269,824 350,107 19,000,127
=========== =========== =========== ========== ==========
</TABLE>
F-4
<PAGE>
LIFEF/X, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Pacific Title / Mirage, Inc. Preferred Stock
---------------------------------------------------------------------
Series A Series B
--------------------------------- ---------------------------------
Shares Amount Shares Amount
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Balance at June 1, 1997 (inception) -- $ -- -- $ --
Issuance of Series A Preferred Stock 8,000,000 -- -- --
Issuance of Series B Preferred Stock and
common stock -- -- 8,000,000 7,999,999
Conversion of Series B Preferred Stock
to common stock -- -- (320,000) (3,200)
Net loss -- -- -- --
--------------- --------------- --------------- ---------------
Balance at December 31, 1997 8,000,000 -- 7,680,000 7,996,799
Issuance of stock warrants (note 9) -- -- -- --
Net loss -- -- -- --
--------------- --------------- --------------- ---------------
Balance at December 31, 1998 8,000,000 -- 7,680,000 7,996,799
Issuance of stock warrants (note 9) -- -- -- --
Issuance of stock warrants (note 5) -- -- -- --
Conversion of PTM Preferred and common
stock into LifeF/X common stock and
warrants upon Merger (notes 2 and 5) (8,000,000) -- (7,680,000) (7,996,799)
Deferred compensation - stock options (note 6) -- -- -- --
Vesting of stock options issued
as compensation (note 6) -- -- -- --
Issuance of shares - private placement
offering (note 5) -- -- -- --
Private placement offering costs (note 5) -- -- -- --
Common stock subscribed (note 5) -- -- -- --
Net loss -- -- -- --
--------------- --------------- --------------- ---------------
Balance at December 31, 1999 -- -- -- --
Private placement offering costs (unaudited) -- -- -- --
Exercise of stock options (unaudited) -- -- -- --
Completion of stock subscriptions (unaudited) -- -- -- --
Vesting of stock options issued
as compensation (unaudited) -- -- -- --
Increase in capital on transfer of
assets and liabilities to PTM
Productions, Inc., net (unaudited) -- -- -- --
Net loss for the period (unaudited) -- -- -- --
--------------- --------------- --------------- ---------------
Balance at March 31, 2000 (unaudited) -- $ -- -- $ --
=============== =============== =============== ===============
<CAPTION>
Pacific Title / Mirage, Inc. Lifef/x, Inc.
common stock common stock
-------------------------------- ---------------------------------
Shares Amount Shares Amount
-------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Balance at June 1, 1997 (inception) -- $ -- -- $ --
Issuance of Series A Preferred Stock -- -- -- --
Issuance of Series B Preferred Stock and
common stock 100 1 -- --
Conversion of Series B Preferred Stock
to common stock 320,000 3,200 -- --
Net loss -- -- -- --
-------------- --------------- --------------- ---------------
Balance at December 31, 1997 320,100 3,201 -- --
Issuance of stock warrants (note 9) -- -- -- --
Net loss -- -- -- --
-------------- --------------- --------------- ---------------
Balance at December 31, 1998 320,100 3,201 -- --
Issuance of stock warrants (note 9) -- -- -- --
Issuance of stock warrants (note 5) -- -- -- --
Conversion of PTM Preferred and common
stock into LifeF/X common stock and
warrants upon Merger (notes 2 and 5) (320,100) (3,201) 12,960,750 12,601
Deferred compensation - stock options (note 6) -- -- -- --
Vesting of stock options issued
as compensation (note 6) -- -- -- --
Issuance of shares - private placement
offering (note 5) -- -- 6,000,000 6,000
Private placement offering costs (note 5) -- -- 39,167 391
Common stock subscribed (note 5) -- -- -- --
Net loss -- -- -- --
-------------- --------------- --------------- ---------------
Balance at December 31, 1999 -- -- 18,999,917 18,992
Private placement offering costs (unaudited) -- -- -- --
Exercise of stock options (unaudited) -- -- 10,938 19
Miscellaneous share adjustment (unaudited) -- -- 91 --
Completion of stock subscriptions (unaudited) -- -- -- --
Vesting of stock options issued
as compensation (unaudited) -- -- -- --
Increase in capital on transfer of
assets and liabilities to PTM
Productions, Inc., net (unaudited) -- -- -- --
Net loss for the period (unaudited) -- -- -- --
-------------- --------------- --------------- ---------------
Balance at March 31, 2000 (unaudited) -- $ -- 19,010,946 $ 19,011
============== =============== =============== ===============
<CAPTION>
Deferred
Common compensation Total
Additional stock related to Accumulated shareholders'
paid-in capital subscribed stock options deficit equity
--------------- --------------- --------------- --------------- -----------
<S> <C> <C> <C> <C> <C>
Balance at June 1, 1997 (inception) -- -- -- -- --
Issuance of Series A Preferred Stock -- -- -- -- --
Issuance of Series B Preferred Stock and
common stock -- -- -- -- 8,000,000
Conversion of Series B Preferred Stock
to common stock -- -- -- -- --
Net loss -- -- -- (1,027,740) (1,027,740)
-------------- --------------- --------------- --------------- -----------
Balance at December 31, 1997 -- -- -- (1,027,740) 6,972,260
Issuance of stock warrants (note 9) 6,000 -- -- -- 6,000
Net loss -- -- -- (5,505,334) (5,505,334)
-------------- --------------- --------------- --------------- -----------
Balance at December 31, 1998 6,000 -- -- (6,533,074) 1,472,926
Issuance of stock warrants (note 9) 1,462,383 -- -- -- 1,462,383
Issuance of stock warrants (note 5) 23,389,176 -- -- -- 23,389,176
Conversion of PTM Preferred and common
stock into LifeF/X common stock and
warrants upon Merger (notes 2 and 5) 7,987,399 -- -- -- --
Deferred compensation - stock options (note 6) 2,928,689 -- (2,928,689) -- --
Vesting of stock options issued
as compensation (note 6) 25,950 -- 656,541 -- 682,491
Issuance of shares - private placement
offering (note 5) 17,994,000 -- -- -- 18,000,000
Private placement offering costs (note 5) (1,158,347) -- -- -- (1,157,956)
Common stock subscribed (note 5) -- (579,000) -- -- (579,000)
Net loss -- -- -- (32,616,775) (32,616,775)
-------------- --------------- --------------- --------------- -----------
Balance at December 31, 1999 52,635,250 (579,000) (2,272,148) (39,149,849) 10,653,245
Private placement offering costs (unaudited) (236,984) -- -- -- (236,984)
Exercise of stock options (unaudited) 9,981 -- -- -- 10,000
Completion of stock subscriptions (unaudited) -- 579,000 -- -- 579,000
Vesting of stock options issued
as compensation (unaudited) 958,144 -- 292,869 -- 1,251,013
Increase in capital on transfer of
assets and liabilities to PTM
Productions, Inc., net (unaudited) 3,704,867 -- -- -- 3,704,867
Net loss for the period (unaudited) -- -- -- (1,725,664) (1,725,664)
-------------- --------------- --------------- --------------- -----------
Balance at March 31, 2000 (unaudited) 57,071,258 -- (1,979,279) (40,875,513) 14,235,477
============== =============== =============== =============== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
LIFEF/X, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Period from Cumulative Cumulative
June 1, 1997 June 1, 1997 Three months ended June 1, 1997
(inception) (inception) ---------------------- (inception)
through Years ended December 31, through March 31, through
December 31, --------------------------- December 31, ----------------------- March 31,
1997 1998 1999 1999 1999 2000 2000
------------- ------------ ----------- ---------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
(Unaudited) (Unaudited)
Cash flows from
operating activities:
Net loss $ (1,027,740) (5,505,334) (32,616,775) (39,149,849) (20,925,409) (1,725,664) (40,875,513)
Adjustments to reconcile
net loss to net cash
(used in) operating
activities:
Depreciation expense -- -- -- -- -- 6,410 6,410
Loss on disposal -- -- 15,549,874 15,549,874 17,549,874 -- 15,549,874
Noncash interest expense -
warrants issued in
connection with debt conversion -- -- 9,302,339 9,302,339 -- -- 9,302,339
Noncash interest expense -
warrants issued in
connection with loans -- -- 1,462,383 1,462,383 72 -- 1,462,383
Noncash compensation
expense - stock options -- -- 682,491 682,491 -- 292,869 975,360
Changes in operating assets
and liabilities, net of
effects of acquisition of
Pacific Title and
Art Studio:
Other receivables, prepaid
expenses and other assets -- -- (192,249) (192,249) -- (201,334) (393,583)
Accounts payable, accrued
expenses and other
long-term liabilities 113,300 170,823 937,250 1,221,373 22,503 698,815 1,920,188
Net cash provided by (used in)
discontinued operation (176,858) 4,783,201 (6,079,122) (1,472,779) -- -- (1,472,779)
------------- ------------ ----------- --------- ---------- --------- ---------
Net cash (used in)
operating activities (1,091,298) (551,310) (10,953,809) (12,596,417) (3,352,960) (928,904) (13,525,321)
------------- ------------ ----------- ---------- ---------- --------- ----------
Cash flows from
investing activities:
Acquisition of Pacific Title
and Art Studio, net of
cash acquired (15,478,659) -- -- (15,478,659) -- -- (15,478,659)
Purchase of property, plant
and equipment (496,710) (2,623,631) (1,187,494) (4,307,835) -- (337,575) (4,645,410)
------------- ------------ ----------- ---------- --------- --------- ----------
Net cash (used in)
investing activities (15,975,369) (2,623,631) (1,187,494) (19,786,494) -- (337,575) (20,124,069)
------------- ------------ ----------- ---------- ---------- --------- ----------
Cash flows from financing
activities:
Proceeds from note payable
to related party 600,000 1,500,000 12,300,000 14,400,000 3,900,000 -- 14,400,000
Borrowings of long-term debt
from related party -- 1,700,000 -- 1,700,000 -- -- 1,700,000
Borrowings on debt 8,766,667 50,000 -- 8,816,667 -- -- 8,816,667
Proceeds from sale of
warrants exercisable into
600,000 shares of common stock -- 6,000 -- 6,000 -- -- 6,000
Proceeds from issuance of
Series B Preferred Stock
and common stock 8,000,000 -- -- 8,000,000 -- -- 8,000,000
Proceeds from sale of stock
through private placement -- -- 17,421,000 17,421,000 -- 579,000 18,000,000
Restricted cash from stock
subscriptions -- -- (9,051,000) (9,051,000) -- 9,051,000 --
Private placement
offering costs -- -- (1,157,956) (1,157,956) -- -- (1,157,956)
Proceeds from exercise of
stock options -- -- -- -- -- 10,000 10,000
Net cash provided by (used in)
financing activities -
discontinued operation (300,000) (81,059) 407,299 26,240 (547,040) (720,644) (694,404)
------------- ----------- ----------- ---------- ---------- --------- ---------
Net cash provided by
financing activities 17,066,667 3,174,941 19,919,343 40,160,951 3,352,960 8,919,356 49,080,307
------------- ----------- ----------- ---------- ---------- --------- ----------
Net increase in cash and
cash equivalents -- -- 7,778,040 7,778,040 -- 7,652,877 15,430,917
Cash and cash equivalents at
beginning of period -- -- -- -- -- 7,778,040 --
------------- ----------- ----------- ----------- ---------- ---------- ----------
Cash and cash equivalents
at end of period $ -- -- 7,778,040 7,778,040 -- 15,430,917 15,430,917
============= =========== =========== =========== ========== ========== ==========
Supplemental disclosures of
cash flow information:
Cash paid during the
period for:
Interest, including
discontinued operation $ 60,277 700,056 726,802 1,487,135 183,455 189,212 1,676,347
Income taxes -- 800 800 1,600 -- 2,506 4,106
============ =========== =========== ========= ========== ========== ==========
Supplemental disclosure of
noncash financing activities:
Common stock warrants $ -- -- 23,389,176 23,389,176 -- -- 23,389,176
Common stock subscribed -- -- 579,000 579,000 -- -- 579,000
Deferred compensation
related to stock options -- -- 2,928,689 2,928,689 -- -- 2,928,689
Transfer of assets and
liabilities of discontinued
to PTM Productions,
Inc., net -- -- -- -- -- 3,704,867 3,704,867
============= =========== =========== ========= ========== ========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
LIFEF/X, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(Information as of and for the three months ended March 31, 1999 and 2000 is
unaudited)
(1) Summary of Significant Accounting Policies
(a) Organization and Description of Business
On December 14, 1999, Fin Sports U.S.A., Inc. (FSI) completed a
transaction (the Merger), whereby FSI acquired all of the outstanding
capital stock of Pacific Title/Mirage, Inc. (PTM) through the merger
of a wholly owned subsidiary of FSI, with and into PTM, with PTM as
the surviving corporation. In connection with the Merger, FSI changed
its name to Lifef/x, Inc. (LifeF/X or the Company) and PTM changed its
name to Lifef/x Networks, Inc. For a detailed discussion of this
transaction, refer to note 2 - Acquisition of Pacific Title/Mirage,
Inc. by Fin Sports U.S.A., Inc.
LifeF/X, Inc. and its wholly-owned subsidiary, LifeF/X Networks, Inc.
have been engaged in the following operations: (1) the development of
LifeF/X technology, a mathematically based technology capable of
creating photo-realistic computer animation of biological entities,
including humans animated in real time, and (2) the non-LifeF/X
operations, which provides film title, credits, special effects,
digital effects and related services to the motion picture and
television industry.
The Company is a development stage enterprise as defined in Statement
of Financial Accounting Standards (SFAS) No. 7, "Accounting and
Reporting by Development Stage Enterprises." The Company is devoting
substantially all of its present efforts to developing technology.
Planned principal operations have commenced, but have not produced
LifeF/X technology revenue to date.
The Company's inception was June 1, 1997 when development of LifeF/X
technology commenced, and the Company was formally incorporated on
September 11, 1997.
On September 30, 1997, Mirage Technologies, LP (Mirage) contributed
certain of its technologies and net assets to the Company in exchange
for 8,000,000 shares of Series A Preferred Stock and 25 shares of
common stock. This transaction was accounted for as a reorganization
of entities under common control and, accordingly, the assets and
liabilities were recorded at their historical cost basis in a manner
similar to a pooling of interests. Since there was no historical-cost
basis for the technology contributed by Mirage, no value was assigned.
The Company assumed net liabilities from Mirage totaling $792,878 that
consisted primarily of the fixed assets and expenses related to the
LifeF/X development activities of Mirage.
F-7
<PAGE>
LIFEF/X, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(Information as of and for the three months ended March 31, 1999 and 2000 is
unaudited)
On October 30, 1997, Safeguard Scientifics, Inc. (Safeguard) invested
$8 million in cash in the Company in exchange for 8,000,000 shares of
Series B Preferred Stock and 75 shares of common stock. On October 30,
1997, Safeguard converted 320,000 of its Series B Preferred Stock into
320,000 shares of common stock and transferred these shares to an
officer of the Company.
On October 31, 1997, the Company acquired certain assets and
liabilities of Pacific Title and Art Studio (PTAS) for net purchase
consideration of approximately $15.5 million. The acquisition was
accounted for as a purchase and the results of PTAS' operations are
included in the results of operations of the Company from the date of
acquisition. The aggregate purchase price has been allocated to the
assets and liabilities of PTAS based upon their respective fair market
values. The excess of the purchase price over the fair value of net
assets acquired was approximately $7.3 million and is being amortized
over the expected useful life. Refer to item (f) of note 1 - Summary
of Significant Accounting Policies.
The Company has incurred losses from its inception (June 1, 1997) to
date. During this period, Safeguard has loaned the Company significant
amounts to support the operations of the business and to finance
capital expenditures. In 1999, the Board of Directors decided to
concentrate the Company's efforts on LifeF/X development, with primary
emphasis on Internet applications and, accordingly, initiated steps to
dispose of the non-LifeF/X operations, and thereby reduce cash
outflows and raise cash through the sale of non-LifeF/X assets to
repay the Company's bank debt. The Company is focusing on development
of LifeF/X technology for potential commercial uses with primary
emphasis on Internet applications. Therefore, the non-LifeF/X
operations have been reflected as a discontinued operation in the
accompanying consolidated financial statements for all periods
presented. Refer to note 3 - Discontinued Operation and Spin Off
Transaction.
On March 20, 2000, LifeF/X sold its non-LifeF/X assets, to PTM
Productions, Inc., an entity owned by the pre-Merger Pac Title/Mirage
shareholders. The sale included a transfer of all liabilities
associated with the discontinued operation, including all debt.
In addition, Safeguard has fully indemnified LifeF/X against all
liabilities associated with the discontinued operation. Refer to
note 3 - Discontinued Operation and Spin Off Transacton.
F-8
<PAGE>
LIFEF/X, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(Information as of and for the three months ended March 31, 1999 and 2000 is
unaudited)
(b) Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of LifeF/X, Inc. and its wholly-owned subsidiary LifeF/X
Networks, Inc. All significant intercompany accounts, intercompany
profits and intercompany transactions are eliminated.
(c) Cash and Cash Equivalents
Cash and cash equivalents are comprised of highly liquid investments
with original maturities of three months or less.
(d) Revenue Recognition
Revenue related to the Company's discontinued non-LifeF/X operations
are from film title and special effects service contracts and are
recognized on a percentage-of-completion basis based on costs incurred
to estimated total costs to be incurred. Unbilled receivables amount
to $576,450 and $1,374,874 as of December 31, 1998 and 1999,
respectively, and represent revenue that has been earned by the
Company, but not yet billed to the customer. All unbilled receivables
are related to the discontinued operation and included in net
liabilities of discontinued operation - current. Refer to note 3 -
Discontinued Operation and Spin off Transaction. Any anticipated
losses on contracts are expensed when identified.
Revenue for continuing operations is expected to be derived from the
sale of software products and services of the LifeF/X technology.
Revenues will be recognized upon shipment. To date, no LifeF/X
technology revenues have been recognized.
(e) Property, Plant and Equipment
Property, plant and equipment are stated at cost, less accumulated
depreciation and amortization. All property, plant and equipment are
related to the discontinued operation and included in net assets of
discontinued operation - long-term. Depreciation of property, plant
and equipment is calculated using the straight-line method over the
estimated useful lives of the assets, generally 3 to 15 years or, for
leasehold improvements, the term of the lease, if shorter. The
Company also utilizes equipment that is subject to operating and
capital leases. Refer to note 7 - Commitments. Refer to note 3 -
Discontinued Operation and Spin Off Transaction for a discussion of
the transfer of all of these lease obligations to PTM Productions,
Inc.
F-9
<PAGE>
LIFEF/X, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(Information as of and for the three months ended March 31, 1999 and 2000 is
unaudited)
(f) Excess of Cost over Net Assets Acquired
The Company continually evaluates the recoverability of goodwill for
indication of impairment based on the undiscounted future cash flows
from the related business activity. During 1998, the Company assessed
the goodwill attributable to its digital effects business and
consequently wrote off approximately $1,113,000 which is included in
loss on discontinued operation in the accompanying consolidated
statements of operations. The remaining excess of cost over net assets
acquired is being amortized on a straight-line basis over 20 years. As
of December 31, 1999, excess of cost over net assets acquired was
$5,202,185, net of accumulated amortization of $1,000,000, which is
included in net assets of discontinued operation - long-term.
(g) Research and Development Costs
Research and development costs related to designing, developing and
testing the LifeF/X and other technologies are charged to expense as
incurred.
(h) Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes."
Under SFAS No. 109, deferred income taxes reflect the impact of
"temporary differences" between assets and liabilities for financial
reporting purposes and such amounts as measured by tax laws and
regulations.
(i) Concentration of Credit Risk
Substantially all of the Company's past business activity has been
related to its discontinued operation, primarily customers in the
motion picture and television industry located in Southern California.
The Company performs ongoing credit evaluations of its customers but
does not require collateral. The Company maintains reserves for
potential credit losses and such losses have been within management's
expectations. Although the Company does not currently foresee credit
risk associated with its receivables in excess of amounts provided for
in the allowance for doubtful accounts, repayment is dependent upon,
among other things, the financial stability of its customers and the
industry and geographic location in which the Company operates.
F-10
<PAGE>
LIFEF/X, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(Information as of and for the three months ended March 31, 1999 and 2000 is
unaudited)
One customer represented approximately 21% of the Company's 1999 net
revenue related to the discontinued operation, and two customers
represented approximately 40% and 14% of the Company's accounts
receivable as of December 31, 1999, which is included in net
liabilities of discontinued operation - current.
(j) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at
the date of the financial statements and revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
(k) Accounting for Stock Options
The Company accounts for stock option grants under Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," which permits the use of the intrinsic-value method for
grants to employees in accordance with Accounting Principles Board
(APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations.
(l) Earnings (Loss) per Share
Basic earnings (loss) per share is computed by dividing net income
(loss) available to common shareholders by the weighted average number
of common shares outstanding during the period in accordance with SFAS
No. 128, "Earnings Per Share." Diluted earnings (loss) per share
reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into
common stock or resulted in the issuance of common stock that then
shared in the earnings of the entity. Diluted earnings (loss) per
share is computed similarly to fully diluted earnings (loss) per share
pursuant to APB Opinion No. 15.
There were 1,514,835, 5,529,375 and 5,518,437 (unaudited) common stock
options outstanding at December 31, 1998 and 1999, and March 31, 2000,
respectively, and 27,951,312 warrants to purchase shares of common
stock at December 31, 1999 and March 31, 2000 which were not included
in the computation of diluted loss per share because the impact would
have been antidilutive .
F-11
<PAGE>
LIFEF/X, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(Information as of and for the three months ended March 31, 1999 and 2000 is
unaudited)
(m) Long-Lived Assets
The Company reviews long-lived assets for impairment whenever events
or changes in circumstances indicate that the carrying amount of the
assets may not be recoverable. All long-lived assets are included in
net assets of discontinued operation - long-term. Recoverability of
assets to be held and used is measured by a comparison of the carrying
amount of the assets to future undiscounted operating cash flows
expected to be generated by the assets. If such assets are considered
to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the fair
value of the assets.
In March 1999, the Company reviewed its long-lived assets in light of
operating losses that the Company continued to recognize. The future
undiscounted cash flows were compared to the net carrying value of the
related assets. The future undiscounted cash flows were not sufficient
to recover the net carrying value of the assets, and a $1.4 million
impairment charge was recorded by the Company and is included in the
loss on discontinued operation in the year ended December 31, 1999.
Refer to note 3 - Discontinued Operation and Spin Off Transaction.
(n) Other Comprehensive Income (Loss)
On January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for
reporting and presentation of comprehensive income (loss) and its
components in a full set of financial statements. Comprehensive income
(loss) consists of net income (loss) and net unrealized gains (losses)
on securities and is presented in the statements of shareholders'
equity and comprehensive income (loss). The statement requires only
additional disclosures in the financial statements; it does not affect
the Company's financial position or results of operations. The Company
does not have any transactions or other economic events that qualify
as other comprehensive income (loss) as defined under SFAS No. 130. As
such, net income (loss) equaled comprehensive income (loss) for all
periods.
F-12
<PAGE>
LIFEF/X, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(Information as of and for the three months ended March 31, 1999 and 2000 is
unaudited)
(o) Segment Reporting
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related
Information." SFAS No. 131 establishes a standard for the way public
business enterprises are to report selected information about
operating segments. The determination of an entity's operating
segments is based upon a management approach, including the way
management organizes the segment within the enterprise for making
operating decisions and assessing performance. Management currently
reviews financial data at the highest level, the commercial
application of LifeF/X technology and film title and special effects
services (non-LifeF/X operations). Therefore, under the management
approach of SFAS No. 131, there are two operating segments, one of
which is treated as a discontinued operation. Refer to note 3 -
Discontinued Operation and Spin Off Transaction.
(p) Unaudited Interim Financial Statements
The accompanying unaudited interim consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information. In the opinion of
management, the accompanying unaudited consolidated financial
statements have been prepared on the same basis as the audited
consolidated financial statements and include all adjustments,
consisting only of normal recurring adjustments, for the fair
statement of the Company's financial condition as of March 31, 2000
and its results of operations and cash flows for the three months
ended March 31, 1999 and 2000.
(2) Acquisition of Pacific Title/Mirage, Inc.
by Fin Sports U.S.A., Inc.
On December 14, 1999, Fin Sports U.S.A., Inc. acquired all of the
outstanding capital stock of PTM through the merger of a wholly owned
subsidiary of FSI with and into PTM, with PTM as the surviving corporation.
Since the shareholders of PTM received the majority voting interests in the
combined company, PTM is the acquiring enterprise for financial reporting
purposes. The transaction was recorded as a reverse acquisition using the
purchase method of accounting whereby equity of PTM was adjusted for the
fair value of the acquired tangible net assets of the wholly owned
subsidiary of FSI.
Because PTM is the acquirer for accounting purposes, the consolidated
financial statements presented at December 31, 1998 and for the period from
June 1, 1997 (inception) through December 31, 1997 and for the year ended
December 31, 1998 are therefore those of PTM, not FSI. In addition, the
operating results for the period January 1, 1999 through the date of the
transaction, December 14, 1999, reflect those of PTM, not FSI. Operating
results thereafter reflect the combined operations of PTM and FSI.
F-13
<PAGE>
LIFEF/X, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(Information as of and for the three months ended March 31, 1999 and 2000 is
unaudited)
The operating results reflected in the accompanying consolidated financial
statements do not include FSI's operating activities prior to December 14,
1999, the date of the Merger. The following summarized pro forma
information assumes the Merger occurred on June 1, 1997 (inception),
January 1, 1998 and January 1, 1999, respectively:
<TABLE>
<CAPTION>
Period from
June 1, 1997
(inception)
through Years ended December 31,
December 31, --------------------------------
1997 1998 1999
------------------- --------------- -------------
<S> <C> <C> <C>
Revenue $ -- -- --
Loss from continuing operations (658,352) (1,447,033) (17,167,322)
Loss per share from continuing operations (.05) (.11) (1.29)
Weighted average shares outstanding 12,999,917 12,999,917 13,295,807
</TABLE>
In December 1999, prior to the Merger, Savage Holdings, Inc. (SHI), a
consultant, entered into an option agreement with Duane Jenson (Jenson),
principal shareholder of FSI for services rendered to Jenson for the benefit of
FSI. Pursuant to the terms of the option agreement, Jenson granted to SHI an
option to receive 64% of any proceeds from the sale of FSI common stock owned
by Jenson. The option exercise price was $500,000 and the option was exercisable
only during the ten-day period immediately following the Merger.
After the Merger, SHI exercised this option. SHI has no voting rights or any
other rights of a common shareholder. Jenson deposited shares of FSI common
stock equal to 64% of his holdings into an escrow account. FSI ascribed a value
of $3.1 million to this option at the date of grant and accordingly, FSI
recognized a charge to its results of operations, prior to the Merger.
(3) Discontinued Operation and Spin Off Transaction
As discussed in note 1 - Summary of Significant Accounting Policies, the
Company's Board of Directors decided to dispose of the non-LifeF/X
operations in March 1999 and the Company has accounted for the non-LifeF/X
operations as a discontinued operation.
F-14
<PAGE>
LIFEF/X, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(Information as of and for the three months ended March 31, 1999 and 2000 is
unaudited)
The condensed operating results of the discontinued operation are as
follows:
<TABLE>
<CAPTION>
Period from
June 1, 1997
(inception)
through Years ended December 31,
December 31, -----------------------------
1997 1998 1999
--------------- ------------ ------------
<S> <C> <C> <C>
Revenue $ 2,971,759 21,633,151 14,059,769
Loss from discontinued operation, including
$1,400,000 impairment charge in 1999 (369,658) (4,060,980) (3,002,332)
Loss on disposal, including $7,449,874 for
operating losses from measurement date
until December 31, 1999 and $2,500,000
for losses for the remaining disposal
period -- -- (15,549,874)
=============== ============ ===========
</TABLE>
The accrued liability for estimated operating losses of the discontinued
operation for the period from January 1, 2000 to the date of the spin-off, March
20, 2000, include: (1) estimated fees payable to the bank of approximately
$200,000 related to the restructured bank facility (note 4) and, (2) a charge of
approximately $800,000 related to modification of terms of certain stock options
held by employees of the discontinued operation (note 6).
The operating loss incurred by the discontinued operation during the period
from January 1, 2000 to March 20, 2000 was $1,839,500 (unaudited). This amount
was applied to the accrued liability for estimated operating losses of
discontinued operation for the remaining disposal period, established in the
year ended December 31, 1999.
F-15
<PAGE>
LIFEF/X, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(Information as of and for the three months ended March 31, 1999 and 2000 is
unaudited)
The net assets (liabilities) of the discontinued operation are summarized
as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------
1998 1999
------------------- -------------------
<S> <C> <C>
Current assets $ 3,530,391 4,728,178
Current portion of long-term bank debt (note 4) (1,600,000) (4,666,667)
Bank line of credit (note 4) (2,550,000) (2,484,000)
Short-term notes payable to related party (note 9) -- (2,775,000)
Current liabilities - other (1,967,039) (1,900,883)
Accrued liability for estimated operating losses of discontinued
operation for remaining disposal period -- (2,500,000)
------------------- -------------------
Net liabilities of discontinued operation - current $ (2,586,648) (9,598,372)
=================== ===================
</TABLE>
<TABLE>
<CAPTION>
December 31,
--------------------------------------------
1998 1999
------------------- -------------------
<S> <C> <C>
Property, plant and equipment, net $ 8,962,970 7,287,839
Excess of cost over net assets acquired, net 5,502,185 5,202,185
Other assets 115,325 42,400
Long-term bank debt, net of current portion (note 4) (4,666,667) --
Other long-term debt to related parties (note 9) (570,497) (980,692)
Long-term liabilities - other (1,199,619) (1,500,031)
Accrued loss on disposal of discontinued operation -- (5,600,000)
---------------- ----------------
Net assets of discontinued operation - long-term $ 8,143,697 4,451,701
================ ================
</TABLE>
F-16
<PAGE>
LIFEF/X, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(Information as of and for the three months ended March 31, 1999 and 2000 is
unaudited)
On March 20, 2000, the Company sold all of its non-LifeF/X assets
and liabilities (collectively, the "Spin Off Assets and Liabilities")
detailed above to PTM Productions, Inc. (PTM Productions), an entity owned
by the pre-Merger PTM stockholders. The Spin Off Assets and Liabilities
consist primarily of the assets and liabilities relating to PTM's Optical
Division, Scanning and Recording Division and now defunct Digital Division,
including: certain leased and owned real property, outstanding bank debt
and certain debt owed to Safeguard for loans made by Safeguard to PTM
during the period between October 1, 1999 and the consummation of the spin
off transaction (the Post September 30 Debt).
All the Spin Off Assets and Liabilities were transferred to PTM
Productions, effective with the March 20, 2000 sale. Neither the Company
nor its stockholders will be entitled to any beneficial interest in the
Spin Off Assets and Liabilities. At the date of the spin off transaction,
the liabilities of the non-LifeF/X operations exceeded the assets of the
non-LifeF/X operations, and as a result, the Company recorded additional
paid-in capital in March 2000 of $3,704,867 (unaudited) to reflect that
the liabilities assumed by PTM Productions exceeded net assets transferred
to PTM Productions.
In connection with the spin off transaction, the Company obtained consents
from a number of third parties, including its bank lender, which holds a
lien covering all of its assets, including the LifeF/X technology. Assets
relating to the LifeF/X technology were released in conjunction with the
spin off. As part of the spin off transaction, the Company transferred
this bank debt to PTM Productions and Safeguard has agreed to indemnify the
Company from and against any and all losses and liabilities relating to or
arising from the bank debt. In addition, in connection with the spin off
transaction, PTM Productions and Safeguard have provided certain
indemnities to the Company for the Spin Off Assets and Liabilities. In
consideration for the Safeguard indemnification, subject to any senior
liens, Safeguard has been granted a security interest in the Spin Off
Assets and Liabilities and will be entitled to any excess operating
proceeds or sale proceeds from the Spin Off Assets and Liabilities to
secure repayment of the Post September 30 Debt and reimbursement of
indemnification amounts paid by Safeguard to the Company.
F-17
<PAGE>
LIFEF/X, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(Information as of and for the three months ended March 31, 1999 and 2000 is
unaudited)
In addition to the Safeguard indemnity described above, Safeguard will
indemnify the Company for shortfalls in the day-to-day operating expenses
of the Optical and Scanning and Recording Divisions under contracts and
other arrangements entered into in the ordinary course of business of such
Divisions, but not for claims, losses or liabilities outside the ordinary
course of the day-to-day operations of these Divisions or any other unusual
claims or liabilities including, without limitation, any disputes,
litigation or other proceedings whether arising under contracts or other
arrangements entered into in the ordinary course or otherwise, claims by
present or former employees and claims relating to any sale or transfer
(whether or not consummated) of any or all of the Spin Off Assets and
Liabilities.
Neither PTM Productions nor Safeguard will indemnify the Company for any
losses or liabilities relating to any Spin Off Assets and Liabilities to
the extent they are actually used in the LifeF/X business.
At March 31, 2000, the consolidated balance sheet reflects a $565,311
(unaudited) payable to PTM Productions, Inc. by LifeF/X. This represents
disbursements by PTM Productions for LifeF/X payroll and other operating
expenses that were reimbursed by LifeF/X subsequent to March 31, 2000
(unaudited).
(4) Long-Term Bank Debt and Lines of Credit
The Company has a $3,000,000 revolving credit facility with a bank that has
been extended until May 29, 2000. Borrowings under the credit facility bear
interest, which is payable monthly, at prime (7.75% at December 31, 1998
and 8.5% at December 31, 1999) plus .25%. There was $2,550,000 and
$2,484,000 outstanding on the credit facility at December 31, 1998 and
1999, respectively, which is included in net liabilities of discontinued
operation- current. Refer to note 3-Discontinued Operations and Spin Off
Transaction. The credit facility is collateralized by accounts receivable
and a $2,000,000 guarantee by Safeguard.
The Company's term loan agreement and revolving credit facility contain
various covenants related to financial ratios, minimum levels of net worth
and other limitations. The Company was in compliance with these covenants
through October 31, 1998. The Company was not in compliance with certain
financial covenants as of December 31, 1998. Notwithstanding the fact that
the Company has not been in compliance since December 31, 1998, the bank,
based on the continued support provided by Safeguard and the timeliness of
the Company's scheduled loan payments, has not declared any defaults or
pursued any remedies against the Company to date. Refer to note 3 -
Discontinued Operation and Spin Off Transaction, for a discussion of
Safeguard's indemnification obligations. As of December 15, 1999, the
Company entered into a consent letter with the bank pursuant to which the
bank agreed, subject to certain terms and conditions (including an increase
in principal payments as noted below), to extend the repayment of the
credit facility to February 29, 2000 and which has subsequently been
extended to May 29, 2000 through a forbearance agreement with the bank.
F-18
<PAGE>
LIFEF/X, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(Information as of and for the three months ended March 31, 1999 and 2000 is
unaudited)
The following is a summary of long-term bank debt included with assets
(liabilities) of discontinued operation. Refer to note 3 - Discontinued
Operation and Spin Off Transaction:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------
1998 1999
------------------- -----------------
<S> <C> <C>
Term loan with bank $ 6,266,667 4,666,667
Less current portion 1,600,000 4,666,667
---------------- ----------------
Long-term debt, net of current portion $ 4,666,667 --
================ ================
</TABLE>
Under the original term loan agreement, the term loan was payable in 60
monthly principal installments through November 2002 of $133,333 plus
interest at prime (7.75% at December 31, 1998 and 8.5% at December 31,
1999) plus .25%. In December 1999, the Company agreed to increase the
principal payments to $158,333 per month from January 2000 through February
2000 and $183,333 per month until November 2002. On March 20, 2000, the
Company entered into a restructure agreement with the bank that allowed the
Company to extend repayment of the amounts outstanding under its line of
credit to May 29, 2000 and obtained a forbearance with respect to the debt
covenants from the bank on the long-term debt through May 29, 2000.
However, there is no assurance that the bank will extend the term past May
29, 2000. Therefore, all of the term debt has been classified in net
liabilities of discontinued operation -current, in the December 31, 1999
consolidated financial statements. The term loan is secured by all assets
of the Company's discontinued operation (excluding equipment subject to
capitalized leases). In connection with this restructure agreement, the
Company agreed to reimburse the bank for certain legal fees incurred,
estimated at $100,000 and Safeguard has agreed to transfer warrants to
purchase LifeF/X common stock at an exercise price of $0.01 per share to
the bank valued at $100,000. Such amounts have been included in accrued
liability for estimated operating losses of discontinued operation.
F-19
<PAGE>
LIFEF/X, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(Information as of and for the three months ended March 31, 1999 and 2000 is
unaudited)
(5) Shareholders' Equity
Prior to the Merger, the Company had 20,000,000 shares of Preferred Stock
authorized, with 8,000,000 shares of Series A Preferred Stock and 7,680,000
shares of Series B Preferred Stock outstanding. All of the shares of the
Series B Preferred Stock and 1,760,000 shares of the Series A Preferred
Stock were owned by Safeguard. In conjunction with the Merger, the Series A
Preferred Stock was converted into LifeF/X Common Stock using a conversion
factor of 1.0937432, resulting in the issue of 8,749,846 shares. The Series
B Preferred Stock was converted into LifeF/X Common Stock using a
conversion factor of .2856811467, resulting in the issue of 2,194,031
shares. In addition, the Series B Preferred Stock converted into warrants
to purchase LifeF/X common stock at an exercise price of $.01 per share
using a conversion factor of .8080621094, resulting in the issue of
6,205,917 warrants to Safeguard.
Effective upon the Merger, Safeguard converted $14,086,837 of PTM debt and
accrued interest thereon of $761,837 owed to Safeguard into the right to
receive warrants for 3,997,500 shares of LifeF/X common stock. The warrants
have a term of ten years (expiring December 2009) and are exercisable
beginning December 14, 2000 (one year after the Merger), at an exercise
price of $.01 per share subject to certain early exercise events specified
in the warrants.
In connection with the Merger, warrants for 11,725,000 PTM shares held by
Safeguard prior to the Merger carried forward on a share-for-share basis as
warrants for LifeF/X common stock. The warrants have a term of ten years
(expiring December 2009) and are exercisable beginning December 14, 2000
(one year after the Merger), subject to certain early exercise events
specified in the warrants. 50% of the warrants held by Safeguard were
carried forward as warrants to purchase 5,862,500 shares of LifeF/X common
stock at an exercise price of $2.50 per share and the remaining 50% to
purchase 5,862,500 shares of LifeF/X common stock at $5.00 per share. In
addition, Safeguard received warrants to purchase 5,862,500 shares of
LifeF/X common stock at an exercise price of $6.00 per share.
Upon issuance, the Company estimated the fair value of the warrants using a
Black-Scholes option pricing model with the following weighted-average
assumptions: risk-free interest rate of 6.5%; dividend yield of 0%;
volatility factor of the expected market price of the Company's common
stock of 60%, and a weighted-average expected life of the warrants of
seven years. The range of values assigned to the warrants was $1.94 to
$3.00 per share, and the total value assigned was $23,389,176. The value
assigned to the warrants, less the $14,086,837 in debt and accrued
interest converted, amounted to $9,302,339, which was recorded as
additional paid-in capital and as additional interest expense during
the year ended December 31, 1999.
F-20
<PAGE>
LIFEF/X, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(Information as of and for the three months ended March 31, 1999 and 2000 is
unaudited)
Concurrently with the Merger, LifeF/X, Inc. initiated a private placement
offering for $18 million through the sale of 6,000,000 units at $3.00 per
unit to certain investors. Each unit consisted of (i) one share of common
stock and (ii) a warrant to purchase .01 share of common stock at $7.50 per
share, exercisable pursuant to the holder's put right, all on certain terms
and conditions.
The private placement occurred in two stages. The first portion of the
placement closed in December 1999 and the Company received the proceeds
relating to 2,983,000 units. The second portion of the placement closed in
February 2000 at which time Company received the balance of the proceeds
relating to 3,017,000 units. At December 31, 1999, the balance sheet
reflects $9,051,000 in escrow funds and cash from stock subscriptions which
had been received but not yet paid to the Company. Subsequent to year end,
the funds in escrow were released to the Company.
At December 31, 1999, the Company had unit subscriptions for $579,000 which
were funded subsequent to year end. These are reflected as common stock
subscribed in the shareholders' equity section of the consolidated balance
sheet. At December 31, 1999 the costs of the offering were estimated at
$1,157,956 and were deducted from additional paid-in capital, offsetting
the gross proceeds of the offering. During the three months ended March 31,
2000, the Company incurred additional costs of $236,984 (unaudited)
directly related to the offering which were deducted from additional paid-
in capital in the quarter ended March 31, 2000.
Safeguard purchased 333,333 units of the offering for $1,000,000 ($3.00 per
unit), receiving 333,333 shares of common stock and related warrants for
the purchase of 3,333 shares.
Refer to note 2 - Acquisition of Pacific Title/Mirage, Inc. by Fin Sports
U.S.A., Inc., for a discussion of the acquisition of all of PTM's capital
stock by FSI in conjunction with the Merger in December 1999.
(6) Stock Option Plan
PTM had a stock option plan (the 1997 Compensation Plan) which provided for
the grant to PTM employees of incentive stock options and for the grant of
nonstatutory stock options, stock awards or restricted stock to PTM
employees, directors and consultants. Effective upon the Merger, this stock
option plan was terminated and LifeF/X, Inc. adopted the 1999 Long-Term
Incentive Plan (the Plan) with terms substantially similar to those of the
PTM plan. The new Plan reserves up to 5,529,375 shares of LifeF/X common
stock for issuance under the Plan. Following the adoption of the new plan,
LifeF/X, Inc. assumed the obligations of outstanding options granted to
PTM employees under the PTM plan.
F-21
<PAGE>
LIFEF/X, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(Information as of and for the three months ended March 31, 1999 and 2000 is
unaudited)
These outstanding option obligations included an option grant to Lucille
Salhany (the Chief Executive Officer, Co-President and a director of the
Company) for 1,952,459 shares of common stock (after adjusting for the
conversion from PTM shares to FSI shares). The options are exercisable at
$1.50 per share (as adjusted). 20% of the options vested at the date of
grant and the balance of the options vest on a quarterly basis over two
years. For financial reporting purposes, the Company has recorded deferred
stock compensation of $2,928,689 during the year ended December 31, 1999,
representing the difference between the exercise price and the fair value
of the Company's common stock on the grant date. This amount is being
amortized by a charge to operations ratably over the two year vesting
period. Such amortization expense amounted to $656,541 for the year ended
December 31, 1999 and $292,869 for the quarter ended March 31, 2000
(unaudited).
In addition, the Company recognized $25,950 of compensation expense for
options granted to a non-employee, representing the fair value of such
options on the grant date.
In addition, in connection with the Merger, LifeF/X, Inc. granted options
to various employees subject to vesting schedules. Nonstatutory stock
options granted must be at least 85% of fair market value at grant date.
Outstanding options under the Plan vest in varying increments and expire on
or before the 10th anniversary of the grant date or upon earlier
termination.
Restricted stock purchase options may be subject to vesting contingencies
or other specified conditions.
F-22
<PAGE>
LIFEF/X, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(Information as of and for the three months ended March 31, 1999 and 2000 is
unaudited)
The following table summarizes stock option activity for the period from
June 1, 1997 (inception) through December 31, 1997 and for the two years
ended December 31, 1999, (as adjusted for the conversion of PTM shares to
LifeF/X shares at a factor of 1.0937432 LifeF/X shares per PTM share): All
option grants (except the 1,952,459 options granted to Lucille Salhany as
described above), were at exercise prices which approximated or exceeded
the fair market value of the underlying common stock at the date of grant.
<TABLE>
<CAPTION>
Weighted-
average
Number of exercise price
shares per share
------------------- -------------------
<S> <C> <C>
Balance at December 31, 1997 -- $ --
Granted 1,514,835 .91
------------------- -------------------
Balance at December 31, 1998 1,514,835 .91
Granted 4,788,362 2.39
Canceled (773,822) (.91)
------------------- -------------------
Balance at December 31, 1999 5,529,375 2.19
Exercised (unaudited) (10,938) .91
------------------- -------------------
Balance at March 31, 2000 (unaudited) 5,518,437 $ 2.19
=================== ===================
Reserved for future issuance at December 31, 1999 --
===================
Reserved for future issuance at March 31, 2000 (unaudited) --
===================
</TABLE>
In March 2000, the Company's Board of Directors granted stock options for
an additional 219,023 shares pending the approval of the Company's
shareholders. Shareholder approval is necessary in order to expand the
number of shares authorized under the Plan from 5,529,375 shares of
LifeF/X stock to 7,981,850 shares. As shareholder approval had not been
obtained as of March 31, 2000, all options granted in excess of the
original 5,529,375 shares authorized are not considered outstanding and
have not been included in the preceding analysis. Management will seek
shareholder approval at the next annual meeting of shareholders. Once
shareholder approval is obtained, the additional options will be
effectively granted and the appropriate APB 25 and SFAS 123 calculations
can be completed.
F-23
<PAGE>
LIFEF/X, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(Information as of and for the three months ended March 31, 1999 and 2000 is
unaudited)
If the Company had elected to recognize compensation cost based on the fair
value at the date of grant, consistent with the method as prescribed by
SFAS No. 123, "Accounting for Stock Based Compensation," loss from
continuing operations before discontinued operation for the years ended
December 31, 1998 and 1999 would have changed to the pro forma amount
indicated below:
<TABLE>
<CAPTION>
1998 1999
-----------------------------------
<S> <C> <C>
Loss from continuing operations:
As reported $ (1,444,354) (14,064,569)
Pro forma (1,832,000) (15,465,000)
Basic and diluted loss per
share from continuing
operations - pro forma (5.23) (12.18)
==================================
</TABLE>
The fair value of options granted during 1999 was determined using a Black-
Scholes option pricing model with the following assumptions: risk-free
interest rate of 6.5%, dividend yield of 0%, expected volatility of 60% and
an expected life of 5 years. At date of grant, the fair value of the stock
options ranged from $1.73 to $2.19 per option in 1999. The fair value of
options granted during 1998 was determined using a Black-Scholes option
pricing model with the following assumptions: risk-free interest rate of
6.0%, dividend yield of 0%, expected volatility of 0% and an expected life
of 5 years. At date of grant, the fair value of the stock options was $.28
per option in 1998.
F-24
<PAGE>
LIFEF/X, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(Information as of and for the three months ended March 31, 1999 and 2000 is
unaudited)
The following table summarizes information about stock options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
Options outstanding
-----------------------------------------------------------------------------------------------------------------------------
Weighted-
average Weighted- Weighted-
Range of remaining average average
exercise Number contractual exercise Number exercise
prices outstanding life price exercisable price
-------------- ------------------ ------------------ ------------------ ---------------- ------------------
<S> <C> <C> <C> <C> <C>
$ .91 741,013 8.3 years $ .91 522,491 $ .91
1.50 1,952,459 9.9 years 1.50 437,694 1.50
3.00 2,835,903 9.9 years 3.00 310,958 3.00
--------------- ------------
5,529,375 1,271,143
=============== ============
</TABLE>
In March 2000, the Company's Board of Directors accelerated the vesting of
certain stock options and made other modifications to the Plan for options
held by employees of the discontinued operation that will no longer be
LifeF/X employees after the date of the spin-off. The Company has accounted
for this modification of terms and the increase in the intrinsic value of
these stock options, which totaled $812,745. In addition, during the
quarter ended March 31, 2000 (unaudited), the Company extended the exercise
period for stock options held by a former employee of the discontinued
operation. This modification of terms resulted in an expense of $145,399
(unaudited). These items, which totaled $958,144, were provided for in the
accrued liability for estimated operating losses of the discontinued
operation, established in the year ended December 31, 1999 and were applied
to that account in the quarter ended March 31, 2000, with an offsetting
increase in additional paid-in capital.
F-25
<PAGE>
LIFEF/X, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(Information as of and for the three months ended March 31, 1999 and 2000 is
unaudited)
(7) Commitments
The Company has an exclusive, worldwide, perpetual license and support
agreement for the use of certain continuum modeling technology in
commercial applications, excluding professional, medical, engineering and
scientific applications. The license requires quarterly license fees and
monthly development fee payments to be made to the licensor. At December
31, 1999 LifeF/X had three quarterly license fee payments of $25,000
remaining. The development fee payments are $12,500 per month through
October 2002. The Company has the option to extend the agreement for one or
more additional one-year terms for an annual development fee of $200,000
(subject to adjustments for inflation).
The Company conducts a portion of its discontinued operation in a leased
facility under a lease expiring in 2007 and leases certain machinery and
equipment under operating leases expiring at various dates through 2003.
Rent expense on the facility and operating lease expense of its
discontinued operation during disposal period is included in the provision
for loss on disposal of discontinued operation. The Company is obligated
under various capital leases for computer hardware and software equipment
that expire at various dates during the next three years. Refer to note 3-
Discontinued Operation and Spin Off Transaction.
F-26
<PAGE>
LIFEF/X, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(Information as of and for the three months ended March 31, 1999 and 2000 is
unaudited)
Future minimum lease payments under noncancelable operating leases (with
initial or remaining lease terms in excess of one year) and lease payments
for real estate, as well as future minimum capital lease payments as of
December 31, 1999, including leases related to its discontinued operation,
are as follows:
<TABLE>
<CAPTION>
Capital Operating
leases leases
--------------- ---------------
<S> <C> <C>
Year ending December 31:
2000 $ 476,696 2,707,490
2001 368,975 1,467,445
2002 224,964 620,820
2003 12,435 657,178
2004 8,438 655,889
Thereafter -- 2,222,740
--------------- ---------------
Total minimum lease payments 1,091,508 $ 8,331,562
===============
Less amount representing interest 211,465
---------------
Present value of minimum capital lease payments 880,043
Less current installments of obligations under capital leases,
included in net assets of discontinued operation - current 373,639
---------------
Obligations under capital leases, excluding current
installments, included in net assets of discontinued
operation - long-term $ 506,404
===============
</TABLE>
Total future minimum lease payments under the operating lease relating to
the facility lease were $5,137,982.
Facility rent expense and operating lease payments for the period ended
December 31, 1997 (seven months) and for the years ended December 31, 1998
and 1999 was approximately $111,000, $2,596,000 and $3,342,000,
respectively, which is included in loss from discontinued operation.
During the quarter ended March 31, 2000, the Company entered into an office
lease for its headquarters in Boston, Massachusetts. The lease has a five
year term with monthly lease payments that total $240,000 (unaudited) per
year for the five year term of the lease.
F-27
<PAGE>
LIFEF/X, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(Information as of and for the three months ended March 31, 1999 and 2000 is
unaudited)
(8) Income Taxes
The provision for income taxes consists of minimum franchise taxes for the
state of California.
The difference between the Company's U.S. Federal statutory income tax rate
of 34%, as well as its state and local rate, net of a Federal benefit, when
compared to its effective rate of zero is principally comprised of its
valuation allowance.
The components of the net deferred tax asset at December 31, 1998 and 1999
are presented below:
<TABLE>
<CAPTION>
December 31,
----------------------------------
1998 1999
--------------- ---------------
<S> <C> <C>
Deferred tax assets:
Net operating losses $ 793,497 6,081,024
Credit carryforwards 71,383 105,383
--------------- ---------------
Gross deferred tax assets 864,880 6,186,407
Less valuation allowance (864,880) (6,186,407)
--------------- ---------------
Deferred tax assets, net of valuation allowance $ -- --
=============== ===============
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences and loss carryforwards become
deductible. Due to the uncertainty as to whether the Company will realize
the benefits of these deductible temporary differences, a full valuation
allowance has been established as of December 31, 1998 and 1999.
F-28
<PAGE>
LIFEF/X, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(Information as of and for the three months ended March 31, 1999 and 2000 is
unaudited)
At December 31, 1999, the Company has net operating loss carry forwards for
federal tax reporting purposes of approximately $17,000,000 which expire at
various dates, primarily in years 2012 through 2019. The Company has
research and experimentation credit carry forwards of approximately
$105,000, which expire in 2019.
The net operating loss and credit carryforwards may be subject to certain
limitations due to changes in ownership, which may inhibit the Company's
ability to use these carryforwards in the future.
(9) Related Party Transactions
(a) Management Fees
In connection with the initial capitalization of the Company discussed
in note 1 - Summary of Significant Accounting Policies, Mirage
contributed certain assets to the Company which included certain
patent applications. The Company entered into an administrative
services support agreement with Mirage which provides for a fee of
$25,000 per month beginning November 1997. The agreement will expire
on the earlier of October 31, 2002 or six months after a sale of the
Company. The total amount owed to Mirage as of December 31, 1998 and
1999 was $246,000 and $445,000, respectively, which has been included
in net assets of discontinued operation - long-term as of December 31,
1998 and 1999. In March 2000, the agreement was cancelled and Mirage
agreed to forgive the accrued management fee of $445,000 (unaudited).
On October 31, 1997, the Company entered into an administrative
services agreement with Safeguard effective January 1, 1998 that
provided for a monthly fee to Safeguard of 1.5% of net revenues
subject to minimum and maximum annual payments of $100,000 and
$600,000, respectively. This agreement has an initial term through
December 31, 2002 and will continue thereafter unless terminated by
either party. The agreement has been renegotiated to provide for a
minimum annual payment of $50,000 for the year 2000, and will revert
to the above schedule thereafter. The agreement will terminate early
if the Company is sold. The total amount owed to Safeguard as of
December 31, 1998 and 1999 was $324,497 and $535,692, respectively.
Safeguard has agreed not to require payment for at least the next 12
months. The liability as of December 31, 1999 has been transferred to
PTM Productions and has been included in net assets of discontinued
operation - long-term as of December 31, 1998 and 1999 as it is
related to the discontinued operation. All future amounts accruing
under this contract after December 31, 1999 are related to the
continuing operations and will be paid by the Company. At March 31,
2000, LifeF/X had an accrued liability of $12,500 (unaudited) for
the management fee payable to Safeguard.
In May 2000, Safeguard terminated the administrative services
agreement with the Company, effective April 1, 2000.
F-29
<PAGE>
LIFEF/X, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(Information as of and for the three months ended March 31, 1999 and 2000 is
unaudited)
(b) Safeguard
Short-term notes payable to Safeguard consist of the following:
<TABLE>
<CAPTION>
December 31,
----------------------------------
1998 1999
--------------- ---------------
<S> <C> <C>
Notes payable to Safeguard, payable on demand at an annual interest
rate of prime (7.75% and 8.5% at December 31, 1998 and 1999,
respectively) plus 1%, with interest payable monthly $ 1,000,000 2,775,000
Demand note payable to Safeguard, payable upon demand, at an annual
interest rate of prime (7.75% at December 31, 1998), plus 1%,
payable at maturity 700,000 --
---------------- ---------------
$ 1,700,000 2,775,000
================ ===============
</TABLE>
The note payable balance at December 31, 1999 of $2,775,000 reflected
above, represents Post September 30 Debt that is included in the Spin Off
Assets and Liabilities transferred to PTM Productions subsequent to year
end as discussed in note 3 - Discontinued Operation and Spin Off
Transaction. Therefore, at December 31, 1999 this item was included in the
net liabilities of discontinued operation - current.
F-30
<PAGE>
LIFEF/X, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(Information as of and for the three months ended March 31, 1999 and 2000 is
unaudited)
Long-term notes payable to Safeguard consist of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1998 1999
---------------- ---------------
<S> <C> <C>
Term note payable to Safeguard, interest payable monthly at the
prime rate (7.75% at December 31, 1998), due the earlier of an
initial public offering, sale of the Company or March 2001 $ 600,000 --
Term note payable to Safeguard, interest payable monthly at the
prime rate (7.75% at December 31, 1998), due the earlier of an
initial public offering, sale of the Company or March 2001 1,500,000 --
---------------- ---------------
$ 2,100,000 --
================ ===============
</TABLE>
In March 1998, in conjunction with granting of a $1.5 million loan and a
payment of $6,000, Safeguard was issued a warrant to purchase 600,000
shares of PTM common stock at an exercise price of $2.50 per share at any
time between April 1, 1998 and April 2, 2005. As of the issuance date, the
warrant was estimated to have a nominal fair value.
In November 1998, in conjunction with the receipt of a note payable for
$1.0 million, the Company issued a warrant to Safeguard to purchase 750,000
shares of the Company's common stock at an exercise price of $2.00 per
share. This warrant had an expiration date of November 30, 2005. As of the
issuance date, the fair value of the warrant was nominal.
From January 1999 through September 1999, Safeguard provided unsecured
loans to PTM totaling $9.5 million at an interest rate of prime plus 1%.
The principal plus the accrued interest was payable on demand. In
conjunction with these unsecured loans, the Company issued additional
warrants to Safeguard to purchase 10,375,000 shares of common stock at an
exercise price of $1.00 per share, bringing the total warrants outstanding
to 11,725,000. These warrants had expiration dates ranging from February
2006 through August 2006.
F-31
<PAGE>
LIFEF/X, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(Information as of and for the three months ended March 31, 1999 and 2000 is
unaudited)
Upon issuance, the Company estimated the fair value of the warrants
using a Black-Scholes option pricing model with the following weighted-
average assumptions: risk-free interest rate of 6.5%; dividend yield of
0%; volatility factor of the expected market price of the Company's
common stock ranging from 20% to 60%, depending on the grant date, and a
weighted-average expected life of the warrants of seven years. The range
of values assigned to the warrants was $0.01 to $0.66 per share, and the
total value assigned was $1,462,383. This amount was recorded as
additional paid-in capital and as interest expense during the year ended
December 31, 1999.
In connection with the Merger, the warrants for 11,725,000 PTM shares
held by Safeguard prior to the Merger carried forward on a share-for-
share basis as warrants for common stock of LifeF/X. The warrants have a
term of ten years (expiring December 2009), and are exercisable
beginning December 14, 2000 (one year after the Merger), subject to
certain early exercise events specified in the warrants. 50% of the PTM
warrants held by Safeguard were carried forward as warrants to purchase
5,862,500 shares of LifeF/X common stock at an exercise price of $2.50
per share and the remaining 50% to purchase 5,862,500 shares of LifeF/X
common stock at $5.00 per share. In addition, Safeguard received
warrants to purchase 5,862,500 shares of LifeF/X common stock at an
exercise price of $6.00 per share.
The total number of shares of LifeF/X common stock that are subject to
exercise under the warrants held by Safeguard after the Merger amounts
to 27,794,250 shares of LifeF/X common stock.
(10) 401(k) Plan
The Company has a retirement plan under Section 401(k) of the Internal
Revenue Code (the Plan). The terms of the Plan provide that employees over
21 years of age who have completed at least six months of employment are
eligible to participate in the Plan. Contributions to the Plan by the
employees are set aside in a separate trust. The Company makes matching
contributions at 25% of the first 6% of each employee's contribution and
may discontinue matching contributions at any time. For the period ended
December 31, 1997 (seven months) and the years ended December 31, 1998 and
1999, the Company made contributions to the Plan of approximately $12,000,
$93,000 and $85,000, respectively.
F-32
<PAGE>
LIFEF/X, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(Information as of and for the three months ended March 31, 1999 and 2000 is
unaudited)
(11) Severance Obligation
Certain of the Company's employees are covered under a collective
bargaining agreement, under which the Company must provide for severance
payments to be paid to these employees based on qualified years of service.
The Company has a severance liability recorded of $523,199 and $517,071 at
December 31, 1998 and 1999, respectively, which has been included in net
assets of discontinued operation - long-term.
(12) Contingencies
The Company is involved in legal proceedings with outside parties involving
routine business matters. Management believes that the ultimate resolution
of these matters will not have a material adverse effect on the Company's
financial condition or results of operations.
F-33
<PAGE>
LIFEF/X, INC.
__________________
Prospectus
__________________
<PAGE>
PART II
Item 24. Indemnification of Directors and Officers
The Company's Articles of Incorporation includes provisions which limit the
liability of our directors. As permitted by applicable provisions of the Nevada
Law, directors will not be liable to the Company for monetary damages arising
from a breach of their fiduciary duty as directors in certain circumstances.
This limitation does not affect liability for any breach of a director's duty to
the Company or our stockholders (i) with respect to approval by the director of
any transaction from which he or she derives an improper personal benefit, (ii)
with respect to acts or omissions involving an absence of good faith, that the
director believes to be contrary to the best interests of the Company or our
stockholders, that involve intentional misconduct or a knowing and culpable
violation of law, that constitute an unexcused pattern or inattention that
amounts to an abdication of his or her duty to the Company or our stockholders,
or that show a reckless disregard for duty to the Company or our stockholders in
circumstances in which he or she was, or should have been aware, in the ordinary
course of performing his or her duties, of a risk of serious injury to the
Company or our stockholders, or (iii) based on transactions between the Company
and our directors or another corporation with interrelated directors or based on
improper distributions, loans or guarantees under applicable sections of Nevada
Law. This limitation of directors' liability also does not affect the
availability of equitable remedies, such as injunctive relief or rescission. In
addition, the Company has granted contractual indemnification rights to (a) its
director, Robert Verratti, under an indemnification agreement dated as of
December 14, 1999, (b) its director Ian Hunter under his consulting agreement
and (c) its executive officers Lucille Salhany, Michael Rosenblatt and Serge
Lafontaine under their respective employment agreements.
The Company has been advised that it is the position of the Commission that
insofar as the provision in the Company's Articles of Incorporation, as amended,
may be invoked for liabilities arising under the Securities Act, the provision
is against public policy and is therefore unenforceable.
Item 25. Other Expenses of Issuance and Distribution
Lifef/x, Inc. is not issuing any common stock under this Registration
Statement. All common stock registered pursuant to this Registration Statement
is being registered on behalf of selling securityholders. Lifef/x, Inc. has
agreed to pay all costs of this Registration Statement. The estimated expenses
for the distribution of the common stock registered hereby, other than
underwriting commissions, fees and Representative's nonaccountable expense
allowance are set forth in the following table:
<TABLE>
<CAPTION>
Item Amount
---- --------
<S> <C>
SEC Registration Fee .............................................................. 82,662
Transfer Agent Fees ............................................................... 500
Legal Fees.......................................................................... 135,000
Accounting Fees ................................................................... 50,000
Printing and Engraving Costs ...................................................... 60,000
Miscellaneous ..................................................................... 10,000
--------
Total ....................................................................... $369,934
========
</TABLE>
Item 26. Recent Sales of Unregistered Securities
The following is information for all securities sold by Lifef/x, Inc., Fin
Sports, U.S.A., Inc. or Pac Title/Mirage, Inc. within the past three years
without registering the securities under the Securities Act:
December 1999/February 2000 Fin Sports U.S.A./Lifef/x, Inc. $18 million Private
Placement
In order to raise capital, the Company executed a private placement for up to
$18 million of the Company's units at a price of $3.00 per unit. Each unit
consisted of one share of the Company's common stock and a warrant to
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<PAGE>
purchase .01 shares of the Company's common stock at an exercise price of $7.50
per share. The private placement was fully subscribed and we received all funds.
By December 31, 1999, the Company or its escrow agent had received over
$17,000,000 in proceeds from the private placement. The Company issued 6,000,000
shares of common stock and warrants for 60,003 shares of common stock at two
closings, which occured on December 14, 1999 and February 2, 2000. All shares of
common stock sold in the private placement and all shares of common stock which
would be issued on exercise of warrants sold in the private placement are being
registered pursuant to this Registration Statement.
The principal terms of this private placement of securities were:
Dates of Sale - first closing on December 14, 1999 and second closing on
February 2, 2000
Title of Securities - common stock and warrants to purchase common stock for
$7.50 per share
Amount Sold - 6,000,000 shares of common stock and warrants to purchase 60,003
shares
Names of Principal Underwriters - MG Securities and Axiom Capital Management
Persons or class of persons to whom sold - accredited investors
Total Offering Price - $18,000,000
Total Underwriting Commissions - $616,220
Exemption From Registration Under Federal Securities Laws - Rule 506 of
Regulation D
Formation of Pac Title/Mirage
In Pac Title/Mirage's capitalization on October 30, 1997, it issued 8 million
shares of Series A Preferred Stock (par value $1.00 per share) to Mirage
Technologies LP and 25 shares of common stock to Mirage Technologies, Inc. (the
general partner of Mirage Technologies LP) in exchange for Mirage Technologies'
contribution of technology and $8 million of Series B Preferred Stock (par value
$1.00 per share) and 75 shares of common stock to Safeguard Scientifics, Inc. in
exchange for $8,000,000 in cash.
The other principal terms of this private placement of securities were:
Date of Sale - October 30, 1997
Names of Principal Underwriters - None
Total Underwriting Commissions - None
Exemption From Registration Under Federal Securities Laws - Federal Securities
Act Section 4(2) because of the small number of offerees (3).
Persons or Class of Persons to Whom Sold - All offerees were accredited
investors.
Issuance of Pac Title/Mirage Warrants to Safeguard Scientifics, Inc. as
Inducement to Safeguard Scientifics, Inc.'s to Make Loans to Pac Title/Mirage
Pac Title/Mirage incurred losses from its inception. Safeguard, which owned
approximately 49% of Pac Title/Mirage, loaned Pac Title/Mirage significant
amounts to support its operations. From the time of Pac Title/Mirage's
formation in 1997 until September 30, 1999, Safeguard Scientifics, Inc. and its
affiliates (collectively, "Safeguard") loaned it a total of $13,325,000.
Safeguard's consideration for making these loans included warrants to purchase
common stock of Pac Title/Mirage at exercise prices ranging from $1.00 to $2.50
per share. These
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<PAGE>
warrants were subsequently converted into warrants to purchase common stock of
Lifef/x, Inc. as part of the merger transaction with Fin Sports as more fully
described in "Description of Securities: Safeguard Warrants."
Issuance date, number of shares, exercise price, expiration date and loans
made are set forth on the following table:
<TABLE>
<CAPTION>
Amount of
Date Number Exercise Expiration Safeguard Loan to Interest
Issued of Shares Price Date Pac Title/Mirage Rate
----------------- ------------------- ----------------- -------------------- ----------------- --------------------
<S> <C> <C> <C> <C> <C>
10/31/97 --- --- --- $ 600,000 Prime + 1%
4/2/98 600,000 $2.50 3/31/05 $1,500,000 Prime + 1%
11/24/98 750,000 $2.00 11/30/05 $1,000,000 Prime + 1%
12/28/98 1,000,000 $1.00 1/1/06 $1,000,000 Prime + 1%
1/13/99 1,000,000 $1.00 2/1/06 $1,000,000 Prime + 1%
2/3/99 1,000,000 $1.00 3/1/06 $1,000,000 Prime + 1%
2/22/99 1,000,000 $1.00 3/1/06 $1,000,000 Prime + 1%
3/12/99 1,000,000 $1.00 4/1/06 $1,000,000 Prime + 1%
4/19/99 1,500,000 $1.00 5/1/06 $1,500,000 Prime + 1%
6/3/99 875,000 $1.00 7/1/06 $ 875,000 Prime + 1%
6/16/99 400,000 $1.00 7/1/06 $ 400,000 Prime + 1%
6/22/99 700,000 $1.00 7/1/06 $ 700,000 Prime + 1%
7/30/99 750,000 $1.00 8/1/06 $ 750,000 Prime + 1%
8/12/99 1,150,000 $1.00 8/13/06 $1,000,000 Prime + 1%
</TABLE>
The other principal terms of this private placement of securities were:
Title of Securities - warrants to purchase common stock
Names of Principal Underwriters - none
Total Underwriting Commissions - none
Exemption From Registration Under Federal Securities Laws - Federal Securities
Act Section 4(2), because of the small number of offerees (1)
Persons or class of persons to whom sold - accredited investors
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<PAGE>
Conversion of Safeguard's Pac Title/Mirage Warrants, Safeguard's Pac
Title/Mirage Stock and Certain Debt Owed to Safeguard By Pac Title/Mirage Into
Lifef/x, Inc. Warrants
The principal terms of this portion of the merger transaction were:
Date of Exchange - December 14, 1999
Title of Securities - warrants to purchase Lifef/x, Inc. common stock at
prices ranging from $0.01 per share to $6.00 per share as more fully set forth
in the table below:
Pac Title/Mirage Securities Tendered by Safeguard:
Warrants to purchase 600,000 shares at $2.50 per share
Warrants to purchase 750,000 shares at $2.00 per share
Warrants to purchase 10,375,000 shares at $1.00 per share
Demand notes in an aggregate principal amount of $13,325,000 and interest
in the aggregate amount of $761,837.
7,680,000 shares of Pac Title/Mirage Series B Preferred Stock
75 shares of Pac Title/Mirage common stock
Lifef/x Securities Issued to Safeguard in Exchange for Safeguard's Pac
Title/Mirage Securities.
2,194,113 shares of Lifef/x, Inc. common stock
Warrants to purchase 5,862,500 shares at $6.00 per share
Warrants to purchase 5,862,500 shares at $5.00 per share
Warrants to purchase 5,862,500 shares at $2.50 per share
Warrants to purchase 10,203,417 shares at $0.01 per share
Names of Principal Underwriters - none
Total Underwriting Commissions - None
Exemption From Registration Under Federal Securities Laws - Federal
Securities Act Section 4(2) because of the small number of offerees
Persons or class of persons to whom sold - accredited investors
Conversion Into Lifef/x, Inc. Common Stock of Pac Title/Mirage Stock Owned by
Shareholders Other Than Safeguard
The principal terms of this portion of the merger transaction were:
Date of Exchange: December 14, 1999
Names of Principal Underwriters: None
Total Underwriting Commissions: None
Exchange of Securities: Each share of Pac Title/Mirage common stock (25
total) and each share of Pac Title/Mirage Class A Preferred Stock
(8,000,000 total) was converted into 1.0937432 shares of Lifef/x, Inc.
common stock.
Exemption From Registration Under Federal Securities Laws - Federal
Securities Act Section 4(2) because of the small number of offerees (2)
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<PAGE>
Persons or class of persons to whom sold - accredited investors
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<PAGE>
Item 27. Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
--------- -----------
<S> <C>
2.1 Agreement and Plan of Merger by and among Fin Sports U.S.A., Inc., PTM Acquisition Corp. and
Pacific Title/Mirage, Inc. dated December 14, 1999 (incorporated by reference to Form 8-K filed by
Lifef/x, Inc. on December 15, 1999)
3.1 Amendment to Bylaws of Fin Sports U.S.A., Inc. (incorporated by reference to Registration Statement
on Form SB-2 filed by Lifef/x, Inc. on March 21, 2000)
3.2 Articles of Incorporation of Lifef/x, Inc. (incorporated by reference to Form 10-KSB filed by
Lifef/x, Inc. on March 30, 2000)
3.3 Bylaws of Lifef/x, Inc. (incorporated by reference to Form 10-KSB filed by Lifef/x, Inc. on March 30,
2000)
4.1 Registration Rights Agreement Dated December 14, 1999 (incorporated by reference to Registration
Statement on Form SB-2 filed by Lifef/x, Inc. on March 21, 2000)
4.2 Fin Sports U.S.A., Inc. Subscription Agreement (incorporated by reference to Registration Statement
on Form SB-2 filed by Lifef/x, Inc. on March 21, 2000)
5.1 Legal Opinion of Branden T. Burningham, Esq. (incorporated by reference to Registration Statement on
Form SB-2 filed by Lifef/x, Inc. on March 21, 2000)
10.1 Employment Agreement dated December 1, 1999 re: Serge LaFontaine (incorporated by reference to
Registration Statement on Form SB-2 filed by Lifef/x, Inc. on March 21, 2000)
10.2 Employment Agreement dated December 1, 1999 re: Michael Rosenblatt (incorporated by reference to
Registration Statement on Form SB-2 filed by Lifef/x, Inc. on March 21, 2000)
10.3 Employment Agreement dated December 1, 1999 re: Lucille Salhany (incorporated by reference to
Registration Statement on Form SB-2 filed by Lifef/x, Inc. on March 21, 2000)
10.4 Consulting Agreement dated January 4, 2000 re: Ian Hunter (incorporated by reference to Registration
Statement on Form SB-2 filed by Lifef/x, Inc. on March 21, 2000)
10.5 Lifef/x, Inc. 1999 Long-Term Incentive Plan including Amendment (incorporated by reference to
Registration Statement on Form SB-2 filed by Lifef/x, Inc. on March 21, 2000)
10.6 Technologies License, Development, Consulting and Collaboration Agreement between Auckland
UniServices Limited and Pacific Title/Mirage, Inc. effective as of November 1, 1997 (incorporated by
reference to Amendment No. 1 to Registration Statement on Form SB-2 filed by Lifef/x, Inc. on May 18,
2000)
10.7 Indemnification Agreement dated December 14, 1999 (incorporated by reference to Registration
Statement on Form SB-2 filed by Lifef/x, Inc. on March 21, 2000)
10.8 Security Agreement dated March 20, 2000 (incorporated by reference to Registration Statement on Form
SB-2 filed by Lifef/x, Inc. on March 21, 2000)
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
10.9 Assignment and Assumption Agreement dated December 14, 1999 (incorporated by reference to
Registration Statement on Form SB-2 filed by Lifef/x, Inc. on March 21, 2000)
10.10 General Bill of Sale, Assignment and Assumption Agreement dated March 20, 2000 (incorporated by
reference to Registration Statement on Form SB-2 filed by Lifef/x, Inc. on March 21, 2000)
10.11 Software License Agreement dated March 20, 2000 (incorporated by reference to Registration Statement
on Form SB-2 filed by Lifef/x, Inc. on March 21, 2000)
10.12 Indemnification Agreement dated December 14, 1999 re: Robert Verratti (incorporated by reference to
Registration Statement on Form SB-2 filed by Lifef/x, Inc. on March 21, 2000)
10.13 Lock-Up/Leak-Out Agreement dated December 14, 1999 (incorporated by reference to Registration
Statement on Form SB-2 filed by Lifef/x, Inc. on March 21, 2000)
10.14 Massachusetts Office Lease dated March 16, 2000 (incorporated by reference to Registration Statement
on Form SB-2 filed by Lifef/x, Inc. on March 21, 2000)
10.15 Asset Purchase Agreement dated October 8, 1997 among Pacific Title and Art Studio, Pacific Title and
Mirage, Inc., Safeguard Scientifics, Inc. and Mirage Technologies, Limited Partnership (incorporated
by reference to Amendment No.1 to Registration Statement on Form SB-2 filed by Lifef/x, Inc. on May
18, 2000)
10.16 Officer's Certificate dated July 17, 2000.
16.1 Letter of Mantyla McReynolds, a Professional Corporation dated December 7, 1999 (incorporated by
reference to Form 8-K filed by Lifef/x, Inc. on December 15, 1999)
21.1 Subsidiaries of Registrant (incorporated by reference to Registration Statement on Form SB-2 filed by
Lifef/x, Inc. on March 21, 2000)
23.1 Consent of KPMG LLP
23.2 Consent of Branden T. Burningham, Esq. (incorporated by reference to Amendment No.1 to Registration
Statement on Form SB-2 filed by Lifef/x, Inc. on May 18, 2000)
23.3 Consent of Loeb & Loeb LLP (incorporated by reference to Amendment No.1 to Registration Statement on
Form SB-2 filed by Lifef/x, Inc. on May 18, 2000)
24.1 Power of Attorney (incorporated by reference to Registration Statement on Form SB-2 filed by
Lifef/x, Inc. on March 21, 2000)
24.2 Certified Resolutions of the Board of Directors Dated March 16, 2000 Authorizing Signature of the
Lifef/x, Inc. Form SB-2 Registration Statement and amendments to the Registration Statement by Power
of Attorney (incorporated by reference to Registration Statement on Form SB-2 filed by Lifef/x, Inc.
on March 21, 2000)
24.3 Power of Attorney dated July 14, 2000.
27.1 Financial Data Schedule (incorporated by reference to Registration Statement on Form SB-2 filed by
Lifef/x, Inc. on March 21, 2000)
</TABLE>
Item 28. Undertakings
The undersigned Registrant hereby undertakes as follows:
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<PAGE>
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) To reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the information
set forth in the Registration Statement; and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the Registration Statement.
(2) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the provisions described above in Item 24, or
otherwise, the Registrant has been advised that in the opinion of the
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless
in the opinion of our counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction of the question
whether such indemnification by it is against public policy as expressed in
the Securities Act and will be governed by the final adjudication of such
issue.
(3) For purposes of determining any liability under the Securities Act,
to treat the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1), or (4), or
497(h) under the Securities Act as part of this Registration Statement as of
the time the Commission declared it effective.
(4) For the purpose of determining any liability under the Securities
Act, to treat each post-effective amendment that contains a form of prospectus
as a new registration statement for the securities offered in the Registration
Statement, and the offering of such securities at that time as the initial
bona fide offering of those securities.
II-8
<PAGE>
Signatures
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this Amendment No. 1
to Registration Statement to be signed on its behalf by the undersigned, in the
City of Boston, State of Massachusetts, on the 18th day of July, 2000.
Lifef/x, Inc.
By: /s/ Lucille S. Salhany
------------------------------------------
Lucille S. Salhany
Co-President, Chief Executive Officer and
Director
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Lucille S. Salhany Co-President, Chief Executive July 18, 2000
------------------------------------------------------- Officer and Director
Lucille S. Salhany
/s/ Michael Rosenblatt Co-President and Chairman of the July 18, 2000
------------------------------------------------------- Board
Michael Rosenblatt
By /s/ Lucille S. Salhany
-------------------------------------------------
Lucille S. Salhany, Attorney-In-Fact
/s/ Richard A. Guttendorf, Jr. Chief Financial Officer Secretary July 18, 2000
------------------------------------------------------- and Director
Richard A. Guttendorf, Jr.
By /s/ Lucille S. Salhany
-------------------------------------------------
Lucille S. Salhany, Attorney-In-Fact
/s/ Dr. Ian Hunter Director July 18, 2000
-------------------------------------------------------
Dr. Ian Hunter
By /s/ Lucille S. Salhany
-------------------------------------------------
Lucille S. Salhany, Attorney-In-Fact
/s/ Robert Verratti Director July 18, 2000
-------------------------------------------------------
Robert Verratti
By /s/ Lucille S. Salhany
-------------------------------------------------
Lucille S. Salhany, Attorney-In-Fact
/s/ Nancy Hawthorne Director July 18, 2000
-------------------------------------------------------
Nancy Hawthorne
By /s/ Lucille S. Salhany
-------------------------------------------------
Lucille S. Salhany, Attorney-In-Fact
/s/ Dr. Steven J. Andriole Director July 18, 2000
-------------------------------------------------------
Steven J. Andriole
By /s/ Lucille S. Salhany
-------------------------------------------------
Lucille S. Salhany, Attorney-In-Fact
/s/ Dr. Leslie G. Selbovitz Director July 18, 2000
------------------------------
Leslie G. Selbovitz
By /s/ Lucille S. Salhany
-------------------------
Lucille S. Salhany, Attorney-In-Fact
</TABLE>
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<PAGE>
