<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 14, 2000
REGISTRATION NO. 333 -43384
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
---------------------------------------
MUSE TECHNOLOGIES, INC.
(Exact names of registrant as specified in its charter)
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<CAPTION>
<S> <C> <C>
DELAWARE 7373 85-0437001
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
1601 Randolph, S.E.
Albuquerque, NM 87106
(505) 843-6873
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
----------------------------------
BRIAN R. CLARK, PRESIDENT
MUSE TECHNOLOGIES, INC.
1601 RANDOLPH, S.E.
ALBUQUERQUE, NM 87106
(505) 843-6873
(Name, address, including zip code, and
telephone number, including area code, of agent for
service)
----------------------------------
Copies of communications to:
NEIL S. BELLOFF, ESQ. THOMAS C. CHASE, ESQ.
PROSKAUER ROSE LLP HILL & BARLOW, A PROFESSIONAL CORPORATION
1585 BROADWAY ONE INTERNATIONAL PLACE
NEW YORK, NEW YORK 10036-8299 BOSTON, MASSACHUSETTS 02110
(212) 969-3000 (617) 428-3000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As
soon as practicable after the registration statement becomes effective and the
effective time of the proposed merger of MUSE Merger Sub, Inc. with and into
Advanced Visual Systems Inc., as described in the Agreement and Plan of Merger
dated as of July 18, 2000, attached as Appendix A to the proxy
statement/prospectus forming a part of this registration statement.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. |_|
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
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. |_|
------------------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
===========================================================================================================================
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES TO AMOUNT TO BE PROPOSED MAXIMUM AGGREGATE AMOUNT OF
BE REGISTERED REGISTERED OFFERING PRICE PER UNIT OFFERING PRICE REGISTRATION FEE
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $.015 per
share 2,100,000 $2.375(1) $4,987,500 $1,317
---------------------------------------------------------------------------------------------------------------------------
</TABLE>
1. Estimated pursuant to Rule 457(c) under the Securities Act of 1933,
as amended, solely for the purpose of calculating the registration fee.
THE REGISTRANT WILL AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL THEREAFTER
BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
<PAGE>
ADVANCED VISUAL SYSTEMS INC.
September 15, 2000
Dear Stockholder:
The boards of directors of Advanced Visual Systems Inc. and MUSE
Technologies, Inc. have agreed to merge our companies. If the merger is
completed, AVS will become a wholly-owned subsidiary of MUSE.
In the merger, AVS stockholders will receive one share of MUSE common
stock for each 3.286 outstanding shares of AVS common stock, AVS Series B
Preferred Stock and AVS Series C Preferred Stock that they own; and one share
of MUSE common stock for each 0.649646 outstanding shares of AVS Series A
Preferred Stock that they own.
The merger cannot be completed unless the stockholders of AVS approve it.
AVS has scheduled a special meeting for its stockholders to vote on the
merger. Whether or not you plan to attend this stockholders' meeting, please
take the time to vote on the proposal(s) to be submitted at the meeting by
completing and mailing the enclosed proxy card to AVS. The date, time and place
of the stockholders' meeting are as follows:
OCTOBER 16, 2000 AT 9:00 A.M.
HILL & BARLOW
ONE INTERNATIONAL PLACE
BOSTON, MASSACHUSETTS 02110
This proxy statement/prospectus provides you with detailed information
about the matters to be considered by the AVS stockholders. We encourage you to
read this entire document carefully.
The board of directors believes that the matters to be presented at the
special meeting are in the best interests of AVS and its stockholders.
Therefore, the board of directors urges stockholders to vote in favor of the
proposals to be presented at the special meeting.
/s/ John William Poduska, Sr.
John William Poduska, Sr.
Chairman of the Board
YOU SHOULD CAREFULLY CONSIDER THE RISK FACTORS BEGINNING ON PAGE 16 OF
THIS PROXY STATEMENT/PROSPECTUS.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
REGULATOR HAS APPROVED OR DISAPPROVED OF THE SECURITIES TO BE ISSUED IN
CONNECTION WITH THE MERGER OR DETERMINED IF THIS PROXY STATEMENT/PROSPECTUS IS
ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIME.
THE INFORMATION IN THIS PROXY STATEMENT/PROSPECTUS IS NOT COMPLETE AND MAY
BE CHANGED. A REGISTRATION STATEMENT RELATING TO THE SECURITIES OFFERED HEREBY
HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THIS PROXY
STATEMENT/PROSPECTUS IS NOT AN OFFER TO SELL SECURITIES AND IT IS NOT
SOLICITING AN OFFER TO BUY SECURITIES IN ANY STATE WHERE OFFERS OR SALES ARE
NOT PERMITTED.
THIS PROXY STATEMENT/PROSPECTUS IS DATED SEPTEMBER 15, 2000 AND IS FIRST
BEING MAILED TO STOCKHOLDERS ON OR ABOUT SEPTEMBER 15, 2000.
<PAGE>
ADVANCED VISUAL SYSTEMS INC.
300 FIFTH AVENUE
WALTHAM, MASSACHUSETTS 02451
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON OCTOBER 16, 2000
To the Stockholders of
Advanced Visual Systems Inc.:
NOTICE IS HEREBY GIVEN that a Special Meeting of stockholders of Advanced
Visual Systems Inc., a Delaware corporation, will be held at 9:00 A.M., local
time, on October 16, 2000, at the offices of Hill & Barlow, One International
Place, Boston, Massachusetts 02110, for the following purposes:
1. To consider and vote upon a proposal to approve and adopt the Agreement
and Plan of Merger, dated as of July 18, 2000, by and among MUSE
Technologies, Inc., a Delaware corporation, MUSE Merger Sub, Inc., a
Delaware corporation and a wholly-owned subsidiary of MUSE, and AVS. The
merger agreement provides for the merger of MUSE Merger Sub with and
into AVS with the result that AVS will become a wholly-owned subsidiary
of MUSE. The merger agreement also provides that AVS stockholders will
receive in the merger one share of common stock, par value $.015 per
share, of MUSE in exchange for each 3.286 outstanding shares of AVS
common stock, AVS Series B Preferred Stock and AVS Series C Preferred
stock that they own, and one share of MUSE common stock for each
0.649646 outstanding shares of AVS Series A Preferred Stock that they
own. The merger agreement also provides that approval of the merger will
constitute consent on behalf of AVS stockholders who vote in favor of
the merger and who own 500 or more shares of AVS capital stock or are
affiliates of AVS (i) to the delivery of a pro rata portion of their
shares of MUSE common stock to be received in the merger, into escrow in
connection with certain indemnification obligations of AVS, and (ii) to
the appointment of one or more stockholder representatives as their
attorneys-in-fact and agents to act on their behalf in all matters
relating to the merger agreement and the escrow agreement. The merger is
described more fully in the attached proxy statement/prospectus, which
includes copies of both the merger agreement and the escrow agreement.
2. To consider and act upon such other business and matters or proposals
as may properly come before the AVS meeting.
The board of directors of AVS has fixed the close of business on September
12, 2000 as the record date for determining the holders of AVS capital stock
having the right to receive notice of, and to vote at, the AVS meeting. Only
holders of record of AVS capital stock at the close of business on such date
are entitled to notice of, and to vote at, the AVS meeting. A list of AVS's
stockholders entitled to vote at the meeting will be available during normal
business hours at AVS's executive offices for ten days before the AVS meeting
for examination by any AVS stockholder for purposes germane to the AVS meeting.
THE BOARD OF DIRECTORS OF AVS RECOMMENDS THAT YOU VOTE "FOR" APPROVAL AND
ADOPTION OF THE MERGER AGREEMENT AND THE OTHER PROPOSALS PRESENTED AT THE AVS
MEETING.
Adoption of the merger agreement requires the affirmative vote of the
holders of a majority of the AVS common stock and preferred stock (Series A and
Series B only), each voting separately as a class, at the AVS meeting. All
stockholders are cordially invited to attend the AVS meeting in person. Whether
or not you expect to attend the AVS meeting, please sign and mail promptly the
enclosed proxy that is being solicited on behalf of the board of directors of
AVS. A return envelope that requires no postage if mailed in the United States
is enclosed for that purpose. The proxies of stockholders who attend the
meeting in person may be withdrawn and such stockholders may vote personally at
the meeting.
<PAGE>
Your vote is very important, regardless of the number of shares you own.
Please vote as soon as possible to make sure that your shares are represented
at the meeting. To vote your shares, you may complete and return the enclosed
proxy card. If you are a holder of record, you may also cast your vote in
person at the special meeting. If your shares are held in an account at a
brokerage firm or bank, you must instruct them on how to vote your shares. If
you do not vote or do not instruct your broker or bank on how to vote, it will
have the same effect as voting against the merger.
By Order of the Board of Directors
/s/ Thomas C. Chase
Thomas C. Chase
Secretary
Waltham, Massachusetts
September 15, 2000
YOUR VOTE IS IMPORTANT TO US.
PLEASE COMPLETE, SIGN, DATE AND RETURN YOUR PROXY.
HOLDERS OF AVS CAPITAL STOCK SHOULD NOT
SEND STOCK CERTIFICATES WITH THEIR PROXY CARDS.
<PAGE>
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
QUESTIONS AND ANSWERS ABOUT THE MERGER
SUMMARY .................................................................................. 1
The Companies ......................................................................... 1
What AVS Stockholders Will Receive .................................................... 1
The Special Meeting ................................................................... 1
Recommendation of AVS Board of Directors .............................................. 2
Reasons for the Merger ................................................................ 2
Votes Required ........................................................................ 3
The Merger ............................................................................ 4
The Appointment of New AVS Directors Following the Merger ............................. 4
Interests of AVS Officers and Directors in the Merger That Are Different From the
Interests of AVS Stockholders ....................................................... 4
Conditions to the Obligations of AVS and MUSE to Complete the Merger .................. 4
Circumstances Where AVS and/or MUSE Can Terminate the Merger Agreement ................ 6
Appraisal Rights Available to AVS Stockholders Who Dissent from The Merger ............ 6
MUSE's Accounting Treatment of the Acquisition ........................................ 6
Listing of the MUSE Common Stock ...................................................... 6
Treatment of Stock Options, Purchase Authorizations and Benefit Plans In the Merger ... 7
Tax Consequences ...................................................................... 7
Stockholder Agreements ................................................................ 7
AVS Affiliates Agreement .............................................................. 7
MUSE Affiliates Agreement ............................................................. 8
Comparative Per Share Information ..................................................... 9
Comparative Per Share Market Price Information ........................................ 11
Forward-Looking Statements May Prove Inaccurate ....................................... 12
Summary of Selected Historical Financial Information .................................. 13
Unaudited Pro Forma Condensed Combined Financial Information .......................... 15
RISK FACTORS ............................................................................. 16
Risks Relating to the Combined Company ................................................ 16
Risks Relating to the MUSE Common Stock Issued in the Merger .......................... 17
Risks Relating to MUSE's Business ..................................................... 18
Risks Relating to AVS's Business ...................................................... 23
THE SPECIAL MEETING ...................................................................... 27
Date, Time and Place of Special Meeting ............................................... 27
Purpose of the Meeting ................................................................ 27
Record Date and Voting Rights ......................................................... 27
Proxies ............................................................................... 28
Solicitation and Revocation of Proxies ................................................ 28
THE MERGER ............................................................................... 29
General Description of the Merger ..................................................... 29
Background of the Merger .............................................................. 29
Recommendation of the AVS Board and AVS's Reason for the Recommendation ............... 31
MUSE's Reasons for the Merger ......................................................... 32
Merger Consideration .................................................................. 32
The Escrow Agreement .................................................................. 32
</TABLE>
i
<PAGE>
<TABLE>
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PAGE
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<S> <C>
Stock Options, Purchase Authorizations and Benefit Plans .............................. 32
Appraisal Rights ...................................................................... 33
Effective Time ........................................................................ 36
Conversion of Shares; Procedures For Exchange of Certificates; No Fractional Shares ... 36
Nasdaq Listing ........................................................................ 36
Expenses .............................................................................. 36
Interests of Certain Persons in the Merger ............................................ 36
Material Federal Income Tax Consequences .............................................. 38
Accounting Treatment .................................................................. 39
Resale of MUSE Common Stock Following the Merger ...................................... 39
THE MERGER AGREEMENT AND RELATED AGREEMENTS .............................................. 40
General ............................................................................... 40
Consideration to Be Received in the Merger ............................................ 40
The Escrow Agreement .................................................................. 40
Corporate Matters ..................................................................... 41
Conditions to the Merger .............................................................. 41
Representations and Warranties ........................................................ 42
Certain Covenants ..................................................................... 43
Termination ........................................................................... 46
Amendment; Waiver ..................................................................... 46
Fees and Expenses ..................................................................... 46
Indemnification ....................................................................... 47
Stockholder Agreements ................................................................ 47
Confidentiality Agreement ............................................................. 47
Agreement of AVS Affiliates ........................................................... 47
MUSE Affiliates Agreements ............................................................ 48
INFORMATION CONCERNING MUSE .............................................................. 49
General ............................................................................... 49
Recent Developments ................................................................... 49
Operating Units ....................................................................... 50
Industry Overview ..................................................................... 51
Products and Services ................................................................. 52
Customers ............................................................................. 54
Strategy .............................................................................. 55
Sales and Marketing ................................................................... 56
Strategic Reselling Partnerships and Other Material Contracts ......................... 57
Acquisition Strategy .................................................................. 59
Competition ........................................................................... 60
The License Agreement ................................................................. 62
Intellectual Property Rights .......................................................... 63
Research and Product Development ...................................................... 63
Employees ............................................................................. 63
Facilities ............................................................................ 63
Legal Proceedings ..................................................................... 64
Management's Discussion and Analysis of Financial Condition and Results of Operations . 65
Management ............................................................................ 71
Principal Stockholders ................................................................ 73
INFORMATION CONCERNING AVS ............................................................... 74
Description of Business ............................................................... 74
Description of Property ............................................................... 74
Legal Proceedings ..................................................................... 74
</TABLE>
ii
<PAGE>
<TABLE>
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PAGE
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<S> <C>
Management's Discussion and Analysis of Financial Condition and Results of Operations 74
Management ........................................................................... 82
Principal Stockholders of AVS ........................................................ 83
Market Price of and Dividends on AVS's Capital Stock and Related Stockholder Matters . 85
DESCRIPTION OF MUSE CAPITAL STOCK ....................................................... 86
General .............................................................................. 86
MUSE Common Stock .................................................................... 86
Warrants ............................................................................. 87
Class A Redeemable Common Stock Purchase Warrants .................................... 88
COMPARISON OF STOCKHOLDERS' RIGHTS ...................................................... 89
General .............................................................................. 89
Authorized Capital Stock ............................................................. 89
Preemptive Rights .................................................................... 89
Quorum ............................................................................... 89
Stockholder Voting ................................................................... 90
Special Meetings of Stockholders ..................................................... 90
Directors ............................................................................ 90
Removal of Directors ................................................................. 91
Vacancies on the Board of Directors .................................................. 91
Amendment to Certificate of Incorporation ............................................ 91
Amendment of By-Laws ................................................................. 91
State Anti-takeover Statutes ......................................................... 92
Appraisal/Dissenters' Rights ......................................................... 92
Indemnification of Directors and Officers ............................................ 93
Insurance ............................................................................ 93
OTHER MATTERS ........................................................................... 94
EXPERTS ................................................................................. 94
LEGAL MATTERS ........................................................................... 94
RELATIONSHIP WITH INDEPENDENT AUDITORS .................................................. 94
WHERE YOU CAN FIND MORE INFORMATION ..................................................... 95
FORWARD-LOOKING STATEMENTS .............................................................. 95
INDEX TO FINANCIAL STATEMENTS ........................................................... F-1
APPENDIX A Agreement and Plan of Merger
APPENDIX B Delaware General Corporation Law Appraisal Rights
</TABLE>
iii
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q. WHY ARE THE TWO COMPANIES PROPOSING TO MERGE?
A. We believe that the merger of MUSE and AVS will create a stronger,
unified company and will diversify the product range of the individual
companies.
Q. WHAT WILL I RECEIVE IN THE MERGER?
A. If the merger is completed, AVS stockholders will receive one share of
common stock of MUSE in exchange: (1) for each 3.286 outstanding shares
of AVS common stock, Series B Preferred Stock and Series C Preferred
Stock that they own and (2) for each 0.649646 outstanding shares of
Series A Preferred Stock that they own. For example, if you own 3,286
shares of AVS common stock, Series B Preferred Stock and/or Series C
Preferred Stock, you will receive 1,000 shares of MUSE common stock in
exchange for your AVS shares. No fractional shares of MUSE common stock
will be issued. Instead, AVS stockholders will receive one share of MUSE
common stock for the fraction you would have otherwise received.
Q. WHAT PERCENTAGE OF THE OUTSTANDING COMMON STOCK OF MUSE WOULD BE HELD BY
FORMER AVS STOCKHOLDERS?
A. Former AVS stockholders would hold approximately 16% of the outstanding
common stock of MUSE.
Q. WHEN DO YOU EXPECT THE MERGER TO BE COMPLETED?
A. We hope to complete the merger shortly after the special meeting.
Q. WHAT DO I NEED TO DO NOW?
A. After carefully reading and considering the information contained in this
document and its appendices, indicate on your proxy card how you want to
vote, and sign and mail the proxy card in the enclosed return envelope as
soon as possible, so that your shares may be represented at the special
meeting. If you sign and send in your proxy card and do not indicate how
you want to vote, we will count your proxy card as a vote in favor of the
proposal or proposals to be voted upon at the special meeting. If you do
not vote or you abstain, it will in most cases have the effect of a vote
against the proposal or proposals presented to the special meeting. The
board of directors of AVS recommends voting in favor of the merger
agreement and the merger.
Q. IF I AM NOT GOING TO ATTEND THE STOCKHOLDER MEETING, SHOULD I RETURN MY
PROXY CARD INSTEAD?
A. Yes. Please fill out your proxy card and mail it to us in the enclosed
return envelope as soon as possible. Returning your proxy card ensures
that your shares will be represented at the special meeting.
Q. WHAT DO I DO IF I WANT TO CHANGE MY VOTE?
A. You should send in a later, dated, signed proxy card to AVS's corporate
secretary before the special meeting or attend the special meeting in
person and vote.
Q. SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A. No. After the merger is completed, we will send AVS stockholders written
instructions for exchanging their stock certificates.
Q. HOW SOON CAN I SELL MY MUSE SHARES?
A. Unless you are an affiliate, there will be no restrictions on the sale or
transfer of your shares after the completion of the merger (other than
those shares which may be held in escrow).
<PAGE>
Q. WHAT ARE THE TAX CONSEQUENCES TO STOCKHOLDERS OF THE MERGER?
A. The merger will not be a taxable event for federal income tax purposes
for AVS stockholders. Tax matters, however, are very complicated and the
tax consequences of the merger to you will depend on the facts of your
particular situation. We encourage you to contact your tax advisors to
determine the tax consequences of the merger to you. To review the tax
consequences to AVS stockholders in greater detail, see pages 38 to 39 of
this proxy statement/prospectus.
Q. WHO CAN HELP ANSWER MY QUESTIONS?
A. If you would like additional copies of this proxy statement/prospectus or
if you have questions about the merger, you can contact us at Advanced
Visual Systems Inc., 300 Fifth Avenue, Waltham, Massachusetts 02451,
Attention: Russell G. Barbour, President and CEO, or you can call us at
(781) 890-4300.
<PAGE>
SUMMARY
This summary highlights selected information from this proxy
statement/prospectus and may not contain all of the information that is
important to you. To better understand the merger and related transactions and
for a more complete description of the legal terms of the merger and related
transactions, you should read carefully this entire document and the documents
to which you are referred. See "Where You Can Find More Information" on page
95. We have included page references parenthetically to direct you to a more
complete description of the topics presented in this Summary.
THE COMPANIES (PAGES 49 AND 74)
ADVANCED VISUAL SYSTEMS INC.
300 Fifth Avenue
Waltham, Massachusetts 02451
(781) 890-4300
www.avs.com *
Advanced Visual Systems Inc., a Delaware corporation, is a leading
provider of sophisticated computer data visualization technology that
transforms large and complex quantities of data into visual representations.
AVS provides software to developers who build customized visualization
software, as well as ready-to-use applications for end-users who analyze
information contained in graphical representation. After the merger, AVS will
be a wholly-owned subsidiary of MUSE. AVS's principal executive officers will
continue to be located at 300 Fifth Avenue, Waltham, Massachusetts 02451.
MUSE TECHNOLOGIES, INC.
1601 Randolph SE, Suite 210
Albuquerque, New Mexico 87106
(505) 843-6873
www.musetech.com *
MUSE Technologies, Inc., a Delaware corporation, develops and markets data
visualization and perceptual computing software products designed to enhance a
computer user's ability to integrate, present, analyze and better understand
complex types of data and information. MUSE also provides its customers with
comprehensive software and hardware solutions, systems integration, and
training and support services.
WHAT AVS STOCKHOLDERS WILL RECEIVE (PAGE 40)
Upon consummation of the merger, stockholders of AVS will receive one
share of MUSE common stock for each 3.286 shares of AVS common stock, AVS
Series B Preferred Stock and AVS Series C Preferred Stock that they own and one
share of MUSE common stock for each 0.649646 outstanding shares of AVS Series A
Preferred Stock that they own. No fractional shares of MUSE common stock will
be issued in the merger. Instead, AVS stockholders will receive one share of
MUSE common stock for the fraction they would have otherwise received.
THE SPECIAL MEETING (PAGE 27)
The special meeting of stockholders of AVS will be held at 9:00 A.M.,
local time, on October 16, 2000, at the offices of Hill & Barlow, One
International Place, Boston, Massachusetts 02110. At the meeting, holders of
AVS capital stock will consider and vote upon:
----------
* Inclusion of any worldwide web address is not intended to, and does not
constitute, incorporation by reference into this proxy statement/prospectus
of any information contained on such website.
1
<PAGE>
o a proposal to adopt the merger agreement and approve the merger,
including (i) the creation of an escrow in connection with certain
indemnification obligations of AVS, which will include a pro rata portion
of each AVS stockholders" shares of MUSE common stock received in the
merger by all AVS stockholders who vote in favor of the merger and who
own 500 or more shares of AVS capital stock or are affiliates of AVS and
(ii) the appointment of Russell G. Barbour and John William Poduska, Sr.
as AVS stockholder representatives to act as attorneys-in-fact and agents
on behalf of the AVS stockholders in connection with all matters relating
to the merger agreement and the escrow agreement; and
o any other matters that may properly come before the meeting.
RECOMMENDATION OF AVS BOARD OF DIRECTORS (PAGE 31)
The board of directors of AVS has approved the merger with MUSE and
determined that the terms are fair to and in the best interests of the AVS
stockholders. Therefore, the AVS board recommends that its stockholders vote in
favor of the proposal to adopt the merger agreement and approve the merger.
REASONS FOR THE MERGER (PAGES 31 AND 32)
MUSE
The Board of Directors of MUSE, with the assistance of management and its
legal and financial advisors, have elected to proceed with the merger for the
following reasons:
o the technical expertise of AVS in the field of data visualization for
the scientific and engineering industries;
o the sizeable installed base of AVS customers and products, and the
potential revenue and other opportunities that could be derived therefrom;
o the ability to add additional software products and professional service
capabilities to those already offered by MUSE;
o the existing international network of AVS sales and technical
professionals;
o perceived economic potential from the AVS product known as OpenViz;
o the terms of the merger agreement;
o the potential operating synergies and cost savings of the combined
enterprise, including consolidation of administrative and support
functions and the combination of sales forces and research and
development capabilities; and
o that the merger is expected to be accounted for as a
pooling-of-interests.
AVS
In reaching its decision to approve the merger, the AVS board considered,
with the assistance of management and its legal and financial advisors, the
following material factors:
o that the merger will create a stronger company and offer the AVS
stockholders an opportunity to receive shares in a publicly-held company
while continuing to participate in the long-term growth of AVS's business
through an ownership interest in MUSE;
o that AVS's available funds and cash generated from operations would not
be sufficient to meet AVS's operating requirements in the absence of the
merger, a different merger or financing or another significant change in
the operations of AVS's business;
2
<PAGE>
o that the merger would provide AVS with a better opportunity to permit
AVS to continue operations which might not otherwise be available on
terms beneficial to the AVS stockholders;
o that the merger provides AVS stockholders with MUSE common stock in a
tax-free exchange at a premium over the fair market value of the AVS
shares prior to the announcement of the merger;
o the terms of the merger agreement;
o potential operating synergies and cost savings of the combined
enterprise, including consolidation of administrative and support
functions and the combination of sales forces and research and
development capabilities;
o that the merger is expected to be accounted for as a
pooling-of-interests;
o that the merger is not subject to approval by MUSE stockholders; and
o publicly available information concerning the financial performance,
condition, prospects and operations of MUSE.
The foregoing discussion of information and factors considered by the AVS
board is not intended to be exhaustive but is intended to include material
factors considered. In light of the wide variety of factors considered, the AVS
board did not find it practical to, and did not, quantify or otherwise assign
relative weight to the specific factors considered, and individual directors
may have given differing weights to different factors. After taking into
consideration all of the factors set forth above, the AVS board approved the
merger by unanimous vote of the directors present at the meeting and determined
that the merger is fair to, and in the best interests of, AVS and its
stockholders and has determined that AVS should proceed with the merger at this
time. ACCORDINGLY, THE AVS BOARD RECOMMENDS THAT THE AVS STOCKHOLDERS VOTE
"FOR" APPROVAL OF THE MERGER AGREEMENT.
VOTES REQUIRED (PAGES 27, 36-37 AND 40-41)
Adoption of the merger agreement and approval of the merger require the
affirmative vote of a majority of the outstanding shares of AVS capital stock,
each voting separately as a class, entitled to vote at the meeting. In
addition, upon obtaining such affirmative vote, the AVS stockholders also will
have approved the escrow agreement and the appointment of the stockholder
representatives as their attorneys-in-fact and agents to act on behalf of each
AVS stockholder in connection with all matters relating to the merger agreement
and, with respect to stockholders who vote in favor of the merger and own 500
or more AVS shares or are affiliates of AVS, the escrow agreement. AVS has
entered into stockholder agreements with certain stockholders of AVS pursuant
to which these AVS stockholders have agreed to vote all of their shares of AVS
capital stock in favor of the adoption of the merger agreement. As of the
record date, these stockholders owned shares representing approximately 38% of
the outstanding shares of AVS capital stock entitled to vote at the AVS special
meeting. As of the record date, AVS directors and executive officers and their
affiliates owned shares of AVS capital stock representing approximately 38% of
the outstanding shares of AVS capital stock entitled to vote at the AVS special
meeting.
PROCEDURES FOR VOTING YOUR SHARES. YOUR VOTE IS VERY IMPORTANT, REGARDLESS
OF THE NUMBER OF SHARES YOU OWN. PLEASE VOTE AS SOON AS POSSIBLE TO MAKE SURE
THAT YOUR SHARES ARE REPRESENTED AT THE MEETING. You may vote your shares by
signing your proxy card and mailing it in the enclosed return envelope. If you
are a holder of record, you may vote in person at the special meeting. If you
do not include instructions on how to vote your properly executed proxy card,
your shares will be voted FOR adoption of the merger agreement. If your shares
are held in an account at a brokerage firm or bank, your broker will vote your
shares only if you provide instructions on how to vote by
3
<PAGE>
following the information provided to you by your broker. If you do not vote or
do not instruct your bank or broker how to vote, it will have the same effect
as voting against the merger.
PROCEDURE FOR CHANGING YOUR VOTE. You can change your vote at any time
before your proxy is voted at the special meeting. You can do this in one of
three ways. First, you can send a written notice stating that you are revoking
your proxy. Second, you can complete and submit a new proxy card. If you choose
either of these two methods, you must submit your notice of revocation of your
new proxy to the Secretary of AVS at the address on page 28. If your shares
are held in an account at a brokerage firm or bank, you should contact your
broker to change your vote. Third, if you are a holder of record, you can
attend the special meeting and vote in person.
THE MERGER (PAGE 29)
The merger agreement is attached as Appendix A to this proxy
statement/prospectus. We encourage you to read the merger agreement because it
is the legal document that governs the merger.
The merger agreement provides that, upon consummation of the merger, MUSE
Merger Sub will merge with and into AVS. AVS will continue as the surviving
corporation and become a wholly-owned subsidiary of MUSE. The merger will
become effective upon the filing of a certificate of merger with the Secretary
of State of the State of Delaware, or such other time as the parties may
specify. This filing is expected to take place as soon as practicable after
receipt of AVS stockholder approval and all required regulatory approvals and
the satisfaction or waiver of the other conditions to the merger.
THE APPOINTMENT OF NEW AVS DIRECTORS FOLLOWING THE MERGER (PAGE 41)
The merger agreement provides that the directors of MUSE Merger Sub
immediately before the effective time of the merger will be the initial
directors of AVS, as the surviving corporation after the merger.
INTERESTS OF AVS OFFICERS AND DIRECTORS IN THE MERGER THAT ARE DIFFERENT
FROM THE INTERESTS OF AVS STOCKHOLDERS (PAGE 36)
As of the record date, AVS officers and directors and their affiliates
owned shares of AVS capital stock representing approximately 38% of the
outstanding shares of AVS capital stock entitled to vote at the AVS special
meeting. Under the merger agreement, AVS's officers and directors will receive
the same consideration for their shares of AVS capital stock as the other AVS
stockholders. The AVS stock options to purchase AVS common stock or Series C
Preferred Stock outstanding immediately prior to the effective time of the
merger that will be converted into options to acquire MUSE common stock in the
merger held by all option holders, including the officers and directors of AVS,
will become fully vested upon the completion of the merger. In addition, as
part of the merger, certain AVS officers will continue to be employed by AVS
after the merger.
CONDITIONS TO THE OBLIGATIONS OF AVS AND MUSE TO COMPLETE THE MERGER (PAGE 41)
Under the merger agreement, the obligations of AVS and MUSE to complete
the merger are subject to the satisfaction or waiver of the following
conditions:
1. the adoption of the merger agreement by the affirmative vote of the
holders of a majority of the voting power of all outstanding shares of
AVS capital stock, each voting separately as a class;
2. the AVS stockholders dissenting or capable of dissenting after the
completion of the merger must not constitute in excess of 10% of the
shares eligible to vote for approval of the merger;
3. the absence of any law, judgment, order or proceeding preventing
completion of the merger;
4
<PAGE>
4. all authorizations, permits, consents, orders or approvals of, or
declarations or filings with, any governmental entity or other person or
entity necessary to effect the transactions contemplated by the merger
agreement must have occurred, been filed or been obtained;
5. each of MUSE and AVS must have obtained all licenses, permits,
approvals and other authorizations from all governmental entities,
whether by transfer, reissuance, modification or otherwise, required to
be obtained by it in connection with or for the operation of the
business as presently conducted and contemplated in the merger
agreement;
6. the declaration of effectiveness of the registration statement on Form
S-4, of which this proxy statement/prospectus forms a part, by the
Securities and Exchange Commission, and the absence of any stop order or
proceedings seeking a stop order;
7. each of MUSE and AVS must have performed and complied with each
agreement, covenant and obligation required to be performed or complied
with by it under the merger agreement;
8. AVS and its subsidiaries, since December 31, 1999, and MUSE, since
March 31, 2000 (other than as otherwise publicly disclosed), must not
have suffered any event, violation or other matter that would have a
material adverse effect on the business, condition (financial or
otherwise), assets, liabilities, operations, properties or prospects of
such party ("Material Adverse Effect");
9. the representations and warranties of each of MUSE and AVS must be true
and correct in all material respects as of the date of the merger
agreement and as of the date of completion of the merger;
10. each of MUSE and AVS must have delivered or caused to be delivered to
the other each of the items required to be delivered in the merger
agreement;
11. AVS must have terminated its Executive Bonus Program and any similar
programs with no Material Adverse Effect to AVS;
12. AVS must have obtained Kubota Corporation's agreement with AVS that the
merger will not trigger the conversion feature of the convertible
promissory note and that such convertible promissory note will be
exchanged for convertible debt of MUSE or convertible debt of AVS
guaranteed by MUSE following the merger;
13. AVS must have obtained the requisite vote of the holders of the Series
A Preferred Stock and Series B Preferred Stock that the merger shall not
be deemed to be a liquidation, dissolution or winding up of AVS for
purposes of the liquidation preference provisions of such securities;
14. certain employees of AVS specified in the merger agreement must have
entered into MUSE's standard confidentiality and trade
secrets/inventions agreement unless those employees had entered into
similar agreements with AVS;
15. MUSE will have obtained a letter from Feldman Sherb & Co., P.C., MUSE's
independent public accountants, with respect to MUSE, and from Arthur
Andersen, LLP, AVS's independent public accountants, with respect to
AVS, to the effect that each of AVS and MUSE may participate in the
merger in a manner so as to permit the merger to qualify as a
pooling-of-interests; and
16. each of MUSE and AVS will have obtained certain affiliates' agreements
for purposes of qualifying the merger for pooling-of-interest accounting
treatment.
5
<PAGE>
CIRCUMSTANCES WHERE AVS AND/OR MUSE CAN TERMINATE
THE MERGER AGREEMENT (PAGE 46)
The merger agreement provides that it may be terminated and the merger may
be abandoned:
(1) at any time before the closing of the merger, by mutual written
consent of MUSE and AVS;
(2) at any time before the closing of the merger, by either MUSE or AVS:
(a) in the event of a material breach of the merger agreement by the
non-terminating party; or
(b) upon notification to the non-terminating party by the terminating
party that the non-terminating party has failed to satisfy a
condition required to be satisfied by such non-terminating party
prior to or at the closing date of the merger; and
(3) at any time after October 31, 2000 by either MUSE or AVS if the merger
has not been consummated by that date.
However the right to terminate pursuant to (2) or (3) above will not be
available to any party whose failure to fulfill any obligation under the merger
agreement has been the cause of or resulted in the failure of the merger to
occur on or before that date.
APPRAISAL RIGHTS AVAILABLE TO AVS STOCKHOLDERS WHO DISSENT
FROM THE MERGER (PAGE 33)
Under Section 262 of the Delaware General Corporation Law, a stockholder
of AVS may dissent from the merger and seek to obtain payment for the fair
value of that stockholder's shares. If you are an AVS stockholder and wish to
dissent, you must deliver to AVS, before the vote on the merger agreement at
the AVS special meeting, a written demand for appraisal of your shares. You
also must not vote in favor of the merger agreement. To not vote in favor of
the merger agreement, you can either:
o vote no in person at the AVS meeting or by proxy;
o abstain from voting;
o fail to vote; or
o revoke a duly executed proxy.
Beneficial owners of shares of AVS capital stock whose shares are held of
record by another person, such as a broker, bank or nominee, and who wish to
seek appraisal, should instruct the record holder to follow the procedures in
Section 262 of the Delaware General Corporation Law, a copy of which is
included as Appendix B to this proxy statement/prospectus. Failure to take any
necessary step may result in a termination or waiver of appraisal rights under
Delaware law.
MUSE'S ACCOUNTING TREATMENT OF THE ACQUISITION (PAGE 39)
The merger is intended to qualify as a pooling-of-interests. The
pooling-of-interests method of accounting assumes the companies had always been
combined, and the historical financial statements for periods prior to closing
of the merger are restated as though the companies had always been combined as
required under United States generally accepted accounting principles. The
assets and liabilities of MUSE and AVS will be carried forward by the combined
company at their historical recorded amounts.
LISTING OF THE MUSE COMMON STOCK (PAGE 36)
MUSE will use its reasonable best efforts to cause the shares of MUSE
common stock to be issued in connection with the merger to be approved for
quotation on the Nasdaq Stock Market or listed on such securities exchange as
MUSE common stock is then listed, subject to official notice of issuance, as
soon as reasonably practicable following the merger.
6
<PAGE>
TREATMENT OF STOCK OPTIONS, PURCHASE AUTHORIZATIONS AND
BENEFIT PLANS IN THE MERGER (PAGE 32)
Under the merger agreement, each AVS stock option to purchase AVS common
stock or Series C Preferred Stock outstanding immediately prior to the
effective time of the merger, whether vested or unvested, will cease to
represent a right to acquire shares of AVS common stock or Series C Preferred
Stock at the effective time of the merger and will be converted into a fully
vested, immediately exercisable option to acquire, on substantially the same
terms and conditions (except with respect to vesting), the number of shares of
MUSE common stock determined by dividing the number of shares of AVS common
stock or Series C Preferred Stock subject to that AVS stock option by 3.286,
rounded, if necessary, to the nearest whole share. The exercise price of these
stock options will be the exercise price for the stock option immediately prior
to the effective time of the merger multiplied by 3.286, rounded to the nearest
whole cent.
MUSE will file a registration statement covering the issuance of the
shares of MUSE common stock subject to each AVS option as soon as practicable
following the merger.
The merger agreement provides that all purchase authorizations under the
AVS 1992 Stock Purchase Plan not exercised at least 30 days prior to the
closing date of the merger will terminate on the closing date of the merger.
Also, the merger agreement provides that AVS will have its board of directors
take the necessary actions to effect the cancellation and substitution of the
AVS stock options and the termination of the purchase authorizations under the
stock purchase plan, including but not limited to adopting resolutions
terminating the stock option plan and the stock purchase plan effective no
later than one day prior to the closing date of the merger.
The merger agreement also provides that all AVS employees will continue on
their existing benefit plans until such time after the effective time of the
merger, in MUSE's sole and absolute discretion, as MUSE decides to convert to
employee benefit plans and programs maintained by MUSE at that time.
TAX CONSEQUENCES (PAGE 38)
You should not recognize income, gain or loss upon the exchange of the AVS
capital stock into MUSE common stock. Your tax basis in MUSE common stock
received upon conversion should generally be equal to your tax basis in the AVS
capital stock exchanged.
STOCKHOLDER AGREEMENTS (PAGE 47)
AVS entered into individual stockholder agreements with certain
stockholders. These stockholders combined represented approximately 38% of the
AVS capital stock then outstanding.
The stockholders signing the stockholder agreements agreed, among other
things, to vote their shares of AVS capital stock in favor of the adoption of
the merger agreement and approval of the merger and any other transactions
contemplated by the merger agreement. Each of the stockholder agreements
provides that it will terminate upon the earlier of the completion or the
merger and the termination of the merger agreement in accordance with its
terms.
AVS AFFILIATES AGREEMENT (PAGE 47)
Rule 145 under the Securities Act of 1933 regulates the disposition of
securities of "affiliates" of AVS in connection with the merger. AVS has
delivered to MUSE a letter identifying all persons who are or may be deemed to
be, at the time of the AVS meeting, "affiliates" of AVS for purposes of Rule
145 under the Securities Act. This letter may be further updated before the
effective time of the merger. AVS has agreed to use its best efforts to cause
each person who is identified as an affiliate to deliver to MUSE, before the
effective time of the merger, a written affiliate's agreement. Under these
affiliate's agreements, each affiliate will represent that he, she or it has
been advised that the affiliate may not sell, transfer or otherwise dispose of
MUSE common stock issued to the affiliate in the merger unless the sale,
transfer or other disposition:
7
<PAGE>
(1) has been registered under the Securities Act;
(2) complies with the requirements of Rule 145 under the Securities Act;
or
(3) in the opinion of counsel reasonably acceptable to MUSE, is otherwise
exempt from registration under the Securities Act.
Notwithstanding the foregoing, each affiliate will have further agreed not
to acquire any shares of MUSE common stock and not to transfer or dispose of
any of its shares of MUSE common stock prior to the date by which at least 30
days of combined results of operations of MUSE and AVS have been made publicly
available.
MUSE AFFILIATES AGREEMENTS (PAGE 48)
MUSE is required to obtain agreements from its affiliates similar to those
required for AVS affiliates.
8
<PAGE>
COMPARATIVE PER SHARE INFORMATION
The following table sets forth selected historical per share information
of MUSE and AVS and unaudited combined per share information after giving
effect to the merger between MUSE and AVS, under the pooling-of-interests
method of accounting, assuming that one share of MUSE common stock had been
issued in exchange for each 3.286 outstanding shares of AVS capital stock. You
should read this information in conjunction with the selected historical
audited and unaudited financial information, included elsewhere in this
document, and the historical audited financial statements of MUSE and AVS and
related notes that are incorporated in this document by reference. The pro
forma combined per share information is derived from, and should be read in
conjunction with, the unaudited pro forma condensed combined financial
statements and related notes included elsewhere in this document. Unaudited Pro
Forma AVS Per Share Equivalents are calculated by dividing the Unaudited Pro
Forma Combined per share amounts by 3.286. The historical per share information
is derived from audited financial statements as of and for each of the years in
the three-year period ended December 31, 1999 for AVS and September 30, 1999
for MUSE.
The unaudited pro forma combined per share information does not purport to
represent what the actual financial position or results of operations of MUSE
and AVS would have been had the merger occurred on at the beginning of the
earliest period presented or to project MUSE's and AVS's financial position or
results of operations for any future date or period.
9
<PAGE>
UNAUDITED COMPARATIVE PER SHARE DATA
<TABLE>
<CAPTION>
FOR THE NINE FOR THE NINE FOR THE FOR THE
MONTHS ENDED MONTHS ENDED YEAR ENDED YEAR ENDED
JUNE 30, 2000 JUNE 30, 1999 SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
--------------- ---------------- ---------------------- ---------------------
<S> <C> <C> <C> <C>
HISTORICAL MUSE
Net Income (loss) per common
share -- basic ............ ($0.33) ($0.35) ($0.51) $0.04
Net Income (loss) per common
share-diluted ............. ($0.33) ($0.35) ($0.51) $0.04
Book value per common share
at period end ............. $1.20 $1.59 $1.43 $1.28
<CAPTION>
FOR THE NINE FOR THE NINE FOR THE FOR THE
MONTHS ENDED MONTHS ENDED YEAR ENDED YEAR ENDED
JUNE 30, 2000 JUNE 30, 1999 DECEMBER 31, 1999 DECEMBER 31, 1998
--------------- ---------------- ---------------------- ---------------------
<S> <C> <C> <C> <C>
HISTORICAL AVS
Net Income (loss) per common
share-basic ............... ($0.26) ($0.06) $0.02 ($1.73)
Net Income (loss) per common
share -- diluted .......... ($0.26) ($0.06) $0.02 ($1.73)
Book value per common share
at period end ............. ($1.13) ($0.97) ($0.90) ($0.92)
<CAPTION>
FOR THE NINE FOR THE NINE FOR THE FOR THE
MONTHS ENDED MONTHS ENDED YEAR ENDED YEAR ENDED
JUNE 30, 2000 JUNE 30, 1999 SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
--------------- ---------------- ---------------------- ---------------------
<S> <C> <C> <C> <C>
PRO FORMA COMBINED
PER MUSE SHARE
Net Income (loss) per common
share -- basic ............ ($0.35) ($0.47) ($0.60) ($0.46)
Net Income (loss) per common
share -- diluted .......... ($0.35) ($0.47) ($0.60) ($0.46)
Book value per common share
at period end ............. $0.59 -- -- --
<CAPTION>
FOR THE NINE FOR THE NINE FOR THE FOR THE
MONTHS ENDED MONTHS ENDED YEAR ENDED YEAR ENDED
JUNE 30, 2000 JUNE 30, 1999 SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
--------------- ---------------- ---------------------- ---------------------
<S> <C> <C> <C> <C>
EQUIVALENT PRO FORMA
COMBINED PER AVS
SHARE
Net Income (loss) per common
share -- basic ............ ($0.11) ($0.14) ($0.19) ($0.14)
Net Income (loss) per common
share -- diluted .......... ($0.11) ($0.14) ($0.19) ($0.14)
Book value per common share
at period end ............. $0.18 -- -- --
</TABLE>
10
<PAGE>
COMPARATIVE PER SHARE MARKET PRICE INFORMATION
MUSE's common stock is traded on the Nasdaq SmallCapTM Market under the
symbol "MUZE" and on the Boston Stock Exchange under the symbols "MZE". The
following table sets forth, for the periods indicated, the range of high and
low bid prices of the common stock as reported by Nasdaq SmallCap Market. These
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission, and may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
MUSE COMMON STOCK HIGH LOW
----------------- ----------- ----------
<S> <C> <C>
From November 17, 1998 (first trade date) through December 31, 1998 ..... $ 14.00 $ 8.50
Quarter ended March 31, 1999 ............................................ $ 10.50 $ 3.88
Quarter ended June 30, 1999 ............................................. $ 8.13 $ 3.88
Quarter ended September 30, 1999 ........................................ $ 6.25 $ 3.25
Quarter ended December 31, 1999 ......................................... $ 4.063 $ 2.625
Quarter ended March 31, 2000 ............................................ $ 6.25 $ 2.719
Quarter ended June 30, 2000 ............................................. $ 5.375 $ 2.00
Quarter beginning July 1, 2000 through August 31, 2000 .................. $ 3.375 $ 2.00
</TABLE>
On May 4, 2000, the last trading day before the public announcement of the
proposed acquisition of AVS, the last reported closing sales price per share of
MUSE common stock was $4.375. On September 13, 2000, the last reported closing
sales price per share of MUSE common stock was $2.38.
Since the securities of AVS are not publicly traded, they have no readily
ascertainable market value.
Since the market price of MUSE common stock is subject to fluctuation, the
market value of the shares of MUSE common stock that holders of AVS capital
stock will be entitled to receive pursuant to the merger may increase or
decrease prior to and following the merger. The exchange ratio is fixed and
will not be adjusted to compensate AVS's stockholders for decreases in the
market price of MUSE common stock which could occur prior to the merger
becoming effective. WE URGE STOCKHOLDERS TO OBTAIN CURRENT MARKET QUOTATIONS
FOR MUSE COMMON STOCK. WE CANNOT ASSURE YOU AS TO THE FUTURE PRICES OR MARKETS
FOR MUSE COMMON STOCK.
NEITHER MUSE NOR AVS HAS PAID ANY CASH DIVIDENDS IN THE PAST. BOTH MUSE
AND AVS INTEND TO RETAIN FUTURE EARNINGS, IF ANY, TO FUND THE DEVELOPMENT AND
GROWTH OF THEIR BUSINESS AND DO NOT ANTICIPATE PAYING CASH DIVIDENDS IN THE
FORESEEABLE FUTURE.
11
<PAGE>
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE
Each of AVS and MUSE has made forward-looking statements in this proxy
statement/ prospectus, and in documents that are incorporated by reference in
this proxy statement/prospectus, that are subject to risks and uncertainties.
Forward-looking statements include the information concerning possible or
assumed future results of operations of AVS and MUSE, including the anticipated
benefits from the merger. Also, when AVS and MUSE use words such as "believes,"
"expects," "anticipates" or similar expressions, we are making forward-looking
statements. You should note that many factors could affect the future financial
results of AVS and MUSE and could cause the results to differ materially from
those expressed in our forward-looking statements. Such factors include,
without limitation, those disclosed in the "Risk Factors" section of this proxy
statement/prospectus.
12
<PAGE>
SUMMARY OF SELECTED HISTORICAL FINANCIAL INFORMATION
We are providing the following financial information to assist you in your
analysis of the financial aspects of the merger. We derived the MUSE
information from the audited financial statements of MUSE as of and for each of
the years ended September 30, 1996 through 1999. We derived the AVS information
from the audited financial statements as of and for the years ended December
31, 1995 through 1999. The selected financial information as of and for the
period ended June 30, 1999 and 2000 for MUSE and AVS are derived from unaudited
condensed financial statements, which in the opinion of management of each of
MUSE and AVS, include all adjustments, consisting of normal recurring
adjustments, necessary to present fairly the information for such periods. The
selected financial information of MUSE is only a summary and should be read in
conjunction with the historical financial statements of MUSE and related notes
contained in the annual and quarterly reports and other information that MUSE
has filed with the Securities and Exchange Commission. See "Where You Can Find
More Information" on page 95 for information on where you can obtain copies of
this other information. The selected financial information of AVS should be
read in conjunction with AVS's audited financial statements and related notes
for the years ended December 31, 1999, 1998 and 1997 and unaudited financial
statements for the six months ended June 30, 1999 and 2000, included elsewhere
in this proxy statement/prospectus.
MUSE HISTORICAL FINANCIAL INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, NINE MONTHS ENDED JUNE 30,
-------------------------------------------------- --------------------------
1996 1997 1998 1999 1999 2000
------------ ------------ ----------- ------------ ------------ ------------
In thousands, except per share data (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenue ................................ $ 355 $ 756 $ 6,206 $ 1,723 $ 1,113 $ 6,542
Income (loss) from operations .......... $ (1,203) $ (2,049) $ 1,123 $ (5,248) $ (3,401) $ (3,662)
Net income (loss) ...................... $ (1,203) $ (2,049) $ 324 $ (5,112) $ (3,440) $ (3,532)
Basic earnings (loss) per share ........ $ (0.18) $ (0.28) $ 0.04 $ (0.51) $ (0.35) $ (0.33)
Diluted earnings (loss) per
share ................................. $ (0.18) $ (0.28) $ 0.04 $ (0.51) $ (0.35) $ (0.33)
Weighted Average Common
Shares Outstanding .................... 6,872 7,193 7,672 10,049 9,892 10,717
Weighted Average Dilutive
Shares Outstanding .................... 6,872 7,193 8,654 10,049 9,892 10,717
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
----------------------------------------------- -----------------------
1996 1997 1998 1999 1999 2000
--------- --------- ---------- ---------- ---------- ----------
In thousands (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Total Assets .......................... $1,180 $1,366 $12,813 $15,525 $17,169 $16,655
Long-term debt ........................ $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Shareholders equity (deficit) ......... $ 940 $ (58) $11,214 $14,514 $16,187 $12,734
</TABLE>
13
<PAGE>
AVS HISTORICAL FINANCIAL INFORMATION
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------------------------ -----------------------
1995 1996 1997 1998 1999 1999 2000
------------ ---------- ---------- ------------ ------------ ----------- -----------
In thousands, except per share data (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenue ............................... $ 19,408 $17,917 $18,575 $ 15,396 $ 13,775 $ 6,453 $ 5,787
Income (loss) from operations ......... $ 753 $ (829) $ (735) $ (5,889) $ 667 $ 105 $ (750)
Net income (loss) ..................... $ 640 $ (825) $ (819) $ (6,162) $ 84 $ (220) $ (977)
Basic earning per share ............... $ 0.16 $ (0.20) $ (0.21) $ (1.73) $ 0.02 $ (0.06) $ (0.26)
Diluted earnings per share ............ $ 0.10 $ (0.20) $ (0.21) $ (1.73) $ 0.02 $ (0.06) $ (0.26)
Weighted Average Common
Shares Outstanding ................... 3,991 4,136 3,882 3,572 3,641 3,641 3,692
Weighted Average Dilutive
Shares Outstanding ................... 6,320 4,136 3,882 3,572 5,511 3,641 3,692
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------------------------------------------------ --------------------------
1995 1996 1997 1998 1999 1999 2000
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
In thousands (UNAUDITED)
BALANCE SHEET DATA
Total Assets ......................... $14,161 $12,218 $13,388 $ 6,158 $ 5,412 $ 5,212 $ 4,315
Long-term debt ....................... $ 86 $ 0 $ 2,984 $ 2,527 $ 3,113 $ 3,088 $ 2,048
Shareholders equity (deficit) ........ $ 5,222 $ 4,456 $ 2,704 $ (3,342) $ (3,268) $ (3,540) $ (4,178)
</TABLE>
14
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
We intend that the merger will be accounted for under the
pooling-of-interests method of accounting, which means that for accounting and
financial reporting purposes we will treat our companies as if they had always
been combined. For a more detailed description of pooling-of-interests
accounting, see "The Merger -- Accounting Treatment."
The following unaudited pro forma condensed combined selected financial
information has been derived from, and should be read in conjunction with, the
Unaudited Pro Forma Condensed Combined Financial Statements and related notes
included elsewhere in this proxy statement/ prospectus.
We have presented below unaudited pro forma selected combined financial
information that reflects the pooling-of-interests method of accounting and
that is intended to provide you with a better picture of what our businesses
might have looked like had they always been combined, i.e., giving effect to
the merger between MUSE and AVS as if it had occurred on October 1, 1998 for
income statements, and as of June 30, 2000 for the balance sheet. In addition,
such pro forma information for the year ended September 30, 1999 and nine
months ended June 30, 1999 also include the acquisition by MUSE of Virtual
Presence, Ltd. in November 1999 as if such acquisition occurred as of October
1, 1998. Such acquisition has been accounted for under the purchase method of
accounting. The historical audited and pro forma unaudited financial
information for Virtual Presence are included elsewhere in this proxy
statement/prospectus. As a result of various factors, including any synergies
which may have resulted, you should not rely on the unaudited pro forma
selected combined financial information as being indicative of the historical
results that would have occurred or the results that may be achieved after the
merger.
MUSE TECHNOLOGIES, INC AND ADVANCED VISUAL SYSTEMS INC.
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
NINE MONTHS ENDED FISCAL YEAR ENDED
JUNE 30, SEPTEMBER 30,
----------------------- -----------------------
2000 1999 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Income Statement Data
Revenue ......................................... $ 16,183 $ 10,923 $ 18,863 $ 23,338
Income (loss) from operations ................... (3,954) (4,085) (6,174) (2,501)
Net income (loss) ............................... (4,230) (5,280) (7,432) (4,211)
Basic Earnings (loss) Per Share ................. (0.35) (0.47) (0.60) (0.46)
Diluted Earnings (loss) Per Share ............... (0.35) (0.47) (0.60) (0.46)
Weighted Average Common Shares
Outstanding .................................... 12,114 11,340 12,376 9,142
Weighted Average Dilutive Shares Outstanding..... 12,114 11,340 12,376 9,142
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 2000
---------------
<S> <C>
Balance Sheet Data
Total Assets ............................... $20,970
Long-term debt ............................. $ 2,151
Shareholders equity ........................ $ 7,556
</TABLE>
15
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RISK FACTORS
In addition to the other information contained or incorporated by
reference in this proxy statement/prospectus, AVS stockholders should consider
the following risk factors before they decide whether or not to vote in favor
of the approval and adoption of the merger agreement.
RISKS RELATING TO THE COMBINED COMPANY
IF WE CANNOT SUCCESSFULLY INTEGRATE OUR COMPANIES, OUR BUSINESS COULD BE
ADVERSELY AFFECTED.
The merger involves the integration of two companies that have previously
operated independently. To combine AVS and MUSE, we will need to integrate and
coordinate:
o the management and administrative functions,
o product offerings and sales,
o marketing, and
o research and development efforts of each company.
If we cannot successfully integrate our companies' operations, our business and
the results of operations of the combined businesses could be adversely
affected.
Combining our companies will present a number of challenges, including:
o the management of businesses with different customer bases and
different approaches to manufacturing, sales and service, and
o the integration of a number of geographically separated research and
development and other facilities.
Whether or not this will succeed will depend largely on our companies' ability
to retain key management, sales and research and development personnel. In
addition, our management will be occupied with integrating our companies'
operations following the merger and this may temporarily distract management
from our companies' day-to-day businesses. We, thus, cannot assure you that our
companies will be smoothly and successfully integrated.
THE FAILURE TO ATTRACT OR THE LOSS OF SENIOR MANAGEMENT PERSONNEL COULD
DETRIMENTALLY IMPACT OUR BUSINESS.
The success of our combined company depends to a significant extent on the
efforts of our senior management. The loss of one or more of these individuals
could adversely affect us. Our continued success will depend on our ability to
retain existing, and attract additional, qualified senior management personnel.
We may not be successful in doing this.
DIRECTORS AND CERTAIN OFFICERS OF AVS HAVE POTENTIAL CONFLICTS OF INTEREST IN
RECOMMENDING THAT YOU VOTE IN FAVOR OF THE MERGER AGREEMENT
As of the record date, AVS officers and directors and their affiliates
owned shares of AVS capital stock representing approximately 38% of the
outstanding shares of AVS capital stock entitled to vote at the AVS special
meeting. Under the merger agreement, AVS's officers and directors will receive
the same consideration for their shares of AVS capital stock as the other AVS
stockholders. The AVS stock options to purchase AVS common stock or Series C
Preferred Stock outstanding immediately prior to the effective time of the
merger that will be converted into options to acquire MUSE common stock in the
merger held by all option holders, including the officers and directors of AVS,
will become fully vested upon the completion of the merger. In addition, as
part of the merger, certain AVS officers will continue to be employed by AVS
after the merger.
The receipt of compensation or other benefits in the merger for current
directors and officers of AVS following completion of the merger, may influence
these directors and officers in making their recommendation that you vote in
favor of the adoption of the merger agreement.
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RISKS RELATING TO THE MUSE COMMON STOCK ISSUED IN THE MERGER
THE VALUE OF MUSE COMMON STOCK RECEIVED WILL FLUCTUATE
Upon completion of the merger, all shares of AVS capital stock will be
converted into shares of MUSE common stock. The ratios at which the shares will
be converted are fixed. However, the market price of MUSE common stock when the
merger is completed may vary from its market price at the date of this document
and at the date of the stockholder meeting of AVS. No adjustment for changes in
the market price of MUSE common stock will be made. Stock price changes may
result from a variety of factors that are beyond the control of MUSE,
including:
o changes in its business,
o changes in operations and prospects,
o regulatory considerations and
o general stock market and economic conditions.
Stockholders of AVS are urged to obtain current market quotations for MUSE
common stock.
THE EQUITY LINE AGREEMENT AND CONVERTIBLE NOTE MAY HAVE A DILUTIVE IMPACT ON OUR
STOCKHOLDERS.
The issuance of shares to be received by Kingsbridge Capital, Ltd.
pursuant to an equity line agreement and a convertible note recently entered
into or the exercise of warrants by Kingsbridge and the selling securityholders
pursuant to a registration statement filed concurrently with this proxy
statement/prospectus could have a dilutive impact on our stockholders. As a
result, our net income or loss per share could be materially decreased in
future periods, and the market price of our common stock could be materially
and adversely affected. In addition, the common stock to be issued under the
equity line agreement will be issued at a discount to the then-prevailing
market price of the common stock. These discounted sales could have an
immediate adverse effect on the market price of the common stock. The issuance
of such shares and the shares issuable upon exercise of warrants would have a
further dilutive effect on our common stock and could adversely affect our
stock price.
WE HAVE NOT PAID DIVIDENDS ON OUR COMMON STOCK.
We have not paid any cash dividends on our capital stock and do not
anticipate paying any cash dividends in the foreseeable future. Earnings, if
any, will be retained to finance future growth.
IF WE FAIL TO CONTINUE TO MEET NASDAQ'S SMALLCAP MARKET LISTING MAINTENANCE
REQUIREMENTS, NASDAQ MAY DELIST OUR COMMON STOCK AND WARRANTS.
There is a possibility that our common stock and warrants could be
delisted from the Nasdaq Smallcap Market if we fail to meet the listing
maintenance criteria. To qualify for continued inclusion in the Nasdaq SmallCap
Market, we will have to maintain (a) either $2,000,000 in net tangible assets
(total assets minus total liabilities and goodwill); market capitalization of
$35,000,000; or net income of $500,000 in the most recently completed fiscal
year or in two of the last three most recently completed fiscal years; and (b)
a market value of the public float of $1,000,000. In addition, continued
inclusion requires two market-makers and a minimum bid price of $1.00. In the
event of Nasdaq SmallCap Market delisting, trading, if any, in our securities
may then continue to be conducted on the OTC Electronic Bulletin Board or in
the non-Nasdaq over-the-counter market. As a result, an investor may find it
more difficult to dispose of, or to obtain accurate quotations as to the market
value of our securities. We will also have to comply with the maintenance
criteria of the Boston Stock Exchange for continued listing on that exchange.
IF OUR SECURITIES BECOME SUBJECT TO THE PENNY STOCK RULES, THE SECURITIES MAY
BECOME MORE DIFFICULT TO SELL.
The Securities and Exchange Commission has adopted rules that regulate
broker-dealer practices in connection with transactions in "penny stocks."
Penny stocks are equity securities with a price of
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less than $5.00 (other than securities registered on national securities
exchanges or quoted on the Nasdaq system, provided that current price and
volume information with respect to transactions in those securities is provided
by the exchange or system). The penny stock rules require a broker-dealer,
prior to a transaction in a penny stock not otherwise exempt from the rules, to
deliver a standardized risk disclosure document approved by the Securities and
Exchange Commission that provides information about penny stocks and the nature
and level of risks in the penny stock market. The broker-dealer also must
provide the customer with current bid and offer quotations for the penny stock,
the compensation of the broker-dealer and its salesperson on the transaction,
and monthly account statements showing the market value of each penny stock
held in the customer's account. The bid and offer quotations, and the
broker-dealer and salesperson compensation information must be given to the
customer orally or in writing prior to effecting the transaction and must be
given to the customer in writing before or with the customer's confirmation.
These disclosure requirements may have the effect of reducing the level of
trading activity in the secondary market for a stock that becomes subject to
the penny stock rules. If our securities become subject to the penny stock
rules, investors in this offering may find it more difficult to sell their
securities.
THE EXISTENCE OF REGISTRATION RIGHTS, WARRANTS AND STOCK OPTIONS COULD
ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK AND OUR ABILITY TO OBTAIN
ADDITIONAL EQUITY FINANCING ON FAVORABLE TERMS.
In addition to the 10,808,882 shares of our common stock outstanding,
there are outstanding warrants to purchase 2,598,388 shares of our common
stock. We have issued to the underwriter of our initial public offering a unit
purchase option to purchase 120,000 units consisting of 120,000 shares of our
common stock and warrants to purchase 60,000 shares of common stock. We also
have stock option plans pursuant to which options to purchase 2,760,847 shares
of common stock are outstanding. The holders of warrants and the underwriter's
unit purchase option have demand and/or piggyback registration rights.
Continuum Resources International, ASA also possesses certain demand and
piggyback registration rights with respect to the 1,000,000 shares of common
stock held by them and the 1,000,000 shares of common stock underlying its
warrants. Kingsbridge also holds warrants to purchase an aggregate of 275,000
shares of our common stock and has also received registration rights with
respect thereto. The existence of these registration rights, as well as the
sale of shares of common stock pursuant to registration statements which we may
be required to prepare, may have a depressive effect on the price of our common
stock in the market. In addition, the existence of such warrants and options
and the registration rights referred to above may adversely affect the terms on
which we can obtain additional equity financing. The holders of warrants are
likely to exercise them at a time when we would otherwise be able to obtain
capital on terms more favorable than those provided by the warrants.
RISKS RELATING TO MUSE'S BUSINESS
OUR FUTURE PROFITABILITY IS UNCERTAIN AND WE HAVE A HISTORY OF LOSSES AND
ACCUMULATED DEFICIT WHICH MAY CONTINUE IN THE FUTURE.
Our revenue to date has not been substantial, and any increase in revenue
will be dependent upon our ability to market our products, either directly or
through distributors or strategic partners. We expect to substantially increase
our operating expenses in anticipation of increased revenue with no assurance
that we will generate sufficient revenue to cover such expenses. Accordingly,
we can not assure you that we will ever be able to successfully market and
commercialize our products or that we will ever achieve sustained profitable
operations.
WE MAY NEED ADDITIONAL CAPITAL IN THE FUTURE FOR OPERATIONS AND ACQUISITIONS.
We have expended, and will need to expend, additional funds in order to
continue our marketing and product development programs and for acquisitions.
To date, we have completed a number of acquisitions and we are in the process
of acquiring AVS. The acquisitions will require cash to fund the purchases and
assimilation of the acquired businesses into our company. Our capital
requirements depend on numerous factors, including:
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o the progress and strategic direction of our product development,
marketing and sales programs;
o our ability to enter into strategic arrangements or other marketing
arrangements which result in the commercialization of our products;
o our need to purchase or lease additional capital equipment; and
o the cost of filing, prosecuting, defending and enforcing any patent
claims and other intellectual property rights.
To date, our principal source of funds has been from the sale of our debt and
equity securities and revenues from sales activities. We have entered into an
equity line agreement with Kingsbridge which allows us to issue and sell and
requires Kingsbridge to purchase up to an aggregate of $18,000,000 of our
common stock, subject to certain limitations based on market price and trading
volume of our common stock and the satisfaction of other conditions. We cannot
assure you that we will meet all of the conditions required to obtain financing
under the equity line agreement. Further, if our current and projected needs
change due to unanticipated events or otherwise, we may be required to obtain
additional capital and there can be no assurance that additional financing will
be available or that the terms of any financing will be acceptable to us. If
adequate funds are not available, we may be required to delay, scale back or
eliminate one or more of our product development programs, including but not
limited to the further development of our software products, or related
products, or we may be forced to obtain funds through entering into
arrangements with collaborative partners or others that may require us to
relinquish rights to our technologies or products that we would not otherwise
relinquish.
BECAUSE POTENTIAL CUSTOMERS MAY NOT ACCEPT OUR PRODUCTS WE MAY NEVER ACHIEVE
ENOUGH SALES TO MAKE OUR BUSINESS PROFITABLE.
The commercial success of our products will be dependent on their
acceptance by potential customers. Our software products are based on
technology that has had extremely limited marketplace acceptance and is subject
to the risks of failure inherent in products based on new technologies. A
significant portion of our resources will be used for research and development
and marketing relating to our software and other products and services. There
can be no assurance that we can or will develop marketable products. The
failure of our products to achieve market acceptance would have a material
adverse effect on us.
WE HAVE LIMITED SALES AND MARKETING CAPABILITIES.
Our ability to generate revenue and profits from our software products is
dependent upon our ability to successfully market our products. Our sales
efforts for our software products will be undertaken by a direct sales force as
well as potential strategic partners who can develop and market applications
based on our software products in various industries. Substantial marketing
efforts will be required to increase sales. In addition, we are subject to the
risks inherent in any attempt to commercialize products based on emerging
technology, many of which are not within our control. Our ability to generate
revenue and profits is dependent upon the ability and success of our sales
force and traditional marketing methods. We cannot assure you that we will be
successful in our marketing efforts.
WE ARE DEPENDENT ON STRATEGIC PARTNERS TO HELP MARKET AND COMMERCIALIZE OUR
SOFTWARE PRODUCTS.
To the extent that we rely upon strategic partners to perform such
functions as marketing or commercialization of applications based on our
software products, we will be dependent upon the ability and willingness of
those strategic partners to perform their obligations in a timely manner. The
amount and timing of the allocation of resources by any strategic partner
pursuant to its arrangement or agreement with us may be affected by numerous
factors not within our control, including, but not limited to:
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o a change in management or direction by the strategic partner,
o the introduction by the strategic partner of products which may
compete with our products or applications or
o the strategic partner's perception of the market for our products.
Conflicts of interest could arise between us and one or more of our
strategic partners which, depending on the nature of the conflict, could have a
material adverse effect upon our business, prospects and financial condition.
Although we will seek to restrict our strategic partners from developing
competitive products we may not be able either to obtain or enforce the
restrictions. Our strategic partners or their affiliates may develop, either
alone or with others, products which are competitive or have applications which
are competitive with our products. Those conflicts could affect the support
provided by the strategic partner for our products which could have a material
adverse effect on us.
Our ability to enter into arrangements with strategic partners on
acceptable terms may be affected by our financial condition. To the extent that
we are in a position where it requires substantial capital to fund our
operations, it may be necessary for us to grant to strategic partners rights to
our products or technology which we would not otherwise grant. There can be no
assurance that we can or will be able to enter into strategic relationships or
that any agreements or arrangements with strategic partners will generate
revenue or profits for us.
OUR DEPENDENCE ON A LICENSE AGREEMENT COULD HAVE A MATERIAL ADVERSE EFFECT ON
OUR BUSINESS.
One of our software products, MuSE (Multi-dimensional user oriented
Synthetic Environment), is based on software which is licensed to us by Sandia
Corporation. The license agreement grants us exclusive rights to develop and
commercialize MuSE until October 2005 and thereafter provides a non-exclusive
right through 2015. At the end of the period of exclusivity, we may request
that Sandia extend our exclusivity through 2015, which determination shall be
made in Sandia's sole discretion. Sandia Corporation has the right to terminate
the license or make the license non-exclusive in the event we fail to pay the
required royalties under the license agreement, with an annual minimum royalty
of $20,000 through the year ending December 31, 2006. Any termination of the
license agreement will have a material adverse effect on us. Furthermore, if
and when the license becomes non-exclusive, other companies may obtain the
rights to the MuSE technology to develop products which may compete with our
products.
THE COMPUTER AND SOFTWARE INDUSTRIES ARE SUBJECT TO RAPID CHANGES IN
TECHNOLOGY.
The computer industry in general and the software industry in particular
are subject to rapid changes in technology, which can make our hardware or
software obsolete. Advances in technology create markets for new products and
can change or reduce the market for existing products. There can be no
assurance that future technological developments will not result in
technologies which render our products or applications obsolete. In order for
us to obtain market acceptance of our software and related products, we must be
able to convince our potential customers and strategic partners that we have
the technological capabilities to meet the technological demands of the
marketplace. Furthermore, the willingness of a potential strategic partner to
enter into an agreement or arrangement with us and to devote the financial and
personnel resources to the development of applications using our software may
be dependent on, among other factors, our ability or the ability of the
strategic partner to offer solutions which are competitive with products
developed and offered by others and whether those products can generate an
acceptable market share.
WE MAY HAVE DIFFICULTY PROTECTING PATENTS AND OTHER PROPRIETARY RIGHTS TO OUR
TECHNOLOGY AND INTELLECTUAL PROPERTY CLAIMS AGAINST US CAN BE COSTLY AND MAY
RESULT IN THE LOSS OF SIGNIFICANT RIGHTS.
We believe that patent and other protection of intellectual property
rights is crucial to our business and that our future will depend in part on
our ability to develop proprietary and/or patented
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products, maintain trade secret protection and operate without infringing the
proprietary rights of others. Our products are based on patents and other
proprietary technology developed by us and by Sandia Corporation or licensed to
us by others. Patents have been issued separately to us and to Sandia
Corporation with respect to various aspects of MuSE. However, no assurance can
be given that the patents will be upheld if challenged. Any challenge to the
validity of our patent or license rights, regardless of whether we ultimately
prevail, could be expensive and could require us to use a significant portion
of our resources for litigation, without any assurance of success.
Under our license agreement with Sandia Corporation, Sandia has the
obligation to defend the patents licensed to us against any claim of
infringement or invalidity, as a result of which we will be dependent upon
Sandia's willingness or ability to defend the patents against any claim.
We cannot assure you that third parties will not challenge the validity
and enforceability of the patent applications or any patents owned or issued in
the future to us, or that the challenges will not be successful. We cannot
assure you that patent infringement claims will not be asserted and found to
have merit, that we will not be enjoined from using MuSE or licensing MuSE, or
that we would not be forced to obtain a license and pay future royalty fees as
well as past damages to the party claiming infringement.
We will generally rely on a combination of trade secret, copyright,
trademark and patent law to protect our proprietary rights in the intellectual
property developed by us or licensed to us. Although we intend to provide
products utilizing our software to our customers primarily in object code form,
we cannot assure that unauthorized third parties will not be able to duplicate
the software code.
BECAUSE OUR PRODUCT LIABILITY INSURANCE MAY BE INSUFFICIENT OR MAY NOT BE
AVAILABLE IN THE FUTURE,
OUR BUSINESS COULD BE SIGNIFICANTLY AFFECTED.
The use of our products, including products designed and marketed by a
potential strategic partner, or the distribution of products manufactured by
others, may expose us to liability claims resulting from the use of such
products. We currently maintain limited product liability insurance in the
aggregate amount of $2,000,000 per occurrence with a total aggregate limit of
$5,000,000, and we cannot assure you that the coverage will be adequate.
Furthermore, we cannot assure you that adequate product liability insurance
will be available to us or any of our strategic partners in the future at a
reasonable cost, if at all. Our inability or the inability of any strategic
partner to obtain sufficient coverage at an acceptable cost or to obtain other
protection against potential liability could prevent or inhibit the
commercialization of one or more of our proposed products. A successful product
liability claim or a product recall would have a material adverse effect upon
our business, prospects and financial condition.
OUR DEPENDENCE ON GOVERNMENT CONTRACTS COULD HAVE A MATERIAL ADVERSE EFFECT ON
OUR BUSINESS.
We maintain several Federal government contracts and receive grants from
the Federal government, all of which are cancellable and subject to
renegotiation at the option of the government for any reason. We derive a
portion of current revenues, and expect to continue to derive a portion of our
revenues in the near future, from government contracts. Accordingly, any
cancellation or renegotiation relating to significant projects could have a
material adverse impact on us.
OUR BUSINESS MAY BE SIGNIFICANTLY AFFECTED BY THE LOSS OF OUR KEY PERSONNEL.
We are dependent upon the services of Brian Clark, President and Chief
Financial Officer and John Hough, Managing Director of Virtual Presence. Given
our early stage of development and the shortage of personnel trained in the
application and adaptation of our MuSE product, we are dependent on our ability
to identify, hire, train, retain and motivate high quality personnel,
especially highly skilled engineers involved in the ongoing developments
required to adapt MuSE to specific applications and solutions. Loss of the
services of any of Messrs. Clark or Hough could have a material adverse effect
on our operations and financial condition. We have entered into three-year
employment agreements with Mr. Clark commencing as of June 1, 1998, providing
for current annual compensation
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of $150,000 and with Mr. Hough commencing as of November 15, 1999, providing
for current annual compensation of $150,000. Each agreement provides for
certain bonuses, severance benefits and non-competition covenants and, in some
cases, payments in the event of a change of control.
WE OPERATE IN A HIGHLY COMPETITIVE INDUSTRY WHICH MAY ADVERSELY AFFECT OUR
OPERATIONS.
There are many companies, both public and private, engaged in developing
and marketing products which compete or have applications which compete with
our products. At the present time, AVS and divisions of Parametric
Technologies, Engineering Animation and Computer Associates, among other
companies, market competing products. We believe that the principal factors
affecting our ability to compete include such factors as:
o the functionality and architecture of MuSE and other software products
developed by us,
o the performance and benefits of specific applications created using
our software products, and
o the perceived ability of us and/or a strategic partner to support and
service MuSE after installation.
Most of the companies with which we compete and are expected to compete
have substantially greater financial resources, research and development
capabilities, sales and marketing staffs and distribution channels. We cannot
assure you that our products and services will achieve sufficient quality,
functionality or cost-effectiveness to compete with existing or future
alternatives. Additionally, other major software companies may be able to
develop competing products and, if our software products gain market
acceptance, other more established companies may enter our markets.
OUR BUSINESS MAY BE SIGNIFICANTLY AFFECTED BY COST-REDUCTION PROGRAMS OF OUR
CUSTOMERS.
The pricing of our software products and software products in general may
be affected by the continuing efforts of end-users and information technology
managers to contain or reduce costs through various means, including
curtailment of discretionary spending or reduction in the scope of or
termination of existing projects. We cannot predict the effect that cost
reduction measures or changes in the overall economy may have on our business,
and we cannot assure you that those actions or changes in the economy will not
have a material adverse effect on our business, financial condition and results
of operations. Further, to the extent that those actions or changes have a
material adverse effect upon the business, financial condition and
profitability of other companies that are prospective strategic partners for
our products, our ability to commercialize or distribute our products may be
adversely affected.
QUARTERLY FLUCTUATIONS IN OUR BUSINESS COULD ADVERSELY AFFECT REVENUES,
OPERATING RESULTS AND THE MARKET PRICE OF OUR COMMON STOCK
Quarterly revenues and operating results will fluctuate as a result of a
variety of factors. These factors, some of which are beyond our control,
include:
o the timing of the completion, material reduction or cancellation of
major projects,
o the loss of a major customer or the termination of a relationship with
a strategic partner,
o timing of the receipt of new business,
o timing of the hiring or loss of personnel,
o changes in the pricing strategies and business focus of us or our
competitors,
o capital expenditures, operating expenses and other costs relating to
the expansion of operations,
o general economic conditions and acceptance and use of our software
products.
Revenues and operating results are difficult to forecast because of those
fluctuations.
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The trading prices of our common stock and warrants are subject to
fluctuation in response to quarterly variations in operating results,
announcements of technological innovations or new products or services by us or
our competitors, as well as other events or factors. In addition, the stock
market has from time to time experienced price and volume fluctuations which
have particularly affected the market price of technology-oriented and computer
software companies, which often have been unrelated to the operating
performance of these companies. These broad market fluctuations may adversely
affect the market price of our common stock and warrants.
RISKS RELATING TO AVS'S BUSINESS
AVS'S FAILURE, FOR ANY REASON, TO INCREASE REVENUES WOULD HAVE A MATERIAL
ADVERSE EFFECT ON AVS'S BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION.
AVS may not be able to obtain adequate financing to fund future operations
Although AVS has always been able to obtain adequate financing to run its
operations, AVS is unsure about its ability to obtain adequate financing in the
future. AVS expects that its available funds generated through operations will
not be sufficient to meet its needs for working capital and capital
expenditures through the next 12 months. AVS may need to raise additional funds
prior to the expiration of such period if the merger is not completed. AVS
cannot be certain that additional financing will be available to AVS on
favorable terms when required, or at all.
AVS'S QUARTERLY OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY AND YOU
SHOULD NOT RELY ON THEM TO PREDICT AVS'S FUTURE OPERATING RESULTS.
AVS's quarterly operating results have varied significantly in the past
and are likely to vary significantly in the future. This variability is due to
a variety of factors including:
o the size and timing of significant orders and their fulfillment;
o significant international operations;
o demand for AVS's products;
o changes made in pricing policies by AVS or AVS's competitors;
o the number, timing and significance of product enhancements and new
product announcements made by AVS or AVS's competitors;
o AVS's ability to develop, introduce and market new and enhanced
versions of AVS's products on a timely basis;
o changes in the level of operating expenses;
o budgeting cycles of AVS's customers;
o customer order deferrals in anticipation of enhancements or new
products offered by AVS or AVS's competitors;
o nonrenewal of maintenance agreements; product life cycles, software
bugs and other product quality problems; personnel changes;
o changes in AVS's business strategy;
o the level of international expansion;
o seasonal trends; and
o general domestic and international economic and political conditions.
IF AVS FAILS TO SUCCESSFULLY DEVELOP AND MARKET ITS PRODUCTS, AVS MAY NOT
ACHIEVE PROFITABLE OPERATIONS.
Any new product or version of software that is launched may not be
developed successfully or marketed adequately. Failure to produce successful
products in a timely manner could damage AVS's
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reputation and impair AVS's ability to attract new customers, which could cause
AVS's net sales to fall below expectations. If AVS's new products do not
achieve market acceptance, AVS's financial performance will be adversely
affected as AVS is dependent on the acceptance of new products, and associated
revenues to replace declining revenues on existing products as they mature.
AVS MAY NOT BE SUCCESSFUL IN MODIFYING AND ENHANCING ITS PRODUCTS TO KEEP PACE
WITH RAPID TECHNOLOGICAL CHANGE.
The market for information technology and software development services
utilizing AVS's type of products and services is continuing to develop. AVS's
products currently operate on UNIX, Windows and Linux operating systems. AVS
must, therefore, continually modify and enhance AVS's products to keep pace
with changes in these operating systems and servers. If AVS's products are not
compatible with new operating systems, Web Servers, browsers or database
servers that achieve sufficient market penetration, AVS's business will be
materially affected.
AVS's revenues have been attributable to a limited number of products and
related services. As a result, factors adversely affecting pricing of or demand
for such products and services could have a material adverse effect on AVS's
business, operating results and financial condition.
AVS must develop strategic information technology solutions to keep pace
with the continuing changes in information processing technology, evolving
industry standards and client customization requirements. There can be no
assurance that AVS will be successful in addressing whatever issues develop on
a timely basis or that if addressed, AVS will be successful in the marketplace.
Any delay or failure to anticipate and address new developments may have a
material effect on business. In addition, there can be no assurance that
products or technologies developed by other companies will not render AVS's
products and services noncompetitive or obsolete.
AVS FACES COMPETITION FROM LARGER COMPANIES THAT HAVE GREATER RESOURCES.
The data visualization industry includes a number of participants, is
subject to rapid changes and is highly competitive. AVS competes for customers
and experienced personnel with companies that have significantly greater
financial, technical and marketing resources and that generate greater
revenues. Some of these competitors serve only their respective local markets.
In the data visualization market, representative competitors of AVS include,
among others, ILOG, Visual Insights, Numerical Algorithms Group (NAG), Research
Systems Inc. (RSI), Visual Numerics Inc. (VNI), Visual Mining Inc., Template
Graphics Software Inc. (TGS), and Khoral Research Inc. Customers may also elect
to use their internal information systems resources to satisfy their needs for
software development.
AVS'S INTELLECTUAL PROPERTY MAY NOT BE FULLY PROTECTED AGAINST INFRINGEMENT.
AVS relies primarily on a combination of patent, copyright and trademark
laws, trade secrets, confidentiality procedures and contractual provisions to
protect AVS's proprietary rights. These methods only provide limited
protection. AVS currently has one patent pending. There is no guarantee that
the patent will be granted, and if granted there is no assurance that the
patent will adequately protect AVS's proprietary information. AVS has standard
confidentiality agreements with its employees, consultants, clients and
potential clients and AVS limits access to, and distribution of, AVS's
proprietary information but there is no guarantee that these protections will
adequately protect AVS's intellectual property. There can be no assurance that
others will not develop technologies that are similar or superior to AVS's
technology or design around AVS's proprietary rights. Despite AVS's efforts to
protect AVS's proprietary rights, unauthorized parties may attempt to copy
aspects of AVS's products or to obtain and use information that AVS regards as
proprietary. Detecting unauthorized use of AVS's products is difficult, and
while AVS is unable to determine the extent to which piracy exists, AVS expects
that software piracy will be a persistent problem.
In addition, AVS sells its goods in many foreign countries. The laws of
some of these foreign countries do not protect AVS's proprietary rights as
fully as do the laws of the United States. Because of this uncertainty, there
can be no assurance that AVS's means of protecting AVS's proprietary rights
abroad will be adequate.
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AVS MAY BE ACCUSED OF INFRINGING PROPRIETARY RIGHTS OF OTHERS.
There can be no assurance that third parties (including some of AVS's
customers) will not claim that AVS has infringed their intellectual property
rights. AVS expects that software product developers will increasingly be
subject to infringement claims as the number of products and competitors in
AVS's industry grows. Any such claims, with or without merit, could be
time-consuming to defend, result in costly litigation, divert management's
attention and resources, cause product shipment delays or require us to enter
into royalty or licensing agreements. Such agreements, if required, may not be
on terms favorable to AVS. In the event of a successful claim of product
infringement against AVS and AVS's failure or inability to license the
infringed or similar technology, AVS's business, operating results and
financial condition would be materially adversely effected.
AVS DEPENDS ON KEY PERSONNEL.
AVS's success depends on the continuing contributions of AVS's key
management, sales, marketing, customer support and product development
personnel. The loss of key management or technical personnel could adversely
affect AVS's business. Hiring qualified key personnel in the current climate
may be difficult as a result of intense market demand for personnel.
AVS believes that its future success will depend in large part upon its
ability to attract and retain highly-skilled managerial, sales, customer
support and product development personnel. AVS has at times experienced, and
continues to experience, difficulty in recruiting qualified personnel.
Competition for qualified software developers, sales and other personnel is
intense, and there can be no assurance AVS will be successful in attracting and
retaining such personnel. Qualified project managers are in particularly great
demand and are likely to remain a limited resource for the foreseeable future.
Other companies have in the past, and may in the future, attempt to recruit
AVS's employees. Failure to attract and retain key personnel could have a
material adverse effect on AVS's business, operating results and financial
condition.
THE UNPREDICTABLE NATURE OF FOREIGN MARKETS CAN HARM AVS'S BUSINESS OPERATIONS
AND PROFITS.
Revenues from AVS's foreign subsidiaries and distributors accounted for
approximately 72% of AVS's total revenues in fiscal year 1999. AVS currently
has international subsidiaries located in the United Kingdom, Denmark, France,
Italy and Germany that have generated substantially all of AVS's direct
international revenues to date. AVS has committed, and continues to commit,
significant management time and financial resources to developing direct and
indirect international sales and support channels. There can be no assurance,
however, that AVS will be able to maintain or increase international market
demand for AVS's products and services. To the extent that AVS is unable to do
so in a timely manner, AVS's international sales will be limited, and AVS's
business, operating results and financial condition would be materially
adversely affected.
International operations are always subject to certain risks, including
the impact of recessions in foreign economies, the costs of localizing products
for foreign markets, longer receivables collection periods and greater
difficulty in collecting accounts receivable, unexpected changes in regulatory
requirements, difficulties and costs of staffing and managing foreign
operations, reduced protection for intellectual property rights in some
countries, potentially adverse tax consequences and political and economic
instability. AVS cannot be certain that AVS's distributors or resellers will be
able to sustain or increase international revenues from licenses or from
maintenance and service, or that any of these factors will not have a material
adverse effect on AVS's future international revenues, business, operating
results or financial condition.
AVS MAY BE ADVERSELY AFFECTED BY FLUCTUATIONS IN CURRENCY EXCHANGE RATES.
AVS's products and services are generally sold in the local countries'
currency. AVS cannot be certain that fluctuations in currency exchange rates in
the future will not have a material adverse impact on revenues from
international sales and thus, AVS's business, operating results and financial
condition.
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AVS DEPENDS HEAVILY ON ITS KEY STRATEGIC RELATIONSHIPS WITH KUBOTA
CORPORATION.
AVS has a strategic and significant business relationship with Kubota
Corporation. Kubota is a significant AVS stockholder and has exclusive rights
to distribute AVS's products in Japan through its Japanese subsidiary KGT Inc.
KGT provided approximately 15% of AVS's revenue in 1999. Failure to maintain
this strategic relationship could have a material adverse impact on AVS's
business.
POTENTIAL DEFECTS IN AVS'S PRODUCTS COULD HARM SALES AND SUBJECT AVS TO
WARRANTY CLAIMS AND LAWSUITS.
Software products as internally complex as those developed by AVS
frequently contain errors or defects, especially when first introduced or when
new versions or enhancements are released. Although AVS has not experienced
material adverse effects resulting from any such defects or errors to date,
there can be no assurance that defects and errors will not be found in current
versions, new versions or enhancements after commencement of commercial
shipments, resulting in loss of revenues or delay in market acceptance, which
could have a material adverse effect upon AVS's business, operating results and
financial condition.
It is possible that the limitation of liability provisions contained in
AVS's license agreements may not be effective as a result of existing or future
federal, state or local laws or ordinances or unfavorable judicial decisions.
Although AVS has not experienced any product liability claims to date, the sale
and support of AVS's software tools may entail the risk of such claims, which
are likely to be substantial in light of the use of software in complex
applications. Although AVS carries commercial product liability insurance, a
successful product liability claim brought against AVS could have a material
adverse effect upon AVS's business, operating results and financial condition.
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THE SPECIAL MEETING
DATE, TIME AND PLACE OF SPECIAL MEETING
This proxy statement/prospectus is being furnished to holders of capital
stock of Advanced
Visual Systems in connection with the solicitation of proxies by its board of
directors for use at AVS's special meeting of stockholders to be held at 9:00
A.M., local time, on October 16, 2000, at the offices of Hill & Barlow, One
International Place, Boston, Massachusetts 02110, or any adjournment or
postponement thereof.
This proxy statement/prospectus is first being mailed to AVS stockholders
on or about September 15, 2000.
PURPOSE OF THE MEETING
The AVS meeting has been called to consider and vote upon:
o a proposal to approve and adopt the Agreement and Plan of Merger,
dated as of July 18, 2000, by and among MUSE Technologies, Inc., a
Delaware corporation, MUSE Merger Sub, Inc., a Delaware corporation
and a wholly-owned subsidiary of MUSE, and AVS. The merger agreement
provides for the merger of MUSE Merger Sub with and into AVS with the
result that AVS will become a wholly-owned subsidiary of MUSE. The
merger agreement provides that AVS stockholders will receive in the
merger one share of common stock, par value $.015 per share, of MUSE
in exchange for each 3.286 outstanding shares of AVS common stock, AVS
Series B Preferred Stock and AVS Series C Preferred stock that they
own; and one share of MUSE common stock for each 0.649646 outstanding
shares of AVS Series A Preferred Stock that they own. The merger
agreement also provides that approval of the merger will constitute
consent on behalf of AVS stockholders who vote in favor of the merger
agreement and own 500 or more shares of AVS capital stock or are
affiliates of AVS (i) to the delivery of a pro rata portion of their
shares of MUSE common stock to be received by them in the merger, into
escrow in connection with certain indemnification obligations of AVS,
and (ii) to the appointment of one or more stockholder representatives
as their attorneys-in-fact and agents to act on their behalf in all
matters relating to the merger agreement and the escrow agreement; and
o to transact such other business as may properly come before the AVS
meeting
RECORD DATE AND VOTING RIGHTS
AVS has fixed the close of business on September 12, 2000 as the record
date for determining holders of AVS capital stock entitled to notice of, and to
vote at, the AVS meeting. Only holders of record of AVS capital stock on that
date will be entitled to notice of, and to vote at, the AVS meeting. On the
record date, the following shares of capital stock of AVS were outstanding and
entitled to vote:
o 3,751,612 shares of AVS common stock;
o 187,266 shares of AVS Series A Preferred Stock;
o 1,641,765 shares of AVS Series B Preferred Stock; and
o no shares of AVS Series C Preferred Stock.
Each record holder of AVS capital stock on the record date is entitled to cast
one vote per share, exercisable in person or by properly executed proxy, on
each matter properly submitted for the vote of the AVS stockholders at the AVS
meeting.
The presence, in person or by properly executed proxy, of the holders of a
majority of the outstanding shares of AVS capital stock entitled to vote at the
AVS meeting is necessary to constitute a quorum and transact business at the
AVS meeting. The adoption of the merger agreement will
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require the affirmative vote of the holders of at least a majority of the
outstanding shares of AVS capital stock entitled to vote on that matter, each
class or series voting separately as a class. Abstentions will be counted for
purposes of determining a quorum, but will have the effect of a vote against
the matters being voted upon. If a broker holding shares in street name returns
an executed proxy that indicates that the broker does not have discretionary
authority to vote certain shares on one or more matters, those shares will
count towards determining a quorum, but will have the effect of a vote against
the matters being voted upon.
On the record date, AVS's directors, executive officers and affiliates
beneficially owned shares of AVS capital stock representing approximately 38%
of the outstanding shares of AVS's capital stock and, pursuant to a voting
agreement, have agreed to vote their shares in favor of the merger. Except for
stockholders identified under "Information Concerning AVS -- Principal
Stockholders of AVS," as of the record date, to the knowledge of AVS, no other
person beneficially owned more than five percent of the outstanding AVS capital
stock.
PROXIES
All shares of AVS capital stock that are entitled to vote and are
represented at the AVS meeting by properly executed proxies received before or
at the AVS meeting, and not duly and timely revoked, will be voted at the AVS
meeting in accordance with the instructions indicated on the proxies. If no
instructions are indicated, the proxies will be voted "for" approval and
adoption of the merger agreement and approval of the merger. If any other
matters are properly presented for consideration at the AVS meeting, including
consideration of a motion to adjourn or postpone the AVS meeting to another
time and/or place, the persons named in the enclosed form of proxy will have
discretion to vote on those matters in accordance with their best judgment.
SOLICITATION AND REVOCATION OF PROXIES
REVOCATION. A stockholder of AVS may revoke his, her or its proxy at any
time before its use:
o by delivering to the Secretary of AVS a signed notice of revocation or
a later, dated, signed proxy; or
o by attending the AVS meeting and voting in person.
Attendance at the AVS meeting will not, in itself, constitute the revocation of
a proxy.
All written notices of revocation and other communications with respect to
revocation of AVS proxies should be sent to: Advanced Visual Systems Inc., 300
Fifth Avenue, Waltham, Massachusetts 02451, Attention: Thomas C. Chase,
Secretary.
COST OF SOLICITATION. The cost of solicitation of proxies will be paid by
AVS. In addition to solicitation by mail, proxies may be solicited in person by
directors, officers and employees of AVS without additional compensation, and
by telephone, telegram, facsimile or similar method. Arrangements will be made
with brokerage houses and other custodians, nominees and fiduciaries to send
proxy material to beneficial owners. AVS will, upon request, reimburse them for
their reasonable expenses in doing so.
Holders of AVS capital stock should not send any certificates representing
AVS capital stock with the enclosed proxy card. If the merger is approved, a
letter of transmittal will be mailed after the effective time of the merger to
each person who is a holder of outstanding AVS capital stock immediately before
the effective time. AVS stockholders should send certificates representing AVS
capital stock to the exchange agent only after they receive the instructions
contained in the letter of transmittal and only in accordance with those
instructions.
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THE MERGER
Set forth below is a summary of the material terms and provisions of the
merger agreement as it relates to the merger. This summary is qualified in its
entirety by reference to the merger agreement, which is attached as Appendix A
to this proxy statement/prospectus and which is incorporated herein by
reference.
GENERAL DESCRIPTION OF THE MERGER
THE MERGER. The merger agreement provides that, upon consummation of the
merger, MUSE Merger Sub will merge with and into AVS. AVS will continue as the
surviving corporation and become a wholly-owned subsidiary of MUSE. At the
effective time of the merger:
o each 3.286 outstanding shares of AVS common stock, other than shares
owned by holders who are exercising appraisal rights under Delaware
law, will be converted into the right to receive one share of MUSE
common stock;
o each 3.286 outstanding shares of AVS Series B Preferred Stock and/or
Series C Preferred Stock, other than shares owned by holders who are
exercising appraisal rights under Delaware law, will be converted into
the right to receive one share of MUSE common stock;
o each 0.649646 outstanding shares of AVS Series A Preferred Stock, $.10
par value, other than shares owned by holders who are exercising
appraisal rights under Delaware law, will be converted to the right to
receive one share of MUSE common stock;
o each treasury share of AVS will be canceled;
o each outstanding share of common stock of MUSE Merger Sub will be
converted into one share of common stock, no par value, of AVS, the
surviving corporation in the merger; and
o each AVS stock option to purchase AVS common stock or Series C
Preferred Stock outstanding immediately prior to the effective time of
the merger, whether vested or unvested, will cease to represent a
right to acquire shares of AVS common stock or Series C Preferred
Stock and will be converted, at the effective time of the merger, into
a fully vested, immediately exercisable option to acquire, on
substantially the same terms and conditions, the number of shares of
MUSE common stock determined by dividing the number of shares of AVS
common stock or Series C Preferred Stock subject to that AVS stock
option by 3.286, rounded, if necessary, to the nearest whole share, at
a price per share (rounded to the nearest whole cent) equal to the per
share exercise price specified in that AVS stock option multiplied by
3.286.
No fractional shares of MUSE common stock will be issued in the merger.
Instead, AVS stockholders will receive one share of MUSE common stock for the
fraction they would have otherwise received. See "Conversion of Shares;
Procedures for Exchange of Certificates; No Fractional Shares."
The merger agreement provides that MUSE will withhold from the
consideration to be received by the AVS stockholders at the closing of the
merger and place into escrow an aggregate of 160,000 shares of MUSE common
stock in connection with the indemnification obligations of AVS. Only
stockholders who vote in favor of the merger and who hold 500 or more shares of
AVS capital stock prior to the merger or are affiliates of AVS will have their
shares placed in escrow. For stockholders contributing to the escrow, the
number of shares to be withheld will be determined according to each
stockholder's pro rata portion of the shares of MUSE common stock received in
the merger.
BACKGROUND OF THE MERGER
In November 1998, AVS began discussions with Covington Associates LLC
("Covington"), an investment banking firm, with respect to the engagement of
Covington to provide financial advisory services, to explore strategic
alternatives, including a potential business combination, and to assist AVS in
identifying and evaluating candidates for potential business combinations. AVS
formally engaged Covington on April 1, 1999.
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From early 1999 through March 2000, AVS and Covington contacted fifty-six
potential business combination partners to assess their level of interest in a
transaction with AVS. Of the fifty-six parties contacted, eleven parties
executed confidentiality agreements and requested and received confidential
information about AVS. Of those parties who executed confidentiality agreements,
six companies had meetings and discussions with AVS regarding a potential
combination.
On March 2, 2000 AVS entered into a letter of intent to sell a portion of
its business to a private company (the "Company's Letter of Intent"). After
having several discussion with Company 1, on April 14, 2000 AVS notified
Company 1, that based on a substantial reduction of its offer, the negotiations
were terminated, and therefore the exclusivity provisions of the letter of
intent were no longer in effect.
Concurrently with the discussions with Company 1, AVS held discussions
with MUSE with respect to a different portion of the AVS business. On March 7,
2000, AVS met with MUSE to introduce the companies and their products and to
discuss the possibility of MUSE becoming a re-seller for certain AVS products.
MUSE and AVS also discussed whether there was a strategic fit of AVS's OpenViz
product into certain MUSE products. AVS and MUSE met again on March 10, 2000 to
continue discussions about a possible business relationship between the
parties.
On March 21, 2000, Brian Clark of MUSE sent a letter to John William
Poduska indicating that MUSE was interested in acquiring the entire business of
AVS, and suggested a meeting to discuss the possibility. On March 29, 2000,
Russell Barbour contacted Mr. Clark to arrange a meeting. Mr. Barbour pointed
out that discussions could not be held around the portion of the business that
was covered by the Company 1 Letter of Intent, but could discuss the
possibility of MUSE acquiring the remaining portion of the business that
focused on the OpenViz products.
A meeting was held on April 4, 2000 in Boston attended by Mr. Poduska, Mr.
Barbour and Ms. Ziegler from AVS and Mr. Clark, Steve Sukman and Mr. Meglan from
MUSE. At the meeting the parties discussed the possibility of MUSE's acquiring
the OpenViz products and business The parties signed a mutual non-disclosure
agreement on April 7, 2000. On April 15, 2000 Mr. Barbour called Mr. Clark to
inform him that the letter of intent with Company 1 had been terminated. A
meeting was set for April 19, 2000 between MUSE and AVS to discuss the
possibility of MUSE's acquiring all of AVS. In preparation for the April 19,
2000 meeting, a more extensive non-disclosure agreement was executed by the
parties on April 17, 2000.
On April 19, 2000 a meeting was held in Boston to discuss the strategic
fit between AVS and MUSE and the joint prospects of the two companies in the
event of a potential business combination. The meeting was attended by Mr.
Poduska, Mr. Barbour, and Ms. Ziegler from AVS and Mr. Clark, Mr. Sukman, John
Hough from MUSE. General terms of a proposed business combination were
discussed. Messrs. Poduska and Barbour of AVS agreed to discuss the proposed
terms with the AVS board of directors.
The AVS board of directors met on April 24, 2000, and at that meeting Mr.
Barbour presented the outline of the MUSE offer to the board of directors. The
board of directors determined that due to the material change in the offer from
Company 1, it was in the best interest of AVS shareholders to move forward with
negotiations with MUSE and to abandon further discussions with Company 1.
MUSE and AVS met again at the MUSE corporate offices in Albuquerque, New
Mexico on April 27, 2000, and with representatives from Kubota Corporation, a
significant stockholder of AVS and distributor, through its subsidiary KGT,
Inc. of AVS products in Japan, in San Jose, California on April 28, 2000. The
purpose of the meeting with Kubota was to discuss Kubota and KGT's relationship
with AVS and proposed continuing relationship with MUSE. There was a review and
elaboration of the MUSE offer, and a discussion of the Kubota debenture held by
AVS.
On May 1, 2000 the AVS board of directors met to review the status of
negotiations with MUSE. The AVS board of directors, after discussion, voted to
authorize AVS management to enter into a letter of intent with MUSE, on
substantially the terms discussed at the meeting (the "MUSE Letter of Intent").
On May 1, 2000 a meeting of senior AVS and MUSE technical staffs was held in
Waltham,
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Massachusetts. On May 2, 2000 a meeting was held with sales, marketing and
professional services management employees of the two companies to discuss the
companies' products, services and sales and marketing activities and possible
synergies. Also on May 2, 2000 a meeting was held among Messrs. Clark and
Sukman of MUSE, Messrs. Poduska, Barbour, Spigel and Edmonds of AVS and Messrs.
Covington and Dunn of Covington Associates to finalize the terms of an
agreement that would be acceptable to both AVS and MUSE. On May 4, 2000 the
MUSE Letter of Intent was executed by MUSE and AVS. A separate Stockholder
Agreement was entered into as of May 5, 2000 by certain significant
stockholders of AVS and certain members of the board of directors, including
Kubota, Mr. Poduska and Mr. Spigel (collectively "AVS Affiliate Voting
Agreements") whereby the AVS affiliates agreed to vote for the merger.
Following the execution of the MUSE Letter of Intent, the parties
negotiated the terms of the definitive merger agreement over a period of two
months, continued their due diligence review of materials provided by each
party, and reviewed the terms of various drafts of the merger agreement. In
addition, the board met several times and material changes to the letter of
intent were made. The AVS board of directors approved the merger agreement on
June 30, 2000, subject to negotiation of certain changes in the escrow
agreement and other terms. Such negotiation was completed on July 18, 2000, and
the Merger Agreement was executed by MUSE, the Merger Sub and AVS on that date.
RECOMMENDATION OF THE AVS BOARD AND AVS'S REASONS FOR THE RECOMMENDATION
The board of directors of AVS has approved the merger with MUSE and
determined that the terms are fair to and in the best interests of the AVS
stockholders. Therefore, the AVS board recommends that its stockholders vote in
favor of the proposal to approve the merger with MUSE.
In reaching its decision to approve the merger, the AVS board considered,
with the assistance of management and its legal and financial advisors, the
following material factors:
o that the merger will create a stronger company and offer the AVS
stockholders an opportunity to receive shares in a publicly-held
company while continuing to participate in the long-term growth of
AVS's business through an ownership interest in MUSE;
o that AVS's available funds and cash generated from operations would
not be sufficient to meet AVS's operating requirements in the absence
of the merger, a different merger or financing or another significant
change in the operations of AVS's business;
o that the merger would provide AVS with a better opportunity to permit
AVS to continue operations which might not otherwise be available on
terms beneficial to the AVS stockholders;
o that the merger provides AVS stockholders with MUSE Common Stock in a
tax-free exchange at a premium over the fair market value of the AVS
shares prior to the announcement of the merger;
o the terms of the merger agreement;
o potential operating synergies and cost savings of the combined
enterprise, including consolidation of administrative and support
functions and the combination of sales forces and research and
development capabilities;
o that the merger is expected to be accounted for as a pooling of
interests;
o that the merger is not subject to approval by MUSE stockholders; and
o publicly available information concerning the financial performance,
condition, prospects and operations of MUSE.
The foregoing discussion of information and factors considered by the AVS
board is not intended to be exhaustive but is intended to include material
factors considered. In light of the wide variety of factors considered, the AVS
board did not find it practical to, and did not, quantify or otherwise assign
relative weight to the specific factors considered, and individual directors
may have given
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differing weights to different factors. After taking into consideration all of
the factors set forth above, the AVS board approved the merger by unanimous
vote of the directors present at the meeting and determined that the merger is
fair to, and in the best interests of, AVS and its stockholders and has
determined that AVS should proceed with the merger at this time. ACCORDINGLY,
THE AVS BOARD RECOMMENDS THAT THE AVS STOCKHOLDERS VOTE "FOR" APPROVAL OF THE
MERGER AGREEMENT.
MUSE'S REASONS FOR THE MERGER
MUSE's primary reasons for seeking to consummate a business combination
with AVS are the beliefs of MUSE's board of directors and management that a
business combination would result in a number of benefits for MUSE and its
stockholders. The Board of Directors of MUSE, with the assistance of management
and its legal and financial advisors, have elected to proceed with the merger
for the following reasons:
o the technical expertise of AVS in the field of data visualization for
the scientific and engineering industries;
o the sizeable installed base of AVS customers and products, and the
potential revenue and other opportunities that could derived
therefrom;
o the ability to add additional software products and professional
service capabilities to those already offered by MUSE;
o the existing international network of AVS sales and technical
professionals;
o perceived economic potential from the AVS product known as OpenViz;
o the terms of the merger agreement;
o the potential operating synergies and cost savings of the combined
enterprise, including consolidation of administrative and support
functions and the combination of sales forces and research and
development capabilities; and
o that the merger is expected to be accounted for as a
pooling-of-interests.
MERGER CONSIDERATION
Upon consummation of the merger, each 3.286 outstanding shares of AVS
common stock, AVS Series B Preferred Stock and AVS Series C Preferred Stock,
and each 0.649646 outstanding shares of AVS Series A Preferred Stock, other
than shares owned by holders who are exercising appraisal rights under Delaware
law, will be converted automatically into the right to receive one share of
MUSE common stock.
THE ESCROW AGREEMENT
The merger agreement provides that MUSE will withhold from the
consideration to be received by the AVS stockholders at the closing of the
merger and place into escrow an aggregate of 160,000 shares of MUSE common
stock in connection with the indemnification obligations of AVS. Only
stockholders who vote in favor of the merger and who hold 500 or more shares of
AVS capital stock prior to the merger or are affiliates of AVS will have their
shares placed in escrow. For stockholders contributing to the escrow, the
number of shares to be withheld will be determined according to each
stockholder's pro rata portion of the shares of MUSE common stock received in
the merger.
STOCK OPTIONS, PURCHASE AUTHORIZATIONS AND BENEFIT PLANS
Under the merger agreement, each AVS stock option to purchase AVS common
stock or Series C Preferred Stock outstanding immediately prior to the
effective time of the merger, whether vested or unvested, will cease to
represent a right to acquire shares of AVS common stock or Series C Preferred
Stock and will be converted, at the effective time of the merger, into a fully
vested, immediately
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exercisable option to acquire, on the same terms and conditions, the number of
shares of MUSE common stock determined by dividing the number of shares of AVS
common stock or Series C Preferred Stock subject to that AVS stock option by
3.286, rounded, if necessary, to the nearest whole share. The exercise price of
these stock options will be the exercise price for the stock option immediately
prior to the effective time of the merger multiplied by 3.286, rounded to the
nearest whole cent.
MUSE will file a registration statement covering the issuance of the
shares of MUSE common stock subject to each AVS option as soon as practicable
after completion of the merger.
The merger agreement provides that all purchase authorizations under the
AVS 1992 Stock Purchase Plan not exercised at least 30 days prior to the
closing date of the merger will terminate as of that date. Also, the merger
agreement provides that AVS will have its board of directors take the necessary
actions to effect the cancellation and substitution of the AVS stock options
and the termination of the purchase authorizations under the stock purchase
plan, including but not limited to adopting resolutions terminating the stock
option plan and the stock purchase plan effective no later than one day prior
to the closing date of the merger.
The merger agreement also provides that all AVS employees will continue on
their existing benefit plans until such time after the effective time of the
merger, in MUSE's sole and absolute discretion, as MUSE decides to convert to
employee benefit plans and programs maintained by MUSE at that time.
APPRAISAL RIGHTS
If you are an AVS stockholder who does not vote in favor of the merger
agreement and who properly demands appraisal of your shares of AVS capital
stock, you will be entitled to appraisal rights in connection with the merger
under Section 262 of the Delaware General Corporation Law.
The following discussion only applies to AVS stockholders who wish to
dissent from the merger. Only a holder of record of AVS shares may exercise
appraisal rights.
THE FOLLOWING DISCUSSION IS NOT A COMPLETE STATEMENT OF THE LAW PERTAINING
TO APPRAISAL RIGHTS UNDER DELAWARE LAW AND IS QUALIFIED IN ITS ENTIRETY BY THE
FULL TEXT OF SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW, WHICH IS
ATTACHED AS APPENDIX B TO THIS PROXY STATEMENT/PROSPECTUS. ALL REFERENCES IN
SECTION 262 AND IN THIS SUMMARY TO A "STOCKHOLDER" ARE TO THE RECORD HOLDER OF
THE SHARES AS TO WHICH APPRAISAL RIGHTS ARE ASSERTED. IF YOUR SHARES ARE HELD
OF RECORD IN THE NAME OF ANOTHER PERSON, SUCH AS A BROKER OR NOMINEE, YOU MUST
ACT PROMPTLY TO CAUSE THE RECORD HOLDER TO FOLLOW THE STEPS SUMMARIZED BELOW IN
A PROPER AND TIMELY MANNER TO PERFECT APPRAISAL RIGHTS.
Under the Delaware General Corporation Law, if you follow the procedures
set forth in Section 262, you will be entitled to have your AVS shares
appraised by the Delaware Court of Chancery and to receive payment of the "fair
value" of your shares, exclusive of any element of value arising from the
accomplishment or expectation of the merger, together with a fair rate of
interest, as determined by the Court of Chancery.
Under Section 262, where a merger is to be submitted for approval at a
meeting of stockholders, as in the case of the AVS meeting, the corporation,
not less than 20 days before the meeting, must notify each of its stockholders
entitled to appraisal rights that appraisal rights are available and include in
the notice a copy of Section 262. This proxy statement/prospectus will
constitute this notice to AVS stockholders, and the applicable statutory
provisions are attached as Appendix B to this proxy statement/prospectus. If
you wish to exercise appraisal rights or to preserve your right to do so, you
should review the following discussion and Appendix B carefully. If you fail to
timely and properly comply with the procedures specified, you will lose
appraisal rights.
If you wish to exercise appraisal rights, you must:
(1) deliver to AVS, before the vote on the merger at the AVS meeting, a
written demand for appraisal; and
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(2) not vote in favor of the merger. To not vote in favor of the merger,
you can either:
(a) vote "no" in person or by proxy;
(b) not vote at all;
(c) abstain from voting; or
(d) revoke a duly executed proxy.
However, if you vote in favor of the merger agreement, by proxy or in person,
or return a signed proxy that does not contain voting instructions, and you do
not revoke the proxy, you will waive your right of appraisal and nullify any
previously filed written demand for appraisal. A vote against the merger, in
person or by proxy, will not in and of itself constitute a written demand for
appraisal satisfying the requirements of Section 262. In addition, to exercise
appraisal rights, you must hold of record your shares on the date you make the
written demand for appraisal and must continue to hold your shares until the
effective time of the merger. If you fail to comply with any of these
conditions and the merger becomes effective, you will lose appraisal rights and
receive instead MUSE common stock in accordance with the merger agreement.
Only a holder of record of shares may assert appraisal rights for the
shares registered in his, her or its name. A demand for appraisal should be
executed by or on behalf of the holder of record, fully and correctly, as the
holder of record's name appears on his, her or its stock certificates. It must
also state that the stockholder intends to demand appraisal of his, her or its
shares in connection with the merger. If the shares are owned of record in a
fiduciary capacity, such as by a trustee, guardian or custodian, execution of
the demand should be made in that capacity. If the shares are owned of record
by more than one person, as in a joint tenancy and tenancy in common, the
demand should be executed by or on behalf of all joint owners. An authorized
agent, including two or more joint owners, may execute a demand for appraisal
on behalf of a holder of record. However, the agent must identify the record
owner or owners and expressly disclose the fact that, in executing the demand,
the agent is agent for such owner or owners. A record holder such as a broker
who holds shares as nominee for several beneficial owners may exercise
appraisal rights with respect to the shares held for one or more beneficial
owners without exercising appraisal rights with respect to the shares held for
other beneficial owners. If you hold your shares in brokerage accounts or other
nominee forms and wish to exercise appraisal rights, you should consult your
broker to determine the appropriate procedures for making a demand for
appraisal.
All written demands for appraisal pursuant to Section 262 should be sent
or delivered to Advanced Visual Systems Inc. at 300 Fifth Avenue, Waltham,
Massachusetts 02451, Attention: Corporate Secretary.
Within 10 days after the effective time of the merger, AVS, as the
surviving corporation, must notify each holder of shares who has complied with
Section 262 and has not voted in favor of or consented to the merger of the
date that the Merger has become effective. At any time within 60 days after the
effective time of the merger, you have the right to withdraw your demand for
appraisal and to accept the consideration offered in the merger. Within 120
days after the effective time of the merger, but not after that time, AVS or
any holder of shares who is entitled to appraisal rights may file a petition in
the Delaware Court of Chancery demanding a determination of the fair value of
the dissenting shares. AVS is under no obligation to and has no present
intention to file this petition. Accordingly, it is the obligation of the
holders of shares to initiate all necessary action to perfect appraisal rights
within the time prescribed in Section 262.
Within 120 days after the effective time of the merger, if you have
complied with the requirements for exercise of appraisal rights, you will be
entitled, upon written request, to receive from AVS a statement setting forth
the aggregate number of shares not voted in favor of the merger as to which
demands for appraisal have been received and the aggregate number of holders of
those shares. AVS must mail this statement to you within ten days after AVS
receives a written request from you or within ten days after the expiration of
the period for delivery of demands for appraisal, whichever is later.
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If a petition for an appraisal is timely filed by a holder of shares and a
copy is served upon AVS, AVS will then be obligated within 20 days to file with
the Delaware Register in Chancery a duly verified list containing the names and
addresses of all holders of shares who have demanded appraisal and with whom
agreements as to the value of their shares have not been reached. After notice
to these stockholders as required by the Delaware Court of Chancery, the Court
may conduct a hearing on this petition to determine those holders of shares who
have complied with Section 262 and who have become entitled to appraisal
rights. The Delaware Court of Chancery may require the holders of shares who
demanded appraisal to submit their stock certificates to the Register in
Chancery for notation of the pendency of the appraisal proceeding. If you fail
to comply with this direction, the Court of Chancery may dismiss the
proceedings as to you.
After determining the holders of shares entitled to appraisal, the
Delaware Court of Chancery will appraise the "fair value" of their shares,
exclusive of any element of value arising from the accomplishment or
expectation of the merger, together with a fair rate of interest, if any, to be
paid upon the amount determined to be the fair value. You should be aware that
the fair value of your shares as determined by Section 262 could be more than,
the same as or less than the consideration you would receive in the merger if
you did not seek appraisal of your shares. Also, investment banking opinions as
to fairness from a financial point of view are not necessarily opinions as to
fair value under Section 262.
Section 262 provides that "fair value" is to be "exclusive of any element
of value arising from the accomplishment or expectation of the merger." The
Delaware Supreme Court has stated, in Cede & Co. v. Technicolor, Inc., 684 A.2d
289, 299, that this "narrow exclusion does not encompass known elements of
value, including those which exist on the date of the merger because of a
majority acquirer's interim acquisition in a two-step cash-out transaction." In
Weinberger v. UOP, Inc.,
457 A.2d 701 (Del. 1983), the Delaware Supreme Court held that "elements of
future value, including the nature of the enterprise, which are known or
susceptible of proof as of the date of the merger and not the product of
speculation, may be considered." The Delaware Supreme Court has stated that
"proof of value by any techniques or methods which are generally considered
acceptable in the financial community and otherwise admissible in court" should
be considered in the appraisal proceedings. In addition, Delaware courts have
decided that the statutory appraisal remedy, depending on factual
circumstances, may or may not be a dissenter's exclusive remedy. The Court of
Chancery will also determine the amount of interest, if any, to be paid upon
the amounts to be received by persons whose shares have been appraised. The
costs of the action may be determined by the Court and taxed upon the parties
as the Court deems equitable. The Court may also order that all or a portion of
the expenses incurred by any stockholder in connection with an appraisal,
including, reasonable attorneys' fees and the fees and expenses of experts
utilized in the appraisal proceeding, be charged pro rata against the value of
all the shares entitled to be appraised.
If you have duly demanded an appraisal in compliance with Section 262, you
will not, after the effective time of the merger, be entitled to vote your
shares for any purpose or be entitled to the payment of dividends or other
distributions on those shares. You will receive any dividends or other
distributions payable to holders of record of shares as of a date before the
effective time of the merger.
If you demand appraisal of your shares under Section 262 but fail to
perfect, or effectively withdraw or lose, your right to appraisal, your shares
will be converted into the right to receive MUSE common stock pursuant to the
merger agreement, without interest. You will fail to perfect, or effectively
lose or withdraw, your right to appraisal if no petition for appraisal is filed
within 120 days after the effective time of the merger, or if you deliver to
AVS a written withdrawal of your demand for appraisal and an acceptance of the
merger. However, any attempt to withdraw made more than 60 days after the
effective time of the merger will require the written approval of AVS. Once a
petition for appraisal is filed, the appraisal proceeding may not be dismissed
as to any holder absent court approval. It is not necessary that each holder of
shares properly demanding appraisal file a petition for appraisal in the
Delaware Court of Chancery. Rather, a single valid petition suffices for the
petitioning and non-petitioning holders of shares who have properly demanded
appraisal.
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IF YOU FAIL TO FOLLOW THE STEPS REQUIRED BY SECTION 262 OF THE DELAWARE
GENERAL CORPORATION LAW FOR PERFECTING APPRAISAL RIGHTS, YOU MAY LOSE THESE
RIGHTS. IN THAT CASE, YOU WILL RECEIVE MUSE COMMON STOCK IN ACCORDANCE WITH THE
MERGER AGREEMENT.
EFFECTIVE TIME
The merger will become effective upon the filing of a certificate of
merger with the Secretary of State of the State of Delaware, or such other time
as the parties may specify. This filing is expected to take place as soon as
practicable after receipt of AVS stockholder approval and all required
regulatory approvals and the satisfaction or waiver of the other conditions to
the merger. It is currently anticipated that the effective time of the merger
will occur during the fall of calendar 2000. There can be no assurance,
however, that each condition to the merger will be satisfied by then. See "The
Merger Agreement and Related Agreements--Conditions to the Merger."
CONVERSION OF SHARES; PROCEDURES FOR EXCHANGE OF CERTIFICATES; NO FRACTIONAL
SHARES
As promptly as practicable after the effective time of the merger, MUSE
will cause to be sent to each stockholder of record of AVS as of the effective
time of the merger transmittal materials for use in exchanging certificates of
AVS capital stock for certificates of MUSE common stock. The transmittal
materials will contain information and instructions on how to surrender AVS
capital stock certificates for new certificates representing MUSE common stock.
No fractional shares of MUSE common stock will be issued to holders of AVS
capital stock in the merger. Instead AVS stockholders will receive one share of
MUSE common stock in lieu of the fraction they would have otherwise received
following the effective time of the merger.
Until a holder of AVS capital stock surrenders his, her or its
certificates representing shares of AVS capital stock, the certificates will,
after the effective time of the merger, represent for all purposes only the
right to receive MUSE common stock specified in the merger agreement.
ADVANCED VISUAL SYSTEMS STOCKHOLDERS SHOULD NOT SURRENDER THEIR STOCK
CERTIFICATES FOR EXCHANGE UNTIL THEY RECEIVE A TRANSMITTAL FORM.
NASDAQ LISTING
MUSE will use its commercially reasonable efforts to cause the shares of
MUSE common stock to be issued in connection with the merger to be approved for
quotation on the Nasdaq Stock Market or listed on such securities exchange as
MUSE common stock is then listed, subject to official notice of issuance, as
soon as practicable after completion of the merger.
EXPENSES
Except for the costs and expenses incurred in connection with this proxy
statement/prospectus, which will be shared equally by MUSE and AVS, all costs
and expenses incurred in connection with the merger agreement and the
transactions contemplated in the merger agreement will be paid by the party
incurring such costs or expenses.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the AVS board of directors for the
merger, stockholders of AVS should be aware that certain executive officers and
directors of AVS at the time of the approval of the merger agreement had
interests in the merger, including those referred to below, that presented them
with potential conflicts of interest. The AVS board was aware of these
potential interests and considered them, among other matters, in approving the
merger agreement and the transactions contemplated thereby.
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STOCKHOLDER AGREEMENTS. AVS entered into individual stockholder agreements
with certain AVS stockholders:
Kubota Corporation
John William Poduska, Sr.
Poduska Family Limited Partnership
Thomas C. Chase, individually and as a trustee for various trusts
Wallace E. Smith
Masatoshi Kumagai
Marc R. Spigel
These stockholders combined represented approximately 38% of the AVS capital
stock then outstanding.
The stockholders signing the stockholder agreements agreed, among other
things, to vote their shares of AVS capital stock in favor of the adoption of
the merger agreement and approval of the merger and any other transactions
contemplated by the merger agreement. The stockholders agreement provides that
it will terminate upon the earlier of the completion of the merger or the
termination of the merger agreement in accordance with its terms.
AVS AFFILIATE AGREEMENTS. Rule 145 under the Securities Act of 1933
regulates the disposition of securities of "affiliates" of AVS in connection
with the merger. AVS has delivered to MUSE a letter identifying all persons who
are or may be deemed to be, at the time of the AVS meeting, "affiliates" of AVS
for purposes of Rule 145 under the Securities Act. This letter may be further
updated before the effective time of the merger. AVS has agreed to use its best
efforts to cause each person who is identified as an affiliate to deliver to
MUSE, before the effective time of the merger, a written affiliate's agreement.
Under these affiliate's agreements, each affiliate will represent that he, she
or it has been advised that the affiliate may not sell, transfer or otherwise
dispose of MUSE common stock issued to the affiliate in the merger unless the
sale, transfer or other disposition:
(1) has been registered under the Securities Act;
(2) complies with the requirements of Rule 145 under the Securities Act;
or
(3) in the opinion of counsel reasonably acceptable to MUSE, is otherwise
exempt from registration under the Securities Act.
Notwithstanding the foregoing, each affiliate will have further agreed not to
acquire any shares of MUSE common stock and not to transfer or dispose of any
of its shares of MUSE common stock prior to the date in which at least 30 days
of combined results of operation of MUSE and AVS have been made publicly
available.
MUSE AFFILIATES AGREEMENT
MUSE is required to obtain agreements from its affiliates similar to those
required for AVS affiliates.
NON-COMPETE/CONFIDENTIALITY AND TRADE SECRETS/INVENTION AGREEMENTS. Upon
the consummation of the merger, AVS will enter into non-compete/confidentiality
and trade secrets/invention agreements with the following AVS employees if such
individuals have not already executed substantially similar agreements with
AVS:
Russell G. Barbour
Melanie Ziegler
Stig Jensen
Timothy Dunn
Michael Garrity
Robert Mazika
David Goughnour
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These agreements provide that, without the prior written consent of the
board of directors of AVS, the employee may not:
o directly or indirectly compete with the business or proposed business
of AVS while employed by AVS;
o while employed by AVS and for one year after termination, interfere
with any business or employment relationship of AVS;
o during and after his or her term of employment, divulge AVS's
confidential information to any person, or use or exploit it for the
employee's own benefit or for the benefit of anyone other than AVS;
o during and after his or her term of employment, claim ownership of any
confidential information conceived, discovered or made by him or her
during the term of employment; and
o claim any interest in any intellectual property conceived of, or
developed during employment with AVS or for one year after termination
which relates to the fields in which AVS may then be engaged or
contemplates being engaged.
STOCK OPTIONS. The AVS stock options to purchase AVS common stock or
Series C Preferred Stock outstanding immediately prior to the effective time of
the merger that will be converted into options to acquire MUSE common stock in
the merger held by all option holders, including the officers and directors of
AVS, will become fully vested upon the completion of the merger.
AVS STOCK OWNERSHIP IN MUSE.
As of the date hereof and prior to the effective date of the merger, no
director, officer or affiliate of AVS beneficially owns or will own MUSE common
stock
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following are the material United States federal income tax
consequences of the merger to holders of AVS capital stock who exchange their
stock for MUSE common stock in the merger. This summary is for general
information purposes only and may not consider all aspects of federal income
taxation that may be relevant to you because of your particular circumstances.
This discussion is generally limited to the United States federal income
tax consequences to AVS stockholders who will hold the securities as capital
assets within the meaning of Section 1221 of the Internal Revenue Code of 1986,
as amended.
This summary does not deal with the United States federal income tax
consequences to persons subject to special treatment under the Internal Revenue
Code such as
o banks,
o thrifts,
o real estate investment trusts,
o regulated investment companies,
o insurance companies,
o dealers in securities or currencies,
o tax-exempt investors,
o persons that will hold the securities as a position in a "straddle,"
or as part of a "synthetic security" or "hedge," "conversion
transaction" or other integrated investment,
o persons that have a "functional currency" other than the U.S. Dollar,
o investors in pass-through entities, such as partnerships,
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o foreign holders, and
o holders who acquired their shares upon exercise of employee stock
options or similar derivative securities or otherwise or from
compensation.
Further, it does not include any description of any alternative minimum tax
consequences or the consequences arising under United States federal gift and
estate taxes or the tax laws of any state, local or foreign government that may
be applicable to a holder of securities.
This summary is based on the Internal Revenue Code, final and proposed
Treasury regulations thereunder and administrative and judicial interpretations
thereof, as of today. All of these are subject to change, possibly with
retroactive effect.
You are advised to consult your tax advisor as to the United States
federal income tax consequences of the merger for your particular
circumstances, as well as the effect of any state, local, foreign or other tax
laws and of potential changes in applicable tax laws.
EXCHANGE OF AVS CAPITAL STOCK INTO MUSE COMMON STOCK
You should not recognize income, gain or loss upon the exchange of the AVS
capital stock into MUSE common stock. Your tax basis in MUSE common stock
received upon conversion should generally be equal to your tax basis in the AVS
capital stock exchanged. Your holding period in MUSE common stock received upon
exchange should generally begin on the date you acquired the AVS capital stock.
ACCOUNTING TREATMENT
The merger is intended to qualify as a pooling-of-interests. The
pooling-of-interests method of accounting assumes the companies had always been
combined, and the historical financial statements for periods prior to closing
of the merger are restated as though the companies had always been combined as
required under United States generally accepted accounting principles. The
assets and liabilities of MUSE and AVS will be carried forward by the combined
company at their historical recorded amounts.
RESALE OF MUSE COMMON STOCK FOLLOWING THE MERGER
The shares of MUSE common stock to be issued in connection with the merger
will be registered under the Securities Act of 1933 and will be freely
transferable under the Securities Act, except for shares of MUSE common stock
issued to any person who is deemed to be an "affiliate" of AVS at the time of
the special meeting. Persons who may be deemed to be affiliates include
individuals or entities that control, are controlled by, or are under the
common control of AVS and may include executive officers and directors of AVS,
as well as significant stockholders of AVS. Affiliates may not sell their
shares of MUSE common stock acquired in connection with the merger except
pursuant to:
o an effective registration statement under the Securities Act covering
the resale of those shares;
o an exemption under paragraph (d) of Rule 145 under the Securities Act;
or
o any other applicable exemption under the Securities Act.
MUSE's registration statement on Form S-4, of which this proxy
statement/prospectus forms a part, does not cover the resale of shares of MUSE
common stock to be received by AVS's affiliates in the merger.
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THE MERGER AGREEMENT AND RELATED AGREEMENTS
The following description of the merger agreement does not purport to be
complete and is qualified in its entirety by reference to the merger agreement,
a copy of which is attached hereto as Appendix A and incorporated by reference
herein. Stockholders are urged to read the merger agreement in its entirety for
a more complete description of the merger.
GENERAL
The merger agreement provides that, on the terms and subject to the
conditions of the merger agreement, MUSE Merger Sub, a wholly owned subsidiary
of MUSE, will merge with and into AVS. As a result of this merger, AVS will
continue as the surviving corporation and become a wholly owned subsidiary of
MUSE. The combined entity will be named "MUSE Advanced Visual Systems Inc." The
merger will become effective upon the filing of a certificate of merger with
the Secretary of State of the State of Delaware, or such other time as the
parties may specify. This filing is expected to take place as soon as
practicable after receipt of AVS stockholder approval and the satisfaction or
waiver of the other conditions to the merger. It is currently anticipated that
the effective time of the merger will occur during the fall of 2000. We cannot
assure you, however, that each condition to the merger will be satisfied by
then.
CONSIDERATION TO BE RECEIVED IN THE MERGER
The merger agreement provides that, upon consummation of the merger:
o each 3.286 outstanding shares of AVS common stock, other than shares
owned by holders who are exercising appraisal rights under Delaware
law, will be converted into the right to receive one share of MUSE
common stock;
o each 3.286 outstanding shares of AVS Series B Preferred Stock and AVS
Series C Preferred Stock, other than shares owned by holders who are
exercising appraisal rights under Delaware law, will be converted into
the right to receive one share of MUSE common stock; and
o each 0.649646 outstanding shares of AVS Series A Preferred Stock,
other than shares owned by holders who are exercising appraisal rights
under Delaware law, will be converted to the right to receive one
share of MUSE common stock.
EXCHANGE OF SHARES. As soon as practicable after the effective time of the
merger, MUSE will cause to be sent to each stockholder of record of AVS as of
the effective time of the merger transmittal materials for use in exchanging
certificates of AVS capital stock for certificates of MUSE common stock. The
transmittal materials will contain information and instructions on how to
surrender AVS capital stock certificates for new certificates representing MUSE
common stock.
No fractional shares of MUSE common stock will be issued to holders of AVS
capital stock. Instead, AVS stockholders will receive one share of MUSE common
stock for the fraction they would have otherwise received. See "The
Merger-Conversion of Shares; Procedures for Exchange of Certificates; No
Fractional Shares."
Until a holder of AVS capital stock surrenders his, her or its
certificates representing shares of AVS capital stock, the certificates will,
after the effective time of the merger, represent for all purposes only the
right to receive the MUSE common stock specified in the merger agreement.
AVS STOCKHOLDERS SHOULD NOT SURRENDER THEIR STOCK CERTIFICATES FOR
EXCHANGE UNTIL THEY RECEIVE A TRANSMITTAL FORM.
THE ESCROW AGREEMENT
The merger agreement provides that MUSE will withhold from the
consideration to be received by the AVS stockholders at the closing of the
merger and place into escrow an aggregate of 160,000 shares of MUSE common
stock in connection with the indemnification obligations of AVS. Only
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stockholders who vote in favor of the merger and who hold 500 or more shares of
AVS capital stock prior to the merger or are affiliates of AVS will have their
shares placed in escrow. For stockholders contributing to the escrow, the
number of shares to be withheld will be determined according to each
stockholder's pro rata portion of the shares of MUSE common stock received in
the merger.
The Stockholder Representatives. It is a condition to the merger that MUSE
and the stockholder representatives on behalf of certain AVS stockholders
deliver 160,000 shares of MUSE common stock to an escrow agent in connection
with certain indemnity obligations of AVS. Subject to AVS stockholder approval,
the stockholder representatives will be Russell G. Barbour and John William
Poduska, Sr., each of whom will have authority to act on behalf of and to bind
each AVS stockholder for purposes of all matters relating to the merger
agreement and, with respect to stockholders who vote in favor of the merger and
own 500 or more shares or are affiliates of AVS, the escrow agreement.
CORPORATE MATTERS
The merger agreement provides that the directors of MUSE Merger Sub
immediately before the effective time of the merger will be the initial
directors of AVS, as the surviving corporation.
CONDITIONS TO THE MERGER
Under the merger agreement, the respective obligations of each party to
effect the merger are subject to the satisfaction or waiver of each of the
following conditions:
1. the adoption of the merger agreement by the affirmative vote of the
holders of a majority of the voting power of all outstanding shares of
AVS capital stock;
2. the AVS stockholders dissenting or capable of dissenting after the
completion of the merger must not constitute in excess of 10% of the
shares eligible to vote for approval of the merger;
3. the absence of any law, judgment, order or proceeding preventing
completion of the merger;
4. all authorizations, permits, consents, orders or approvals of, or
declarations or filings with, any governmental entity or other person
or entity necessary to effect the transactions contemplated by the
merger agreement must have occurred, been filed or been obtained;
5. each of MUSE and AVS must have obtained all licenses, permits,
approvals and other authorizations from all governmental entities,
whether by transfer, reissuance, modification or otherwise, required
to be obtained by it in connection with or for the operation of the
business as presently conducted and contemplated in the merger
agreement;
6. the declaration of effectiveness of the registration statement on Form
S-4, of which this proxy statement/prospectus forms a part, by the
Securities and Exchange Commission, and the absence of any stop order
or proceedings seeking a stop order;
7. each of MUSE and AVS must have performed and complied with each
agreement, covenant and obligation required to be performed or
complied with by it under the merger agreement;
8. AVS, since December 31, 1999, and MUSE, since March 31, 2000 (other
than as otherwise publicly disclosed), must not have suffered any
event, violation or other matter that would have a material adverse
effect on the business, condition (financial or otherwise), assets,
liabilities, operations, properties or prospects of such party
("Material Adverse Effect");
9. the representations and warranties of each of MUSE and AVS must be
true and correct in all respects as of the date of the merger
agreement and as of the date of completion of the merger;
10. each of MUSE and AVS must have delivered or caused to be delivered to
the other each of the items required to be delivered in the merger
agreement;
11. AVS must have terminated its Executive Bonus Program and any similar
programs with no Material Adverse Effect to AVS;
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12. AVS must have obtained Kubota Corporation's agreement with AVS that
the merger will not trigger the conversion feature of the convertible
promissory note and that such convertible promissory note will be
exchanged for convertible debt of MUSE following the merger;
13. AVS must have obtained the requisite vote of the holders of the Series
A Preferred Stock and Series B Preferred Stock that the merger shall
not be deemed to be a liquidation, dissolution or winding up of AVS
for purposes of the liquidation preference provisions of such stocks;
14. certain employees of AVS in the merger agreement must have entered
into MUSE's standard confidentiality and trade secrets/inventions
agreement unless such employees had entered into a similar agreement
with AVS;
15. MUSE will have obtained a letter from Feldman Sherb & Co., P.C.,
MUSE's independent public accountants, with respect to MUSE, and from
Arthur Anderson, AVS's independent public accountants, with respect to
AVS, to the effect that each of AVS and MUSE may participate in the
merger in a manner so as to permit the merger to qualify as a
pooling-of-interest; and
16. each of MUSE and AVS will have obtained certain affiliate's agreements
for purposes of qualifying the merger for pooling-of-interest
accounting treatment.
REPRESENTATIONS AND WARRANTIES
The merger agreement contains various customary representations and
warranties of the parties, including the following representations by AVS:
o organization, standing and qualification; subsidiaries;
o authority;
o capitalization, equity interest;
o consents and approvals, no violation of law;
o books and records;
o financial statements; certain financial information; earning before
interest and taxes
o absence of undisclosed liabilities;
o absence of certain changes or events;
o real property;
o leases;
o title to assets;
o intellectual property rights;
o contracts;
o litigation;
o plants, buildings, structures, facilities and equipment;
o insurance;
o employee benefit plans;
o tax matters;
o environmental matters;
o labor relations, employees;
o compliance with law;
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o government permits;
o bank accounts, powers-of-attorney;
o brokers or finders;
o transactions with affiliates;
o customers and suppliers;
o accounts receivable and payables;
o guarantees;
o common activities;
o disclosure;
o information supplied;
o vote required; and
o absence of stockholder agreements.
The following representations were also made by MUSE and MUSE Merger Sub:
o organization, standing and qualification;
o authority;
o capitalization;
o validity; issuance of shares;
o consents and approvals, no violation of law;
o brokers or finders;
o information supplied;
o public reports;
o operation of the surviving corporation; and
o disclosure.
CERTAIN COVENANTS
NON-SOLICITATION. Under the merger agreement, AVS has agreed to
immediately cease any existing discussions or negotiations with any third
parties conducted prior to the date of the merger agreement with respect to any
Business Combination (as defined below). For a period from the date of the
merger agreement to the date of the closing of the transactions contemplated by
the merger agreement, AVS must not, and AVS must cause its respective
affiliates and representatives not to, directly or indirectly, take any action
to:
(1) initiate, assist, solicit, receive, negotiate, encourage or accept
any offer or inquiry from any person or entity with respect to a
Business Combination or engage in any Business Combination,
(2) reach any agreement or understanding (whether or not such agreement
or understanding is absolute, revocable, contingent or conditional)
for, or otherwise attempt to consummate, any Business Combination or
(3) furnish or cause to be furnished any information with respect to AVS
to any person or entity (other than MUSE) who AVS or any of its
respective affiliates or representatives knows or has reason to
believe is in the process of considering any Business Combination.
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If AVS or any of its respective affiliates or representatives receives from any
person or entity any offer, inquiry or informational request referred to above,
AVS will, or will cause such affiliate or representative to, promptly advise
such person or entity, by written notice, of the terms of the non-solicitation
provision in the merger agreement and promptly, orally and in writing, advise
MUSE of such offer, inquiry or informational request.
"Business Combination" means any merger, consolidation or combination to
which AVS is a party, any sale, dividend, split or other disposition of the
capital stock of or other equity interest in AVS or any sale, dividend or other
disposition of any of the assets and properties of AVS, other than the
transactions contemplated in the merger agreement.
CONDUCT OF BUSINESS PENDING THE MERGER. Under the merger agreement, AVS
has agreed that, during the period from the date of the merger agreement to the
completion of the merger, it will carry on its business in the ordinary course
in all material respects, substantially in the same manner as previously
conducted, and will use its reasonable efforts to preserve intact its current
business organization and reputation and to preserve its relationship with
employees and with third parties.
In addition to these agreements regarding the conduct of business
generally, AVS has agreed to some specific restrictions relating to the
following:
o any change in its business or operations or in the manner of
conducting its business;
o the occurrence of any event, violation or other matter that would have
a material adverse effect on its business, condition (financial or
otherwise), assets, liabilities, operations, properties or prospects;
o any material casualty loss (whether or not insured) or condemnation or
other taking;
o entering into any employment or consulting contract or commitment
(whether oral or written) or compensation arrangement or employee
benefit plan, or changed or committed to change (including any change
pursuant to any bonus, pension, profit-sharing or other plan,
commitment, policy or arrangement) the compensation payable or to
become payable to any of its officers, directors, employees, agents or
consultants, or made any pension, retirement, profit-sharing, bonus or
other employee welfare or benefit payment or contribution;
o any dividend or other distribution in respect of its common stock or
other capital stock or securities, or directly or indirectly
redeeming, purchasing or otherwise acquiring any of its common stock
or other capital stock or securities, or combining or subdividing or
in any way change any of the terms or provisions of its common stock
or other capital stock or securities;
o any payments to or in respect of, or sale, transfer, or lease of any
property or assets (real, personal or mixed, tangible or intangible)
to, or entry into, amendment or waiver of any rights under any
transactions, agreements or arrangements with or for the benefit of,
any AVS stockholder or any of their respective affiliates, associates
or family members or any of AVS's officers or directors or any
affiliate or associate of its officers or directors;
o any change in any accounting or tax principles, practices or methods,
including its accounts payable or accounts receivable practices and
terms (including reserves);
o incurrence of liability (whether known or unknown, absolute, accrued,
fixed, contingent, liquidated, unliquidated or otherwise, and whether
due or to become due);
o the canceling or waiving of rights with respect to any debts or other
obligations owed to or claims held by AVS (including the settlement of
any claims or litigation or other proceeding);
o the accelerated or delayed collection of notes or accounts receivable
generated by its business in advance of or beyond their regular due
dates or the dates when the same otherwise would have been collected;
o the termination or amendment of any contract under which AVS would
receive from any person or entity or pay to any person or entity more
than $50,000 in any calendar year or disposal of any item of
intellectual property rights or allowing such rights to lapse;
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o any capital expenditures or commitments for additions to property,
plant or equipment constituting capital assets in excess of $50,000
(or $100,000 in the aggregate); and
o incurrence of indebtedness.
STOCKHOLDERS' MEETING. Under the merger agreement, AVS has agreed to call,
give notice of, convene and hold a meeting of its stockholders on a date as
soon as reasonably practicable in accordance with the Delaware General
Corporation Law or solicit its stockholders by written consent for the purpose
of considering and voting upon the approval of the merger, including the
appointment of one or more stockholder representatives as the AVS stockholders'
attorneys-in-fact and agents in connection with all matters relating to the
merger agreement and, with respect to stockholders who vote in favor of the
merger and own 500 or more shares or are affiliates of AVS, the escrow
agreement. Subject to its fiduciary duties under applicable law, AVS has agreed
to take all lawful actions to solicit the approval of the merger by AVS's
stockholders.
EMPLOYEE BENEFITS. Under the merger agreement, all AVS employees will
continue on their existing benefit plans until such time after the closing date
of the transactions contemplated in the merger agreement, in MUSE's sole and
absolute discretion, as MUSE decides to convert to employee benefits plans and
programs maintained by MUSE at that time.
CERTAIN OTHER COVENANTS. The merger agreement contains certain other
covenants including covenants relating to:
o preparation and filing of a proxy statement;
o access to information;
o pooling-of-interests accounting treatment;
o coordination and cooperation with respect to tax matters;
o preparing and filing of disclosure documents;
o actions and filings with governmental bodies, agencies, officials or
other authorities and third parties;
o public announcements;
o maintaining books and records;
o AVS employees and affiliates entering into non-disclosure agreements;
o filing of a Form S-4 registration statement;
o government authorizations;
o the listing of the MUSE common stock to be issued in the merger;
o identifying affiliates of MUSE and AVS and the delivery of affiliate
agreements;
o fees and expenses
o financial statements
o best efforts
o notification of certain matters; and
o insurance.
FURTHER ACTION. The merger agreement provides that each of the parties to
the merger agreement will use its best efforts to take all actions and to do
all other things necessary, proper or advisable to:
o consummate and make effective as promptly as practicable the
transactions contemplated by the merger agreement;
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o obtain in a timely manner all necessary waivers, consents and
approvals;
o effect all necessary registrations and filings; and
o otherwise satisfy or cause to be satisfied all conditions precedent to
its obligations under the merger agreement.
TERMINATION
The merger agreement provides that it may be terminated and the merger may
be abandoned:
(1) at any time before the closing of the merger, by mutual written
consent of MUSE and AVS;
(2) at any time before the closing of the merger, by either MUSE or AVS:
(a) in the event of a material breach of the merger agreement by the
non-terminating party or
(b) upon notification to the non-terminating party by the terminating
party that the non-terminating party has failed to satisfy a
condition set forth in the merger agreement or in any related
agreement contemplated in the merger agreement required to be
satisfied by such non-terminating party prior to or at the
closing date of the merger; and
(3) at any time after October 31, 2000 by either MUSE or AVS if the merger
has not been consummated by that date.
However, the right to terminate pursuant to (2) or (3) above will not be
available to any party whose failure to fulfill any obligation under the merger
agreement has been the cause of or resulted in the failure of the merger to
occur on or before that date.
In the event of the termination of the merger agreement, the merger
agreement provides that it will become void and there will be no liability on
the part of any party except that the provisions with respect to public
announcements in the merger agreement will continue to apply following the
termination. Notwithstanding anything to the contrary, if the termination of
the merger agreement is made under clause (2) above, each party will remain
liable to the other party for any misrepresentation or breach of the merger
agreement by it existing at the time of such termination, and the injured party
may seek such remedies, including damages and fees of attorneys, against the
other with respect to any such misrepresentation or breach as are provided in
the merger agreement or as are otherwise available at law or in equity.
AMENDMENT; WAIVER
The merger agreement may be amended at any time in a writing signed by
each of the parties. Once AVS stockholders have approved the merger, no
amendment that by applicable law requires further approval by the AVS
stockholders may be made without such further approval.
At any time before the effective time of the merger, a party may in a
writing signed by each party:
(1) extend the time for performance of any of the obligations or other
acts of the other parties;
(2) waive any inaccuracies in the representations and warranties of the
other parties contained in the merger agreement or in any document
delivered pursuant to the merger agreement; or
(3) waive compliance, where permissible, with any of the agreements or
conditions contained in the merger agreement.
FEES AND EXPENSES
Expenses incurred in connection with the filing fee for the registration
statement and the printing and mailing of the proxy statement/prospectus and
the preparation of the registration statement will
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be shared equally by MUSE and AVS. Otherwise, all fees and expenses incurred in
connection with the merger agreement and the transactions contemplated thereby
will be paid by the party incurring the expenses, whether or not the merger is
consummated.
The fees and expenses expected to be incurred by MUSE and AVS in
connection with the merger total approximately $800,000 to $1,000,000.
INDEMNIFICATION
Under the merger agreement, those stockholders of AVS who vote in favor of
the merger and who own 500 or more shares of AVS capital stock or who are AVS
affiliates have agreed to indemnify MUSE against any damages arising from
breaches of representations, warranties, agreements and covenants of AVS,
provided that such liabilities may not exceed the value, as of the date of
consummation of the merger, of 160,000 shares of MUSE common stock (except with
respect to liabilities resulting from intentional torts). Such shares of MUSE
common stock will be placed in escrow at the closing of the merger to support
these indemnification provisions. Twelve months after the closing date of the
merger, any escrowed shares not distributed or reserved for distribution to
satisfy indemnification obligations will be distributed among the former
stockholders of AVS from whom shares were withheld. The merger agreement also
provides for indemnification by MUSE for breaches by MUSE of its
representations, warranties, covenants and agreements.
STOCKHOLDER AGREEMENTS
In connection with the merger agreement, AVS entered into individual
stockholder agreements with certain AVS stockholders:
Kubota Corporation
John William Poduska, Sr.
Poduska Family Limited Partnership
Thomas C. Chase, individually and as a trustee for various trusts
Wallace E. Smith
Masatoshi Kumagai
Marc R. Spigel
These stockholders combined represented approximately 38% of the AVS capital
stock then outstanding.
The stockholders signing the stockholder agreements agreed, among other
things, to vote their shares of AVS capital stock in favor of the adoption of
the merger agreement and approval of the merger and any other transactions
contemplated by the merger agreement. Each of the stockholder agreements
provides that it will terminate upon the earlier of the completion of the
merger or the termination of the merger agreement in accordance with its terms.
CONFIDENTIALITY AGREEMENT
AVS and MUSE entered into mutual confidentiality agreements on April 7,
2000 and April 17, 2000 that provide for, among other things, the confidential
treatment of the discussions regarding the merger and the exchange of
confidential information concerning AVS and MUSE. AVS and MUSE subsequently
entered into a letter of intent, dated May 4, 2000, that confirmed the
obligations contained in the confidentiality agreements.
AGREEMENT OF AVS AFFILIATES
Rule 145 under the Securities Act of 1933 regulates the disposition of
securities of "affiliates" of AVS in connection with the merger. AVS has
delivered to MUSE a letter identifying all persons who are or may be deemed to
be, at the time of the AVS meeting, "affiliates" of AVS for purposes of Rule
145 under the Securities Act. This letter may be further updated before the
effective time of the merger. AVS has agreed to use its best efforts to cause
each person who is identified as an affiliate to
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deliver to MUSE, before the effective time of the merger, a written affiliate's
agreement. Under these affiliate's agreements, each affiliate will represent
that he, she or it has been advised that the affiliate may not sell, transfer
or otherwise dispose of MUSE common stock issued to the affiliate in the merger
unless the sale, transfer or other disposition:
(1) has been registered under the Securities Act;
(2) complies with the requirements of Rule 145 under the Securities Act;
or
(3) in the opinion of counsel reasonably acceptable to MUSE, is otherwise
exempt from registration under the Securities Act.
Notwithstanding the foregoing, each affiliate will have further agreed not to
acquire any shares of MUSE common stock and not to transfer or dispose of any
of its shares of MUSE common stock prior to the date in which at least 30 days
of combined results of operation of MUSE and AVS have been made publicly
available.
MUSE AFFILIATES AGREEMENTS
MUSE is required to obtain agreements from its affiliates similar to those
required for AVS affiliates.
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INFORMATION CONCERNING MUSE
GENERAL
MUSE was incorporated in Delaware on October 24, 1995 to develop and
market data visualization and perceptual computing software and solutions
designed to integrate and present complex types of scientific, engineering and
other data. Perceptual computing involves presenting computer-based information
in ways that make the information easier to understand by engaging multiple
senses, such as sight, sound and touch, and to create artificial computer-based
environments in which users can simulate and analyze many different types of
industrial, scientific, medical, research and military issues.
Perceptual computing can be further defined as the integration of concepts
and technologies associated with virtual reality (the creation of artificial
computerized environments), data visualization (the presentation of information
using advanced graphics techniques), 3D graphics (the representation of
computerized objects so that they appear three dimensional) and advanced
input/output technologies (including touch feedback, voice command, voice
synthesis and other forms of computer interaction).
We develop and market several perceptual computing-based software products
as well as provide comprehensive perceptual computing solutions for our
customers. Solutions can include the creation of customized software products
based on proprietary software and hardware manufactured by us and/or other
companies, and the sale, installation and maintenance of computer hardware.
Our customers are most commonly engineers, scientists, analysts,
researchers, government personnel and other advanced computing professionals.
However, our intent and current strategy is to expand our customer base to
include all types of computer users in more general business and financial
markets.
Our executive offices are located at 1601 Randolph, SE, Albuquerque, New
Mexico 87106, and our telephone number is (505) 843-6873.
RECENT DEVELOPMENTS
On November 16, 1999, we purchased all of the outstanding stock of Virtual
Presence, Ltd., a 10 year old U.K. company that creates sophisticated 3D
graphics solutions using proprietary and third party software and hardware.
Virtual Presence, Ltd. (also know as MUSE Virtual Presence) is our wholly-owned
subsidiary that operates offices in London and Manchester, U.K., and is the
majority shareholder of SimTeam SARL, a French company that provides products
and services similar to those of MUSE Virtual Presence in France.
On March 17, 2000, through Virtual Presence, we purchased all of the
outstanding stock of Simulation Solutions, Ltd., a U.K. company involved in
providing advanced solutions to the manufacturing industry using proprietary
and third-party software and hardware. Simulation Solutions (also known as MUSE
Simulation Solutions) operates from the Manchester, U.K. offices of Virtual
Presence.
On March 28, 2000, through Virtual Presence, we completed an asset
purchase of the VRsource.com, an e-commerce Web site that is a reseller of our
hardware and software and that of other companies that are used in virtual
reality, data visualization and perceptual computing.
On June 1, 2000, we entered into an equity line agreement with
Kingsbridge, which entitles us to sell and obligates Kingsbridge to purchase,
from time to time, up to $18,000,000 of our common stock. Our ability to
require Kingsbridge to purchase our common stock is subject to certain
limitations based on the market price and trading volume of our common stock.
Additionally, on August 7, 2000, we sold to Kingsbridge a convertible note in
the principal amount of $1,000,000 with interest at the annual rate of 10%. The
note is convertible into shares of our common stock after the first anniversary
of the issuance of such note at the per share rate of the lower of $2.375 or
88% of the average closing
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bid price for the five trading days prior to conversion. We also issued to
Kingsbridge warrants to purchase 200,000 shares of MUSE common stock in
connection with the equity line agreement exercisable at $3.76 per share over
the four-year period commencing on November 28, 2000 and warrants to purchase
75,000 shares of our common stock in connection with the note issuance
exercisable at $2.6125 per share over the four year period commencing on August
7, 2001.
On July 18, 2000, we executed a merger agreement in connection with the
acquisition by us of AVS.
OPERATING UNITS
We are organized into several operating units:
o MUSE PERCEPTUAL COMPUTING is the developer and primary marketer of the
MuSE software product and also provides customized MuSE-based software
solutions to our customers. MUSE Perceptual Computing operates from
offices in Albuquerque and Houston and as of September 1, 2000 employed a
total of 30 full time personnel. MUSE Perceptual Computing sells and
promotes its products primarily to the U.S. automotive, engineering,
manufacturing, oil and gas, aerospace and fleet management industries.
MUSE Perceptual Computing is an internal division of MUSE Technologies,
Inc.
o MUSE FEDERAL SYSTEMS GROUP distributes MuSE software and provides
customized MuSE-based software solutions to agencies of the U.S. federal
government and its contractors and subcontractors. MUSE Federal Systems
Group employs 4 full time employees from an office in Arlington, VA. MUSE
Federal Systems Group is our wholly owned subsidiary.
o MUSE VIRTUAL PRESENCE is a European distributor of 3D software and
hardware products as well as a provider of custom development,
integration and support services to the European defense, manufacturing,
aerospace, medical, training and other industries. MUSE Virtual Presence
employs 31 full-time employees at offices in London and Manchester (U.K.)
and is the majority shareholder of SimTeam SARL, a French company that
employs 5 persons and provides services similar to that of MUSE Virtual
Presence in France. MUSE Virtual Presence has limited business activities
in the U.S. and is in the process of establishing a U.S. sales force.
MUSE Virtual Presence and SimTeam are also distributors of MuSE software
and services in Europe.
o MUSE SIMULATION SOLUTIONS is an advanced consulting firm specializing in
manufacturing simulation for plant and equipment. MUSE Simulation
Solutions provides software, hardware and professional services in the
field of virtual prototyping and simulation-based design and process
development. MUSE Simulation Solutions has 3 full-time employees and
operates from the Manchester (U.K.) offices of MUSE Virtual Presence.
o MUSE VRSOURCE is an E-commerce retailer of advanced visualization and
perceptual computing hardware and software. From an online operation
(www.musevrsource.com), MUSE VRsource sells equipment, software and other
products to an international clientele of corporations, government
agencies and educational institutions for use in virtual reality and
perceptual computing applications. MUSE VRsource employs one full-time
employee and is an international distributor of MuSE software.
Our family of companies is generally focused on providing customers with
perceptual computing and data visualization solutions in the form of:
1. Perceptual computing software products that our customers can use to
create software solutions on their own;
2. Turn-key perceptual computing solutions that help a customer solve a
particular problem;
3. Training and support for our perceptual computing software products and
solutions;
4. Computing hardware and peripheral devices that are used in perceptual
computing; and
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5. Professional installation, maintenance and support services.
Our belief is that by providing all of the above products and services,
our customers will be able to satisfy most of their perceptual computing, data
visualization and virtual reality requirements from a related group of
companies whose focus and expertise is primarily in the field of computer
graphics software and hardware. We further believe that our ability to provide
such a sweeping range of products and services to multiple international market
segments is a distinct advantage over companies that provide only limited
aspects of our products and services. As the market for our products and
services grows, we believe that we will be poised to capture a significant
share of such market and establish an international brand reflecting our
position as a leader in providing perceptual computing, virtual reality and
data visualization software and solutions.
INDUSTRY OVERVIEW
Our software products and consulting services have historically been
oriented towards meeting the needs of the advanced industrial, federal,
scientific and research sectors of the computer industry, and for migration to
more conventional business and financial desktop computing arenas. Each of
these market sectors has been affected by several trends that have influenced
our strategy and direction:
1. Corporations, government agencies and individual computer users are
dealing with increasingly larger and more complex quantities of
information, most of which is in the form of computer-based data. Making
sense of this information is becoming more and more difficult, and the
disparity of data formats commonly prevents such information from being
integrated into a single computing environment in which a user can
observe, analyze, and interact with the information.
2. Advances in multiprocessing chip technology and enhanced graphics card
capabilities have empowered Windows platform computers and workstations
to match the performance of several UNIX class machines, which until
recently had been the standard of sophisticated computing tasks in many
industries. The decreasing cost of Windows hardware and the large number
of installed Windows operating systems has created a large and growing
population of computer users who are capable of taking advantage of new
software technologies.
3. Wide adoption of the Internet in nearly every business sector has
afforded new possibilities and demands for remote collaboration, content
delivery, data presentation and remote data access.
4. Advances in 3D graphics software and technology have created a paradigm
of "visual computing" in several industries, most notable of which are
the design, engineering, manufacturing and military sectors. Visual
computing is used to create and manipulate true-color, three-dimensional
objects representing complex data with extreme precision and speed,
thereby enhancing understanding. In visual computing, a three-dimensional
full color image replaces the two-dimensional screen image. The use of
visually rich images makes it possible to represent complex data more
understandably as well as to simulate real-world characteristics.
We believe that these trends have created a unique and significant
business opportunity and that data visualization-related software, professional
services and related hardware will continue to grow in demand from both
established and emerging markets. As these markets expand, customers will
likely turn to companies such as ours, that have proven experience with
hardware, software, installation, support, maintenance and training.
We further believe that our software and services enhance visual computing
by rendering 3 or more dimensions of data and utilizing multi-sensory
techniques (the integration of sight, sound and touch) to create a highly
interactive computing experience that is more like real life and is known as
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perceptual computing. Perceptual computing integrates and extends data
visualization, virtual reality and simulation technologies by leveraging some
of the most basic and powerful human skills of trend analysis, pattern
recognition and anomaly detection to make many different types of digital
information easier to understand.
PRODUCTS & SERVICES
We have developed and are currently marketing the following products and
services:
o MUSE (Registered Trademark) (Multi-dimensional user oriented Synthetic
Environment). MuSE is a software development toolkit that is used by
skilled computer programmers to create software applications for
end-users that can be installed on different computing platforms (Windows
NT, UNIX, etc.) and take advantage of different physical or logical input
and output devices (keyboards, mice, voice recognition, speech synthesis,
etc.). MuSE was first developed at Sandia National Laboratories in 1991
and licensed to us in 1995. Since being licensed to us, we have made
numerous enhancements to the MuSE software and added extensive
capabilities and functionalities beyond those of the core software
licensed from Sandia Corporation (see page xx). Multiple users can employ
MuSE to share the same MuSE-based software application and collaborate
from remote locations over computer networks. We believe MuSE represents
a new approach to computer interaction by facilitating the integration of
diverse types of data into a single presentation environment and by
presenting this data using sight, sound and other methods of
representation in a manner that enhances an end-user's ability to analyze
and understand this data. This process is known as "perceptual computing"
because it engages multiple senses and leverages the perceptual skills of
computer users. Computer Graphics World magazine awarded us its
prestigious "Innovation Award" for our advances in the fields of human
computer interaction (1996) and network collaboration (1997). The MuSE
software sells for a base price of $14,000 for the Windows version and
$22,000 for the UNIX version. Programming, maintenance, support and other
services are provided for additional fees.
o FRAMESETTM is a delivery and administration system for computer-based
simulation, education and training. The first version of FrameSET was
completed by MUSE Virtual Presence in November 1999. FrameSET has been
designed to act as a host for any distributed training software. It is
built around Internet browser technology to provide an easily
configurable and customizable, hardware- and content-neutral environment
for delivering educational curricula. FrameSET is in the process of being
enhanced to allow connectivity over internal networks and the Internet,
whereby trainees will have the ability to communicate and collaborate
with other users in any global location and to permit remote mentoring,
remote assessment, monitoring of progress and feedback for trainees
wherever they are situated. We hope to use FrameSET to form a global
medical network of communication and education, increasing the quality
and consistency of medical training curricula worldwide. FrameSET sells
for a base price of $65,000. Programming, maintenance, support and other
services are provided for additional fees.
o MISTTM (Minimally Invasive Skills Trainer) is an advanced (but
simple-to-use) computer-based system designed to teach and assess
minimally invasive surgical skills, and has been validated through
extensive clinical trials at leading hospitals and educational
facilities. The MIST system integrates two standard surgical instruments
with a personal computer. A color monitor displays the movement of the
surgical instruments in real-time 3D graphics, which was completed by
MUSE Virtual Presence's London-based medical software group in 1998. The
3D graphics provide an abstracted representation of the human abdominal
cavity in the form of simple geometric shapes. This enables medical
students to develop and refine the key psychomotor skills required to
become a proficient laparoscopic surgeon. Trainees are guided through a
series of six exercises of progressive complexity that imitate techniques
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employed in surgical procedures. MIST sells for a base price of $20,000
Programming, maintenance, support and other services are provided for
additional fees. The second release of MIST (scheduled for Summer 2000)
includes six additional tasks relating to gynecological surgical skills.
o ICTSTM (Interventional Cardiology Training Simulator) is in the final
stages of development and is designed to reproduce the physics and
physiology of the human cardiovascular system in the thorax, to enable
medical students users to learn how to perform cardiac catheterization.
The system incorporates a haptic feedback interface to give users a
natural and realistic way to interact with the simulation. The FrameSET
instructional system is linked to the simulation to provide a learning
environment framework. When completed, the training simulation will
contain a series of modules that replicate the haemodynamics, blood flow
and dye contrast media mixing, and catheter-vasculature physical
interaction. An additional module produces a synthetic x-ray image to
replicate the fluoroscopic image used by interventional cardiologists to
guide them during their work. The complex mathematics of the simulation
are adapted from standard cardiovascular modeling and analysis
literature. ICTS sells for a base price of $75,000. Programming,
maintenance, support and other services are provided for additional fees.
o CUSTOMIZED APPLICATION DEVELOPMENT represents a significant portion of
revenue for most of our operating units and is a particular strength of
our company. Many of our customers request and pay for our computer
programmers to utilize our software products (and/or those of other
companies that we represent) to create a computer program or complete
software solution that is entirely unique to a very particular problem
that the customer is attempting to solve. Despite the fact that many of
our customers have skilled programmers on their staff, they often turn to
us for extremely advanced application development projects. Custom
applications can be produced for use by a single user at the client
company, or, when used by multiple users, can sometimes produce
additional royalty or licensing revenue. Often, these custom applications
(or portions thereof) can be reutilized in other custom applications for
future customers, or added to our software as new features or
capabilities. The price of a custom application can range from
approximately $25,000 to $1,000,000 or more.
o PERCEPTUAL COMPUTING HARDWARE includes highly advanced UNIX computers;
personal computers of varying sophistication; computer display screens
and projection systems; peripheral devices such as joysticks, head
tracking devices, haptic feedback units, stereoscopic glasses; or any
other piece of hardware that a customer might desire or require to take
advantage of our software or services, or those provided by other
companies. We offer these products to our customers because in many cases
they are an integral part of perceptual computing, because we have
developed significant relationships with many of the manufacturers of
these products, because they afford us additional revenue and profit
opportunity, and because we believe that our customer is better served by
being able to purchase these products from one company that can also
provide support and training. None of the hardware products offered to
our customers are manufactured directly by our operating units, and we do
not inventory any products. Upon receipt of a signed purchase order from
a customer we place an order with a third party manufacturer and collect
payment from the customer upon delivery and/or installation of the part.
We represent approximately 50 manufacturers and offer approximately 200
different products that range in price from under $100 to over $750,000
each. All of our operating units offer hardware to their customers.
o VISUALIZATION FACILITIES are rooms or theaters that are specifically
designed to present information using perceptual computing software and
hardware to groups of decision makers. Advanced computers and projection
systems can be used to produce extremely high resolution images with
clarity and real time performance that are ideal for digital prototype
presentation, high resolution mapping, command and control of processes
and corporate planning and briefing applications. Visualization
facilities have gained acceptance in the manufacturing, digital
prototyping, engineering, process plant design and oil/gas exploration &
production
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industries. Because of our expertise in the field of perceptual
computing, we have begun specifying hardware and software to be utilized
in these industries that have embraced large-scale data visualization.
None of the hardware products offered to our customers are manufactured
directly by our operating units, and we do not inventory any products.
Upon receipt of a signed purchase order from a customer we place an order
with a third party manufacturer and collect payment from the customer
upon delivery and/or installation of the part. We represent approximately
5 manufacturers of large-scale visualization facilities and offer
approximately 35 different equipment configurations that range in price
from approximately $20,000 to over $750,000 each. MUSE Virtual Presence
and MUSE VRsource are the primary resellers of visualization facilities,
however other operating units can refer interested customers to the
primary reselling units.
o SYSTEMS INTEGRATION, MAINTENANCE AND SUPPORT services are provided by
MUSE Virtual Presence and MUSE VRsource to customers with varying types
of perceptual computing hardware and software systems. Many customers
require technical assistance in configuring, installing and maintaining
advanced equipment, as well as training on new systems and performing
routine service on sophisticated hardware. In addition, MUSE Perceptual
Computing and MUSE Federal Systems Group provide training and support to
their customers. Training costs range from $2,500 to $10,000 per session;
software maintenance is routinely 15% of the cost of the software;
maintenance contracts can range from $2,000 to $20,000 per month; and
installation and systems integration services range from $2,000 to
$20,000 per site. These services can be customized into comprehensive
programs that are priced in accordance with the scope of engagement and
length of contract.
o SYNTHETIC TRAINING SYSTEMS are PC-based simulators that permit students
to experience a computerized recreation of complex equipment, facilities
or systems (such as jet fighter cockpits or nuclear power plant control
rooms), and to interact with the features and complexities of these
systems in a lifelike manner. The advantage of synthetic training systems
is that they can be far less costly than traditional simulators or
physical mockups, have been demonstrated to be far more effective in
terms of training speed and efficiency than traditional systems, and
minimize the requirement for high-demand/high-cost equipment (such as
actual aircraft) to be removed from service for training purposes. MUSE
Virtual Presence has developed an advanced synthetic trainer for the
Royal Air Force that now serves as the validation and successful model
for similar systems to be sold into the military, industrial and
commercial markets.
CUSTOMERS
The MUSE companies have built an international clientele for their
perceptual computing products and services. The following is a partial list of
customers for each of our operating units:
MUSE PERCEPTUAL COMPUTING: Goodyear Tire & Rubber, Continuum Resources,
Boeing, Schlumberger, Chevron Research, Lockheed Martin, Jet Propulsion
Laboratory, Los Alamos National Laboratory, Sandia National Laboratories,
Arizona State University, Washington State University.
MUSE FEDERAL SYSTEMS GROUP: NASA (multiple facilities and programs), U.S.
Navy (multiple facilities and programs), U.S. Air Force, U.S. Department of
Transportation, Science Applications International Corporation (SAIC), U.S.
Joint Chiefs of Staff.
MUSE VIRTUAL PRESENCE: British Telecom, Fluor Daniel, British Aerospace,
Nestle U.K., European Union, Lever Brothers, Lloyds Bank, Procter & Gamble,
Rolls Royce, Johnson & Johnson, Royal Air Force, Ethicon, Unilever,
Alenia-Marconi, Severn Trent Water, Diageo, Guidant Corporation.
MUSE SIMTEAM: Electricite de France, Renault, Institut de France Petroleum,
French Army, Schneider, Ecole des Mines, Lectra.
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MUSE SIMULATION SOLUTIONS: British Aerospace, Vickers Defense, DERA,
Bombardier.
MUSE VRSOURCE: Brazilian Army, Michigan University, Technopia (Columbia),
Systema Informatica (Greece), Pro Systems (Netherlands), Computer Graphica
(Italy).
STRATEGY
From the beginning of our 1999 fiscal year until the second quarter of our
2000 fiscal year, the primary sales strategy for MUSE Perceptual Computing and
MUSE Federal Systems Group was to distribute our software products and services
through a network of resellers that had extensive vertical market expertise.
Because the MuSE software product was designed to serve the unique needs of
many different industries, management believed that it would be more efficient
to identify resellers, distributors, service providers and other experts in a
select few industries to sell MuSE software to their existing and potential
customers. That distribution strategy, known as the Strategic Reselling Partner
(SRP) program, has produced lower than expected results to date, and while
several SRP distributors continue to promote and offer the MuSE software
product and services, management believes that establishing a direct sales
relationship with potential customers will shorten the sales cycle, optimize
profitability, and ensure that MuSE software is effectively introduced into our
target markets.
MUSE Virtual Presence, MUSE VRsource and MUSE Simulation Solutions have
historically sold products only using their own direct sales force, without any
dependence on resellers or third party representatives.
Each of our operating units is presently focused on generating revenue and
new business from well-defined industry sectors. Our objective is to optimize
the sale of software, hardware and services into each of these markets. Since
each of our operating units has a distinctive expertise in each sector, they
are not seen as competing with one another despite the fact that they may be
conducting sales activities within the same general market sector. Most market
sectors have multiple areas of specialty and technical requirements.
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<TABLE>
<CAPTION>
MUSE
MUSE MUSE Virtual Simulation
Perceptual MUSE Federal Presence Solutions MUSE
Computing Systems Group (U.S. & (U.S. & VRsource
Industry Focus (US) (US) Europe) Europe) (International)
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Automotive X X X X
------------------------------------------------------------------------------------------------------
Manufacturing X X X X
------------------------------------------------------------------------------------------------------
Engineering X X X X
------------------------------------------------------------------------------------------------------
Aerospace X X X X X
------------------------------------------------------------------------------------------------------
Defense X X X X
------------------------------------------------------------------------------------------------------
Scientific X X
------------------------------------------------------------------------------------------------------
Fleet Mgmt. X X
------------------------------------------------------------------------------------------------------
Training X X
------------------------------------------------------------------------------------------------------
Education X X
------------------------------------------------------------------------------------------------------
Medical X X
------------------------------------------------------------------------------------------------------
Entertainment X X
------------------------------------------------------------------------------------------------------
Oil & Gas X X
------------------------------------------------------------------------------------------------------
Vis. Facilities X X
------------------------------------------------------------------------------------------------------
Decision Support X
------------------------------------------------------------------------------------------------------
Hardware X X
------------------------------------------------------------------------------------------------------
</TABLE>
We believe that the above distribution of market focus provides the
greatest opportunity for revenue generation and growth since the majority of
the targeted industries have already embraced various aspects of perceptual
computing.
Our plan is for MUSE Perceptual Computing and MUSE Federal Systems Group
to focus exclusively on U.S. customers and for MUSE Virtual Presence and MUSE
Simulation Solutions to focus primarily on European opportunities with an
eventual expansion into U.S. markets.
Since MuSE, FrameSET, MIST and ICTS are software products that are in
relatively early stages of their development and deployment, we plan to
dedicate limited resources to their continued enhancement and capability.
Future development efforts are expected to be focused on adding specific
features requested by customers, meeting the requirements of modifications or
enhancements to the operating systems that they utilize, and responding to new
features and capabilities offered by competitors.
SALES AND MARKETING
Our current sales and marketing staff consists of 20 full-time employees:
o MUSE Perceptual Computing employs 8 full-time sales and marketing
personnel, 7 of which provide marketing, public relations, graphic and
Web design services to our entire family of companies, including a
Vice President of Marketing and a Vice President of Communications;
o MUSE Federal Systems Group employs 2 dedicated sales personnel plus
the services of its divisional President who is engaged in full-time
sales activities;
o MUSE Virtual Presence employs 6 dedicated sales personnel including a
Managing Director of Sales and Vice President of Business Development;
o MUSE Simulation Solutions employs 1 dedicated salesperson;
o SimTeam employs 2 dedicated sales personnel; and
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o MUSE VRsource employs 1 dedicated salesperson.
We are presently in the process of hiring additional sales and marketing
personnel with expertise in the field of perceptual computing, with particular
emphasis on expansion of the MUSE Perceptual Computing and the MUSE Virtual
Presence sales forces.
At present, the sales force of each operating unit represents the products
and services of that unit to its customers. When a salesperson identifies an
opportunity to sell a product or service of an affiliated operating unit, the
sales lead is turned over to the appropriate unit. Since each unit tends to
offer specific products to specific target markets, we feel that this strategy
best serves both the company and its customers, however, we anticipate that
selected products and services will be offered by multiple units in the near
future.
Historically, we have not utilized print or display advertising to sell
our products. Instead, we have relied on strategic media relations to place
product articles, customer testimonials and success stories into selected trade
publications, which we believe is more cost effective and informational than
traditional print advertising. As selected target markets mature, however, we
believe that our media relations practice can be augmented by highly targeted
print advertising and direct mail campaigns. Advertising and direct mail
promotions can be expensive and require consistent, repetitive messaging to be
effective.
We attend a substantial number of market-specific trade shows at which
large groups of potential customers congregate to see the latest developments
in their industry. Trade shows permit us to demonstrate our software and
services and directly meet with potential customers to discuss their needs. The
cost of trade shows is extremely expensive; however, we attempt to mitigate the
cost of selected shows by appearing in the exhibition booth of promotional
partners (such as Hewlett Packard, SGI and Sun Computer) to reduce the size and
cost of our participation.
We routinely engage in non-exclusive joint promotions with hardware
companies whose products we offer. Joint promotions can take the shape of trade
shows, customer visits, printed brochures and/or Web-based promotions. Most
commonly, hardware vendors desire software and applications to demonstrate
their products, which we provide in exchange for exhibit booth space, free
hardware or exposure.
STRATEGIC RESELLING PARTNERSHIPS AND OTHER MATERIAL CONTRACTS
One of our sales strategies is to build a direct sales force that can
identify revenue opportunities outside of the customer base served by our SRP
program. As a result of the significant lead time necessary to create an
effective direct sales force and consummate additional distribution and
reseller relationships, our quarterly results are expected to fluctuate
significantly depending on the timing of completion of such arrangements and
any up front fees and sales commitments associated therewith. Accordingly,
results in any one quarter are not indicative of results to be experienced in
subsequent quarters.
Our SRP program is based on establishing revenue-generating partnerships
with proven and qualified sales organizations operating in vertical markets in
which MUSE Perceptual Computing is operating or has targeted. Our SRP program
was designed to provide several benefits to us and the reselling partner by:
o Generating revenue opportunities through the licensing and resale of
MuSE software;
o Producing ongoing revenues through the licensing and sale of product
upgrades and through service, support and maintenance agreements;
o Creating additional revenues through the development of specialized
applications appropriate to the specific vertical market; and
o Producing new product development initiatives that result from
customer feedback and product modification requests.
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Under our SRP program, resellers can secure territorial or vertical market
exclusivity by paying an up-front fee to us, or enter into a non-exclusive
commitment for representation of MuSE software in selected markets. Both
exclusive and non-exclusive SRP agreements establish an anticipated revenue
goal for the reseller over the multi-year period of their agreement. The
relative value of each vertical market or territory is established by mutual
agreement between us and the SRP. The valuation is based upon third-party data
and market projection analysis that are obtained from one or more industry
experts.
To become an SRP, a candidate must possess any or all of the following
qualifications:
o The reseller must have a significant or prominently emerging position
within its vertical market and a business model and product/service
offering that is synergistic with our strategic plan;
o The reseller must have the resources to sell, support and develop
specialized applications that take advantage of MuSE software;
o The reseller must have existing customers who are capable of
purchasing MuSE software; and
o The reseller must have sufficient economic backing and financial
resources to undertake an aggressive sales and marketing effort of
MuSE software to its customers.
In June 1998, we entered into a strategic reselling partner agreement with
Continuum Resources International, ASA, a Norwegian company, with respect to
distribution of our products and services in the oil and gas industry
worldwide. In exchange for such exclusive rights, Continuum Resources paid us a
non-refundable license fee of $5,000,000. Minimum sales commitments totaling
$12,000,000 through 2001 were modified in June 2000 due to significant pricing
reductions in the cost of our products and to enable Continuum Resources to
implement its business plan. The modified agreement requires Continuum
Resources to generate minimum revenues of $250,000 during the next fiscal year
with minimum requirements for succeeding years to be established by mutual
agreement by December 31, 2000. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
In December 1998, we entered into a non-exclusive strategic reselling
partner agreement with Intergraph Corp., an automated business solutions
company with customers worldwide in a variety of commercial sectors and
government. The agreement with Intergraph provides Intergraph with the
non-exclusive right to resell our products and services worldwide in exchange
for minimum annual sales commitments aggregating $4 million through 2001.
In February 1999, we entered into non-exclusive reseller agreements under
our strategic reselling partner program with Analytical Mechanics Associates, a
technical consulting firm, and Federal Data Corporation, an information
technology provider serving primarily the Federal government. Each agreement is
for a term of three years with minimum sales commitments of $3 million over the
term of the agreement.
In March 2000, we entered into a non-exclusive reseller agreement under
our strategic reselling partner program with Pentagon Engineering, a Best of
Class reseller of Hewlett-Packard hardware and the premier Co-Create software
VAR for the US, as well as a developer of custom solutions for the engineering
and automotive industries. Under the terms of a three-year non-exclusive
agreement, Pentagon Engineering has committed to $1,000,000 over the term of
the agreement.
In July 2000, we entered into a non-exclusive reseller agreement under our
SRP program with Science Applications International Corporation (SAIC), a
diversified high-technology research and engineering company that offers a
broad range of expertise in analysis, computer system development and
integration, technical support services, and computer hardware and software
products. Under the terms of the agreement, SAIC plans to offer MuSE products
and services within the U.S. to all federal agencies and companies that are
qualified to perform work for a federal agency. International orders must be
pre-approved by MUSE Federal Systems Group. The term of the agreement is
through May 30, 2003. The agreement requires minimum sales commitments over the
term aggregating $2 million.
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Although our existing strategic reselling partner agreements provide for
minimum annual sales commitments, failure to satisfy such commitments will only
permit us to terminate such strategic reselling partner agreement. Accordingly,
we cannot assure you that the threat of termination of any strategic reselling
partner agreement will be an effective deterrent against any breach of that
strategic reselling partner agreement or that such minimum sales commitments
will be realized.
Our current strategy is to expand our sales force and convert all
operating units to a primarily direct sales model where a combination of
products and services are offered to our customers. For the MUSE Perceptual
Computing unit, this represents a material departure from our original business
plan of dependence on SRPs and a belief that the company would take on the
primary dimensions of a "software publisher" with revenue being generated from
software licensing and royalty income. Management still believes that long-term
revenue can be generated from conventional royalty/licensing publishing
practices by resellers and directly by us; however, as a means of creating a
larger installed base of users, we believe that the current sales strategy of
MUSE Perceptual Computing should be focused on direct contact with corporations
and government agencies that have complex data integration and data analysis
challenges and large populations of users. We believe that select target
markets can benefit from an integrated deployment of our software and
professional services, and that a direct sales effort will produce faster and
more significant revenues.
In April 1999, we entered into a three-year agreement with The Goodyear
Tire & Rubber Company to develop applications using our advanced visualization
and network collaboration software. We agreed to provide software, system
design, consulting, and technical support services to Goodyear on a
project-by-project basis. The agreement includes a three-year renewal option
and provides exclusivity for consulting or application design services within
the tire and rubber manufacturing business throughout its term, provided that
they satisfy the minimum annual project commitments. Sales activities in the
tire and rubber manufacturing industry by our strategic reselling partner's are
not affected by this agreement.
In January 2000, MUSE Virtual Presence entered into an agreement with
Guidant Corporation to provide a sophisticated cardiology training simulator to
Guidant's European headquarters in Belgium. Under the terms of a contract
valued at approximately $500,000, MUSE Virtual Presence will undertake custom
software development work to adapt the company's existing IST (Interventional
radiology/cardiology Simulation-based Trainer) system.
In April 2000, MUSE Virtual Presence was awarded a major contract with the
Manchester Visualization Centre to provide hardware, software and services at
one of the world's most sophisticated facilities for advanced research and
development, interactive computer graphics, multimedia, image processing and
visualization. The contract, valued at $1,000,000, provides for MUSE Virtual
Presence to perform extensive work at the Manchester Visualization Centre,
which is located at the University of Manchester in the United Kingdom. The
project will transform computational systems into high-performance visual
computing platforms for researchers, students and commercial users to project
real-time graphics in a three-screen theater. Included in the project is the
installation of MuSE and FrameSet software.
ACQUISITION STRATEGY
Over the past year, we commenced an acquisition strategy that was designed
to achieve the following goals:
o Add new products, services and capabilities to our core business;
o Create an international presence, primarily in Europe;
o Add new industries to our target markets;
o Add qualified technical personnel to our ranks;
o Add revenue and other forms of economic opportunity from existing or
imminent projects or products; and
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o Build an international brand that is synonymous with perceptual
computing software and solutions.
Our acquisition strategy was motivated by an awareness that perceptual
computing, data visualization and virtual reality were beginning to transcend
their "emerging industry" status and a belief that a company with a broad array
of products, services and offices could better serve a host of customers in an
array of industries.
As well, a series of corporate consolidations have taken place over the
past several years, in which emerging perceptual computing firms have been
acquired by larger companies. The more prominent and significant acquisitions
included:
o Sense8 being acquired by Engineering Animation, Inc.;
o Division being acquired by Parametric Technologies; and
o Multigen-Paradigm being acquired by Computer Associates.
Each of these significant acquisitions positioned software products that
compete with us into a well-financed and high profile corporate setting that
could be seen as providing exceptional advantage over our products and
services. Management saw the deployment of an aggressive MUSE acquisition
strategy as a response to competitive threats and market opportunities.
Management believes that our acquisition efforts to date, including the
acquisition of AVS, will significantly reposition us as a major contender for
perceptual computing market leadership and will provide us with a majority of
the benefits set forth above.
On November 16, 1999, we purchased all of the outstanding stock of Virtual
Presence, Ltd., a 10-year old United Kingdom company that creates sophisticated
3D graphics solutions using proprietary and third party software and hardware.
MUSE Virtual Presence is our wholly-owned subsidiary that operates offices in
London and Manchester, United Kingdom, and is the majority shareholder of
SimTeam SARL, a French company that provides products and services similar to
those of MUSE Virtual Presence in France.
On March 17, 2000, we purchased all of the outstanding stock of Simulation
Solutions, Ltd., a U.K. company involved in providing advanced solutions to the
manufacturing industry using proprietary and third-party software and hardware.
MUSE Simulation Solutions operates from the Manchester, U.K. offices of Virtual
Presence.
On March 28, 2000, we completed an asset purchase of theVRsource.com, an
e-commerce Web site that is a reseller of our hardware and software and that of
other companies that is used in virtual reality, data visualization and
perceptual computing.
On July 18, 2000, we executed the merger agreement in connection with the
acquisition by us of AVS.
At present, management continues to review acquisition candidates whose
products or business strategy complements that of MUSE.
COMPETITION
We believe that the current market for MuSE and other visual computing
software products is relatively small and fragmented. However, based upon
publicly available market research, we believe that this market will grow
rapidly over the next decade. We believe that no single company dominates the
market at the present time; however, a number of emerging companies are
aggressively pursuing opportunities in this market, including AVS, with which
we have recently entered into a merger agreement, and divisions of Parametric
Technologies, Engineering Animation and Computer Associates. Many of the
companies with whom we compete or expect to compete have substantially greater
financial resources, research and development capabilities, sales and marketing
staffs and distribution channels and are better known than we.
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We believe that the principal factors affecting our ability to compete are
the capabilities, functionality and architecture of our products; our ability
to provide expert professional services; the quality, ease of use by end-users,
performance and functionality of the derivative applications developed and
marketed by us; the effectiveness in marketing and distributing our products
and services; and price.
MuSE, FrameSET, MIST and ICTS have all been developed to meet the demands
of new or emerging customer requirements. To that end, very few software
products compete with them on a feature-by-feature basis. Other companies,
however, do manufacture and market software that competes with selected
features of each product. Many of these companies have economic and marketing
resources that are far greater than those of our company. Because the market
for perceptual computing software is just beginning to take on formal
dimensions and because some of our competitors have extensive product lines and
long standing relationships with leading corporations and government agencies,
we may not be able to compete with these products despite what we believe are
superior features and capabilities of our software.
The following competing software products have been identified by
management:
o MUSE: DviseTM by Division, a unit of Parametric Technologies;
WorldToolKitTM by Sense8, a unit of Engineering Animation, Inc.;
AVS/ExpressTM by Advanced Visual Systems; and VegaTM by
Multigen-Paradigm, a unit of Computer Associates. Each of these
competitors offers a less sophisticated (but often easier to use)
paradigm of perceptual computing. We believe that MuSE offers a more
robust development platform than competing products and can facilitate
the integration of diverse data formats more effectively. In addition,
MuSE offers built-in collaboration and sophisticated automatic
perceptual computing capabilities.
o FRAMESET: A number of products exist to provide for the delivery of
training course materials over wide area networks. Management believes
that none of these, however, is specifically designed for the
management and delivery of 3D materials, and we believe that our
product will prove attractive specifically to the developers of
simulation systems -- particularly in the growing medical market.
o MIST: Management believes that no other computer-based training
product exists for laparoscopic surgery psycho-motor skills training,
including from traditional `box-based' trainers (where students
manipulate objects in a physical environment using standard
instruments). Unlike MIST, these traditional training methodologies do
not incorporate performance metrics.
o ICTS: Management believes that ICTS is currently the only product
commercially available for the simulation of coronary radiology.
Colorado Medical and a consortium headed from Singapore are currently
developing similar products, but their price-point in the market is
anticipated to be many times that of ICTS, requiring graphics
workstations rather than a PC platform for delivery.
Numerous solutions providers could be seen as competitors to our
professional consulting service, some of which have marketing budgets and
programming staffs that are significantly larger than ours. These include:
o SGI: Despite its large presence in the 3D graphics marketplace, SGI is
hampered by customer perception of being a proprietary solutions
provider and hardware manufacturer. Since a significant portion of
SGI's revenue is achieved through the reseller channel (including MUSE
Virtual Presence), it is unlikely that SGI will become a primary
competitor without damaging its existing revenue sources. MUSE Virtual
Presence continues to work with SGI in Europe to leverage major
opportunities on a partnership basis.
o EDS: Has made brief forays into the visualization and simulation
marketplaces. Management believes that its lack of technical expertise
in visualization and simulation has limited its success. However, EDS
may become a significant competitor in the future if it perceives
major benefits are to be gained in the marketplace.
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The market for perceptual computing hardware is large and extremely
competitive. In many instances, we compete directly with manufacturers that
have independent sales forces as well as many other distributors of their
products. Manufacturers and large resellers also have a greater ability to
reduce the cost of their products to customers. We do not have any exclusive
reseller agreements with manufacturers and in some cases we have a limited
geographic territory in which we can sell certain products. We offer over 200
products to our customers and the following is a list of companies with whom we
compete for large hardware transactions:
o SGI: SGI has a policy to not directly compete with resellers.
Management believes that our ability to provide professional services
provides us with a competitive advantage.
o TAN GMBH: TAN is a German manufacturer of visualization equipment with
a strong installed base in continental Europe. Management believes
that our ability to provide professional services provides us with a
competitive advantage.
o TRIMENSION LTD.: Trimension is an internationally recognized leader in
visualization facilities.
As the perceptual computing market grows, new software and hardware
products will inevitably become available and additional service providers will
emerge as competitors. We cannot be assured that we will be able to compete
with these companies or that our existing customers will not turn to our
competitors for products and services.
THE LICENSE AGREEMENT
Pursuant to the license agreement with Sandia Corporation, we received (i)
a limited exclusive worldwide license to use and reproduce the MuSE software,
(ii) a license to create derivative works of MuSE software and (iii) the right
to distribute and sublicense the MuSE software. The license agreement provides
us with a ten-year exclusive license with respect to the MuSE software, and
thereafter provides a non-exclusive right through 2015. After the end of the
exclusive ten-year period, we may request that Sandia Corporation extend the
exclusivity through 2015, which determination shall be made in Sandia
Corporation's sole discretion and subject to continued royalty payments under
the license agreement. If the license agreement continues in force for a total
of 20 years, our rights under the license agreement convert to a paid-up
non-exclusive license.
We are required to pay royalties (with an annual minimum royalty of
$20,000) for the term of the license agreement, based on our gross revenues,
less cost of goods sold and certain other expenses, from the sale of products
utilizing MuSE. Additionally, we paid a one-time license fee of $400,000 in
connection with the acquisition of the license agreement from Viga Technologies
Corporation in 1995. We are also required to retain the services of key
personnel capable of supporting the MuSE software. The license agreement is
terminable by Sandia Corporation in the event of a breach thereunder by us
(including, without limitation, due to failure to pay minimum royalties in the
annual amount of $20,000), or in Sandia Corporation's discretion, in the event
of any breach of the license agreement, Sandia Corporation may convert the
license into a non-exclusive license or otherwise reduce our rights thereunder.
As part of the license agreement, we have agreed to grant Sandia
Corporation an irrevocable non-exclusive license to use the MuSE software (and
all enhancements, modifications and corrections made by us) and to develop
derivative works based on the MuSE software for internal use at Sandia
Corporation.
Under the license agreement, we bear the risk that the information and
technology licensed from Sandia Corporation and incorporated in the MuSE
software may infringe the rights of third parties and must indemnify Sandia
Corporation in respect of any claims for copyright infringement brought against
them and arising from the development and distribution of the programs
incorporated in the MuSE software. We have agreed to treat the originally
licensed MuSE software as proprietary to Sandia Corporation. However,
enhancements and modifications to such original software, which have been
extensive, are considered proprietary to us.
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INTELLECTUAL PROPERTY RIGHTS
We have been advised that Sandia Corporation has filed patent applications
for aspects of the MuSE software and holds copyrights to the MuSE software. We
depend on Sandia Corporation for the protection of the intellectual property
covered by the license agreement. We cannot assure you that Sandia Corporation
will be able to patent other inventions present in the MuSE software or
otherwise protect the proprietary intellectual property covered by the license
agreement.
We have filed and are in the process of filing patent applications for
Continuum and related technologies, and also filed trademark and logo
applications.
We will generally rely on a combination of trade secret, copyright,
trademark and patent law to protect our proprietary rights in the intellectual
property developed by us. Although we intend to provide products utilizing the
MuSE software to its customers primarily in object code form, we cannot assure
you that unauthorized third parties will not be able to copy the software. In
addition, we cannot assure you that our competitors will not independently
utilize existing technologies to develop products that are substantially
equivalent or superior to our software. We could incur substantial costs in
defending itself or our licensees in litigation brought by third parties, or in
seeking a determination of the scope and validity of the proprietary rights of
others.
RESEARCH AND PRODUCT DEVELOPMENT
We believe that our future success depends in large part upon the timely
enhancement of existing products and the development of new products and
MuSE-based applications by our customers and third party software developers.
We are currently developing new software products relating to information
management with broad applications in the commercial, government and education
markets and enhancing existing products to improve price and performance,
expand product capabilities, simplify user interfaces, help define and support
emerging industry standards, and develop interoperability with most products
and devices commonly used in our targeted markets. MuSE-based products operate
on a broad range of platforms and with a variety of display and input/output
devices. We also believe that it is beneficial to work with third parties to
accomplish these goals and have, in the past, received funding from outside
sources, such as grants from government organizations, to develop products and
applications. We intend to continue to pursue such external research and
development funding sources.
For fiscal 1999, fiscal 1998 and fiscal 1997, our research and development
expense was approximately $2,303,000, $957,000 and $742,000, respectively. We
sponsored all research and development expenses except for payments derived
from Small Business Innovative Research grants from the Federal government of
approximately $341,000 which were included in revenue in fiscal 1998 and
related to development of certain applications of MuSE.
EMPLOYEES
As of September 1, 2000, we have 74 full-time employees. We believe that
our relationships with our employees are satisfactory. We have no history of
any work stoppages and none of our employees are currently represented by a
union.
FACILITIES
We have completed the construction of a synthetic environment laboratory
and other facilities to develop and demonstrate applications of MuSE within our
Albuquerque headquarters. We lease 8,762 square feet of office and laboratory
space in Albuquerque, New Mexico and by amendment of our lease, have leased an
additional 8,787 square feet of space at our Albuquerque headquarters. The
lease, as amended, provides for base rental payments of approximately $17,600
per month. The amended lease extends the termination date until January 31,
2001.
We lease 2,342 square feet of office space and demonstration facilities in
Arlington, VA. This lease provides for rental payments of $4,977 per month and
terminates on January 31, 2003. We believe that such properties are adequately
insured and are suitable for their intended purposes.
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MUSE Virtual Presence leases approximately 3,500 square feet of space in
London at a rental of $4,500 per month on a lease expiring in 2023.
Additionally, the company leases a 5,000 square foot central development
facility outside of Manchester (U.K.) at a rental of $ 3,500 per month on a
lease expiring in June 2003. MUSE SimTeam leases approximately 1,800 square
feet of space in Paris for a rental of $2,750 per month on a lease expiring in
May 2001.
LEGAL PROCEEDINGS
We are not a party to any material pending legal proceedings.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following presentation of management's discussion and analysis of our
financial condition and results of operations should be read in conjunction
with our consolidated financial statements, the accompanying notes thereto and
other financial information appearing elsewhere in this proxy
statement/prospectus. This section and other parts of this report contain
forward-looking statements that involve risks and uncertainties. Our actual
results may differ significantly from the results discussed in the
forward-looking statements.
OPERATIONAL OVERVIEW
We receive revenue from the sale and licensing of its software products,
the sale of third-party manufactured hardware and software, and by providing
consulting, training, support and maintenance services.
From the beginning of our 1999 fiscal year until the second quarter of our
2000 fiscal year, the primary sales strategy for MUSE Perceptual Computing and
MUSE Federal Systems Group was to distribute our software products and services
through a network of resellers that had extensive vertical market expertise.
Because the MuSE software product was designed to serve the unique needs of
many different industries, management believed that it would be more efficient
to identify resellers, distributors, service providers and other experts in a
select few industries to sell MuSE software to their existing and potential
customers. That distribution strategy, known as the Strategic Reselling Partner
(SRP) program, has produced lower than expected results to date, and while
several SRP distributors continue to promote and offer the MuSE software
product and services, management believes that establishing a direct sales
relationship with potential customers will shorten the sales cycle, optimize
profitability, and ensure that MuSE software is effectively introduced into our
target markets.
Our current strategy is to expand our sales force and convert all
operating units to a primarily direct sales model where a combination of
products and services are offered to our customers. For the MUSE Perceptual
Computing unit, this represents a material departure from our original business
plan of dependence on SRPs and a belief that the company would take on the
primary dimensions of a "software publisher" with revenue being generated from
software licensing and royalty income. Management still believes that long-term
revenue can be generated from conventional royalty/licensing publishing
practices by resellers and directly by us; however, as a means of creating a
larger installed base of users, we believe that the current sales strategy of
MUSE Perceptual Computing should be focused on direct contact with corporations
and government agencies that have complex data integration and data analysis
challenges and large populations of users. We believe that select target
markets can benefit from an integrated deployment of our software and
professional services, and that a direct sales effort will produce faster and
more significant revenues.
Revenue is generated through a direct sales process as well as by
authorized resellers. As a result of significant lead time necessary to market
and consummate such direct sales and reseller agreements, our quarterly results
are expected to fluctuate significantly depending on the timing of completion
of such arrangements and any up front fees and sales commitments associated
therewith. Accordingly, results in any one quarter are not indicative of
results to be expected in subsequent quarters. Currently, our SRP program has
been requiring a greater than anticipated sales cycle and, therefore, sales
attributable to resellers for the period ended June 30, 2000 were not
significant.
Although our existing reseller agreements provide for minimum annual sales
commitments, failure to satisfy those commitments merely permit us to terminate
that agreement. Accordingly, we cannot provide assurance that the threat of
terminating any strategic reselling partner agreement is an effective deterrent
against a breach of the agreement that the minimum sales commitments have not
been realized.
In June 1998, we entered into a strategic reselling partner agreement with
Continuum Resources International, ASA, a Norwegian company, with respect to
distribution of our products and services in
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the oil and gas industry worldwide. In exchange for such exclusive rights,
Continuum Resources paid us a non-refundable license fee of $5,000,000. Minimum
sales commitments totaling $12,000,000 through 2001 were modified in June 2000
due to significant pricing reductions in the cost of our products and to enable
Continuum Resources to implement its business plan. The modified agreement
requires Continuum Resources to generate minimum revenues of $250,000 during
the next fiscal year with minimum requirements for succeeding years to be
established by mutual agreement by December 31, 2000.
In December 1998, we entered into a non-exclusive strategic reselling
partner agreement with Intergraph Corp., an automated business solutions
company with customers worldwide in a variety of commercial sectors and
government. Our agreement with Intergraph provides them with the non-exclusive
right to resell our products and services worldwide in exchange for minimum
annual sales commitments aggregating $4 million through 2001. As of June 30,
2000, Intergraph has not yet generated any sales of our software under the
agreement.
In February 1999, we entered into non-exclusive reseller agreements under
our strategic reselling partner program with Analytical Mechanics Associates
(AMA), a technical consulting firm, and Federal Data Corporation (FDC), an
information technology provider serving primarily the Federal government. Each
agreement is for a term of three years with minimum sales commitments of $3
million over the term of the agreement. As of June 30, 2000, AMA has not yet
generated any sales of our software and FDC has produced approximately $50,000
in sales of MUSE software.
In March 2000, we entered into a non-exclusive reseller agreement under
our strategic reselling partner program with Pentagon Engineering, a Best of
Class reseller of Hewlett-Packard hardware and the premier Co-Create software
VAR for the U.S., as well as a developer of custom solutions for the
engineering and automotive industries. Under the terms of a three-year
non-exclusive agreement, Pentagon Engineering has committed to $1,000,000 over
the term of the agreement.
In July 2000, we entered into a non-exclusive reseller agreement under our
SRP program with Science Applications International Corporation (SAIC), a
diversified high-technology research and engineering company that offers a
broad range of expertise in analysis, computer system development and
integration, technical support services, and computer hardware and software
products. Under the terms of the agreement, SAIC plans to offer MuSE products
and services within the U.S. to all federal agencies and companies that are
qualified to perform work for a federal agency. International orders must be
pre-approved by MUSE Federal Systems Group. The term of the agreement is
through May 30, 2003. The agreement requires minimum sales commitments over the
term aggregating $2 million.
In April 1999, we entered into a three-year agreement with Goodyear Tire &
Rubber Company to develop applications using our advanced visualization and
network collaboration software. We will provide software, system design,
consulting, and technical support services to Goodyear on a project-by-project
basis. The agreement includes a three-year renewal option and provides Goodyear
with exclusivity for consulting or application design services within the tire
and rubber manufacturing business throughout its term, provided that minimum
annual project commitments are satisfied. Sales activities in the tire and
rubber manufacturing industry by our strategic reselling partners are not
affected by this agreement.
In January 2000, MUSE Virtual Presence entered into an agreement with
Guidant Corporation to provide a sophisticated cardiology training simulator to
Guidant's European headquarters in Belgium. Under the terms of a contract
valued at approximately $500,000, MUSE Virtual Presence will undertake custom
software development work to adapt the company's existing IST (Interventional
radiology/cardiology Simulation-based Trainer) system.
In April 2000, MUSE Virtual Presence was awarded a major contract with the
Manchester Visualization Centre to provide hardware, software and services at
one of the world's most sophisticated facilities for advanced research and
development, interactive computer graphics, multimedia, image processing and
visualization. The contract, valued at $1,000,000, provides for
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MUSE Virtual Presence to perform extensive work at the Manchester Visualization
Centre, which is located at the University of Manchester in the United Kingdom.
The project will transform computational systems into high-performance visual
computing platforms for researchers, students and commercial users to project
real-time graphics in a three-screen theater. Included in the project is the
installation of MuSE and FrameSet software.
As a result of the resignation of an executive officer in 1999 and the
purchase of certain of his shares, the excess of the consideration paid over
the value of the shares purchased of $563,685 is reflected as costs in excess
of the value of repurchased stock on the Statement of Operations.
In 1999, we formed MUSE Federal Systems Group, Inc., a wholly owned
subsidiary that will provide software and consulting services exclusively to
federal agencies and government contractors. Through direct sales efforts and
resellers, MUSE Federal Systems Group plans to broaden its customer base and
develop special capabilities and services that are designed to meet the unique
requirements of governmental agencies. MUSE Federal Systems Group received all
requisite government approvals to operate as a government contractor with
security clearances during the second fiscal quarter of this year.
On November 16, 1999, we completed the acquisition of Virtual Presence
Ltd., a provider of interactive visualization solutions for companies in the
European defense, medical and manufacturing industries. We acquired Virtual
Presence for a total of $300,000 in cash at the closing, $300,000 in notes
payable over a nine-month period and 430,839 shares of our common stock,
subject to certain restrictions. Of those shares, 205,522 are subject to
adjustment in the event that the price of the common stock over the twenty
trading days prior to November 15, 2000 is less than $4.41 per share. We expect
that the acquisition of Virtual Presence will enhance our capabilities in
providing interactive visualization solutions and broaden our market presence
in both the United States and Europe.
On March 17, 2000, we acquired Simulation Solutions, Ltd., a U.K. company
that provides advanced software and consulting services in the field of plant
and equipment manufacturing simulation We acquired Simulation Solutions for a
total of $117,333 in cash and 44,895 shares of our common stock Simulation
Solutions has been incorporated into our existing European operation. The
contribution to revenues as a result of this acquisition has not been
significant to date.
On March 28, 2000, we purchased theVRsource.com, a prominent e-commerce
site for advanced visualization and virtual reality hardware, from the
VRSource, Inc., a Colorado corporation, for $400,000 in cash and notes.
TheVRsource.com website offers high performance peripheral devices from leading
hardware manufacturers including Polhemus, Ascension, FakeSpace, Virtual
Technologies, Sony and Virtual Research Corporation. The contribution to
revenues as a result of this acquisition has not been significant to date.
On May 4, 2000, our CEO and Chairman resigned. As a result of certain
severance arrangements and repurchase of stock options to purchase 750,000
shares of our common stock in connection with his resignation, we expect to
incur a charge to earnings in the third fiscal quarter of approximately
$990,000. As part of the resignation arrangement, we will make certain of these
payments over a two-year period.
On May 4, 2000, we entered into a letter of intent to acquire AVS through
a stock-for-stock exchange. Definitive merger documents were executed on July
18, 2000. We believe that the acquisition, upon completion, will create one of
the software industry's leading companies dedicated to developing and
integrating software and solutions using 3D graphics technology. Pursuant to
the merger agreement, we will issue a maximum of 2.1 million shares of common
stock in exchange for all of the common and preferred shares of AVS and a
maximum of 1.3 million employee stock options in exchange for existing AVS
stock options. We anticipate that the acquisition will be completed during our
first quarter of fiscal 2001. The acquisition is subject to a number of
conditions and we cannot assure you that it will be successfully consummated or,
if consummated, that the operations of our company and AVS will be successfully
integrated.
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RESULTS OF OPERATIONS FOR FISCAL 1999 AND FISCAL 1998
Revenues for the fiscal years ended September 30, 1999 ("fiscal 1999") and
September 30, 1998 ("fiscal 1998") were $1,723,267 and $6,206,135,
respectively. The decrease in revenue of $4,482,868 or 72% was due to the
Continuum Resources International ASA Agreement and the receipt of $5,000,000
in connection therewith in fiscal 1998, which was not duplicated in fiscal
1999. Actual product and contract sales increased by $517,132 or 42% in fiscal
1999. We also received interest income in fiscal 1999 of $729,061 as compared
to $0 in fiscal 1998.
Total operating expenses for fiscal 1999 were $6,970,962 as compared to
total operating expenses of $5,083,588 for fiscal 1998. The increase of
$1,887,374 or 37% reflects additional salaries, general and administrative
expenses and increased research and development expenses. Research and
development expenditures for fiscal 1999 increased $1,345,939 or 141% over the
same period in fiscal 1998 due to increases in engineering and technical
personnel (from 8 to 24) and equipment purchases. Selling, general and
administrative expenses for fiscal 1999 increased $1,478,358 or 55% over the
same period in fiscal 1998 due primarily to increases in sales and marketing
personnel and increased costs for trade shows and advertising. During fiscal
1998, we repriced employee stock options from an exercise price of $7.60 per
share to an exercise price of $2.50 per share, resulting in a one-time non-cash
expense of $948,355.
Total other income for fiscal 1999 of $134,737 consisted of interest
income of $729,061 offset by charges of $563,685 related to costs in excess of
the value of repurchased stock of a former executive officer and interest
expense of $30,678. For the previous fiscal year, other expense consisted of
$798,653 in interest charges from notes payable.
Accordingly, the net loss for fiscal 1999 of $5,112,948 as compared to net
income of $323,894 for fiscal 1998 reflected the significant increases in costs
related to the hiring of additional personnel, increased research and
development costs, and the $563,685 charge related to costs in excess of the
value of repurchased stock without a proportional increase in revenues for such
periods.
RESULTS OF OPERATIONS FOR INTERIM PERIOD ENDED JUNE 30, 2000
Revenue for the nine-month period ended June 30, 2000 was $6,542,545, as
compared to revenue of $1,113,206 for the nine-month period ended June 30,
1999. The increase of $5,429,339 or 488% for the nine-month period is primarily
attributable to sales generated by the Virtual Presence subsidiary which was
acquired in November, 1999, together with increases in product and contract
sales during the fiscal 2000 periods.
Total operating expense for the nine-month period ended June 30, 2000 was
$10,204,413, as compared to total expense of $4,513,385 for the nine-month
period ended June 30, 1999. The increase of $5,691,046 or 126% for the
nine-month period is primarily attributable to incorporating the expenses of
the Virtual Presence and simulation solutions operations, an increase in
selling, general and administrative expenses as a result of increases in
engineering and administrative personnel, as well as a one-time charge of
$994,062 resulting from severance and other costs in connection with the
resignation of an executive officer in May 2000.
Total other income (expense) for the nine-month period ended June 30, 2000
was $129,561 income, as compared to $40,073 expense for the nine-month period
ended June 30, 1999. The increase in other income for the nine-month-period
ended June 30, 2000 of $169,634 as compared to the nine-month-period ended June
30, 1999 is primarily attributable to increased interest income of $151,795.
The nine-month-period ended June 30, 1999 included a one-time charge of
$563,685 of costs in excess of market value of repurchased stock and the
nine-month-period ended June 30, 2000 included a one-time charge of $403,677
for costs associated with the proposed AVS merger.
Accordingly, the net loss for the nine-month period ended June 30, 2000 of
$3,532,325, as compared to the net loss of $3,440,252, for the nine-month
period ended June 30, 1999, reflected the significant increases in revenues and
costs associated with the Virtual Presence acquisition, the hiring of
additional personnel, one-time charges for severance costs and acquisition
costs related to the proposed AVS transaction.
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LIQUIDITY AND CAPITAL RESOURCES
Historically, our capital requirements have been funded through a series
of debt and equity financings and revenues received through the strategic
reselling partner program. During fiscal 2000, revenues generated from direct
sales activities have also funded portions of our capital needs.
In July 1998, we sold 1,000,000 shares of common stock and warrants to
purchase 1,000,000 shares of common stock to Continuum Resources for an
aggregate purchase price of $8,000,000. In October 1998, we loaned $1,000,000
to a subsidiary of Continuum Resources for the establishment of a Houston
facility. The loan is payable on demand and bears interest at the rate of 12%
per annum. The loan remains outstanding as of the date hereof. We are currently
in discussions with Continuum Resources to formalize a payment strategy.
Pursuant to a written agreement with Continuum Resources dated June 2000,
Continuum Resources has acknowledged its payment obligations on the loan. In
the event we cannot reach agreement on payment terms or such payment is not
made upon demand, we will be entitled to terminate the reseller agreement and
Continuum Resources' exclusive distribution rights for MuSE software in the oil
and gas industry. We have been informed that Continuum Resources is currently
in the process of raising additional capital through a private offering and
other financing activities; however, we cannot provide assurance that they will
be successful in those efforts or that the loan will be repaid in the near
future. Accordingly, although repayment of the loan is not contingent on such
capital raising efforts, we may be obligated to partially or fully write down
the value of the loan as circumstances warrant.
On November 19, 1998, we consummated an initial public offering through
the sale of 1,200,000 shares of common stock and Class A Warrants to purchase
600,000 shares of common stock and received gross proceeds of $9,600,000.
Additionally, on December 2, 1998, the underwriter of our initial public
offering exercised its over-allotment option in full and we received gross
proceeds of $1,440,000. Total net proceeds to us from the initial public
offering were approximately $9,200,000.
Pursuant to his employment agreement, in January 1999, Brian Clark, our
President and Chief Financial Officer, was given a loan in the principal amount
of $75,000 in connection with his relocation to New Mexico. The loan bears
interest at the rate of 5% per annum and is secured by a pledge of vested stock
options having a value equal to the principal amount of the loan.
On November 16, 1999, we completed the acquisition of Virtual Presence for
a total of $300,000 in cash at the closing, $300,000 in notes payable over a
nine month period and 430,839 shares of our common stock, subject to certain
restrictions. Of such shares, 205,522 are subject to adjustment in the event
that the average price of our common stock over the twenty day period prior to
November 15, 2000 is less than $4.41 per share.
In December 1999, we entered into an agreement with Josephthal & Co., Inc.
for financial advisory services. In connection with this agreement, we paid
$75,000 to Josephthal and granted Josephthal three-year warrants to purchase
82,500 shares of our common stock at $3.90 (representing 120% of the market
price of the common stock on the date of grant). We recorded a charge to
operations of $113,000 in connection with the granting of such warrants. In
April 2000, Josephthal distributed its warrants to certain of its employees and
affiliates.
Our primary sales strategy is to build a direct sales force that can
identify revenue opportunities outside of the customer bases served by our SRP
program. As a result of the significant lead time necessary to create an
effective direct sales force and consummate additional distribution and
reseller relationships, our quarterly results are expected to fluctuate
significantly depending on the timing of completion of such arrangements and
any up front fees and sales commitments associated therewith. Accordingly,
results in any one quarter are not indicative of results to be experienced in
subsequent quarters.
On March 17, 2000, we acquired Simulation Solutions for $117,333 in cash
and 44,895 shares of our common stock. On March 28, 2000, we acquired
theVRsource.com for $400,000 in cash and notes.
On May 4, 2000, we entered into a letter of intent to acquire AVS through
a stock-for-stock exchange. The acquisition, upon completion, would create one
of the software industry's leading
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companies dedicated to developing and integrating software and solutions using
3D graphics technology. Pursuant to the merger agreement, we will issue a
maximum of 2.1 million shares of common stock in exchange for all of the common
and preferred shares of AVS and a maximum of 1.3 million employee stock options
in exchange for existing AVS stock options. We anticipate that the acquisition
will be completed during our first quarter of fiscal 2001. The acquisition is
subject to a number of conditions and we cannot assure you that it will be
successfully consummated or, if successfully consummated, that the operations of
our company and AVS will be successfully integrated.
In May 2000, in connection with the letter of intent with AVS, AVS
borrowed $1,000,000 from us. The note is payable on demand and bears interest
at the rate of 10% per annum payable monthly in advance.
On June 1, 2000, we entered into an equity line agreement with
Kingsbridge. The equity line agreement entitles us to sell and obligates
Kingsbridge to purchase, from time to time, up to $18,000,000 of our common
stock at a discount of 10% or 12% depending on the market price of our common
stock. Our ability to require Kingsbridge to purchase our common stock is
subject to certain limitations based on the market price and trading volume of
our common stock. Additionally, on August 7, 2000, we sold to Kingsbridge a
convertible note in the principal amount of $1,000,000 with interest at the
annual rate of 10%. The note is convertible into shares of our common stock
after the first anniversary of the issuance of such note at the per share rate
of the lower of $2.375 or 88% of the average closing bid price for the five
trading days prior to conversion. We also issued to Kingsbridge warrants to
purchase 200,000 shares of our common stock in connection with the equity line
agreement exercisable at $3.76 per share over the four-year period commencing
on November 28, 2000 and warrants to purchase 75,000 shares of our common stock
in connection with the note issuance exercisable at $2.6125 per share over the
four year period commencing on August 7, 2001.
For the nine months ended June 30, 2000, there was a net decrease in cash
of $9,626,192 as compared to a net increase in cash of $10,961,878 for the
nine-month period ended June 30, 1999. The decrease in cash is primarily
attributable to the net loss of 3,532,325, the acquisition of subsidiaries for
$1,820,595, the purchase of property and equipment for $1,190,744, increases in
accounts receivable of $3,259,015, increase in other assets of $2,545,100 and
an increase in notes receivable of $819,822. For the nine-month-period ended
June 30, 1999, the increase in cash was primarily attributable to the receipt
of proceeds from our initial public offering and collection of accounts
receivable associated with a strategic reselling partner agreement offset in
part by the net loss of $3,440,252.
Our capital requirements depend on numerous factors, including the
progress of our product development programs, our ability to enter into
strategic arrangements or other marketing arrangements which result in the
commercialization and distribution of our products, the need to purchase or
lease additional capital equipment and the cost of filing, prosecuting,
defending and enforcing any patent claims and other intellectual property
rights and the anticipated combination of our operations with those of AVS.
Based upon our current plans we believe that current cash resources of
approximately $2,000,000, the net proceeds from the equity line agreement and
convertible note financing with Kingsbridge, other contemplated debt and equity
financing activities as well as anticipated funds to be generated from
operations (including MUSE Virtual Presence and the planned acquisition of
AVS), will be sufficient to satisfy our needs for at least the next 12 months.
However, if our current and projected needs change due to unanticipated events
or otherwise, or our currently contemplated financing arrangements are not
available to us, we may be required to obtain additional capital from other
sources and there can be no assurances that additional financing will be
available or that the terms of any financing will be acceptable to us.
In the event the AVS merger is consummated, it is anticipated that we will
require significant additional funds in order to complete the effective
combination of our operations (including international operations) and to
continue to fund certain projects under development. We cannot assure you that
such funds will be available or that we can effectively combine our operations
with those of AVS as anticipated. The dollar amount required to successfully
market the combined product
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and service offerings of MUSE and AVS has not yet been determined, however, we
believe that it will be significant and may not produce immediate results. We
plan to develop combined marketing strategies and operating budgets in the near
term to determine the amount of cash required to integrate existing operations,
create a new corporate identity, launch new products, revitalize existing
products, produce new marketing and promotional materials, expand an
international sales force, create an effective customer and product support
organization and invest in new technology development.
We continually explore strategic, joint venture and acquisition
opportunities both in the United States and abroad. From time to time, we may
be involved in negotiations for strategic reselling partner arrangements, other
strategic relationships, joint ventures, financing arrangements or possible
acquisitions, however, current negotiations, if any, are too preliminary to
warrant disclosure at this time. We will keep investors informed as such
negotiations mature.
MANAGEMENT
Directors and Executive Officers
Our directors, executive officers and key employees are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
----------------------------- ----- ----------------------------------
<S> <C> <C>
Brian R. Clark .............. 42 President, Chief Financial
Officer, Secretary, Treasurer and
Director
John Hough .................. 47 Managing Director of Virtual
Presence and Director
Steve Sukman ................ 42 Senior Vice President Presence and
Director
Jack C. Berenzweig .......... 57 Director
Edward A. Masi .............. 52 Director
</TABLE>
Brian R. Clark has been a director since December 1999, our Chief
Financial Officer since October 1996, our Treasurer and Secretary since October
1997 and our President since March 2000. Prior to that, Mr. Clark was an
executive with Optimax Securities Corporation, a corporation engaged in
investment banking, from 1995 until October 1996; Chief Financial Officer of
Softcop International, a software development company, from 1993 to 1995;
Manager of Business Development for Royal Insurance Company of Canada, from
1989 to 1993; and a Chartered Accountant with Deloitte & Touche from 1985 to
1989.
John Hough has been a director since January 2000 and Managing Director of
Virtual Presence since November 1999. Mr. Hough founded Virtual Presence, Ltd.
in 1991 as an offshoot of the consultancy and software company Strategy in
Computing Ltd. of which he was a principal. He sold his interest in Strategy in
Computing in 1994 to concentrate on the virtual reality marketplace. Prior to
establishing Virtual Presence, Mr. Hough held various management and senior
sales positions in the computer software and hardware industry. Mr. Hough was
previously a member of the United Kingdom's Department of Trade and Industry
Foresight Committee on virtual reality and is now an elected member of the
steering group of the United Kingdom virtual reality forum, set up under the
auspices of the Department of Trade and Industry.
Steve Sukman joined our company as Director of Communications in September
1998 after having served as a public relations consultant to MUSE for more than
one year prior to his employment with us. He was promoted to Vice President of
Communications in June 1999 and to Senior Vice President in June 2000. Prior to
joining MUSE, Mr. Sukman engaged in his own consulting practice where he
specialized in providing corporate communications services to technology
companies with complex products in emerging and specialized markets. He
formerly served as Vice President of Potomac West Properties from 1990 through
1992 and Vice President of Los Angeles Restaurant Group from 1992 through 1994.
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Jack C. Berenzweig has been a director since May 1999. Mr. Berenzweig
currently practices law with Brinks Hofer Gilson and Lione, a Chicago
intellectual property law firm, which he joined in 1968. He is a graduate of
Cornell University, where he obtained a bachelor's degree in electrical
engineering, and American University Law School where he obtained a Juris
Doctorate degree and was a member of the Law Review. He is presently a director
and Vice Chairman of the Brand Names Educational Foundation and a former member
of the board of directors of the International Trademark Association. In
addition, he is an ad hoc member of the Asian Patent Attorneys' Association
Anti-counterfeiting Committee.
Edward A. Masi has been a director since January 1997. Since June 1997,
Mr. Masi has been a private consultant for a variety of companies. From March
1992 until June 1997, Mr. Masi was a corporate vice president at Intel
Corporation, responsible for the management of the super-computer business and
the commercial server product development division. From May 1980 until June
1992, Mr. Masi was Executive Vice President of Sales, Marketing and Service at
Cray Research. Prior to his work for Cray, Mr. Masi held various sales and
marketing positions at IBM, where he began his career.
Until November 15, 2001, HD Brous & Co., Inc., the underwriter of our
initial public offering, has the right to designate one nominee, reasonably
acceptable to our company, for election to the Board of Directors. However, no
such nominee has as yet been designated.
We have established an Audit Committee composed of Messrs. Berenzweig and
Masi, both non-employee directors, and have adopted an Audit Committee Charter
to determine the adequacy of internal controls and other financial reporting
requirements. We have also established a Compensation Committee composed of
Messrs. Berenzweig and Masi to review general policy matters relating to
compensation and benefits of employees.
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PRINCIPAL STOCKHOLDERS
The following table shows the beneficial ownership of our outstanding
shares of common stock as of August 31, 2000 by those persons who we know to
beneficially own more than 5% of our common stock, each of our directors and
officers, and all officers and directors as a group. Prior to the merger,
percentage ownership of common stock is based on 10,808,882 shares of common
stock outstanding as of August 31, 2000. After giving effect to the merger,
it is expected that 12,908,882 shares of our common stock will be issued and
outstanding. The current business address of each of our directors and officers
is 1601 Randolph SE, Suite 210, Albuquerque, New Mexico 87106.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Unless otherwise indicated, and subject to
community property laws where applicable, the stockholders named in the table
below have sole voting and investment power with respect to the common stock
shown as beneficially owned by them.
<TABLE>
<CAPTION>
PERCENT OF COMMON STOCK
BENEFICALLY OWNED
--------------------------
NUMBER OF BEFORE AFTER
NAME OF BENEFICIAL OWNER SHARES (1) THE MERGER THE MERGER
-------------------------- ------------ ------------ -----------
<S> <C> <C> <C>
Continuum Resources
International, ASA (2) 2,000,000 18.5% 15.5%
Risayika Haymering 224
4056 Tananger, Norway
Creve Maples 723,355 6.7% 5.6%
1401 Catron SE
Albuquerque, NM 87123
Brian Clark (3) 428,097 4.0% 3.2%
John Hough (4) 315,317 2.9% 2.4%
Steve Sukman (5) 143,250 1.3% 1.1%
Edward A. Masi (6) 54,671 * *
Jack Berenzweig (7) 30,000 * *
Directors and executive
officers as a group (5
persons) (8) 971,335 9.0% 7.5%
</TABLE>
----------
* Less than one percent
(1) Includes currently exercisable options and warrants to purchase shares of
our common stock issuable upon the exercise of such options and warrants
for each named person.
(2) Continuum Resources is a wholly owned subsidiary of The Norex Group, AS, a
publicly held Norwegian company. Includes 1,000,000 shares of our common
stock issuable upon the exercise of warrants.
(3) Includes 428,097 shares of our common stock issuable upon the exercise of
options.
(4) Includes 90,000 shares of our common stock issuable upon the exercise of
options.
(5) Includes 143,250 shares of our common stock issuable upon the exercise of
options.
(6) Includes 54,671 shares of our common stock issuable upon the exercise of
options.
(7) Includes 30,000 shares of our common stock issuable upon the exercise of
options.
(8) Includes an aggregate of 225,317 shares of our common stock and 746,018
shares of our common stock issuable upon exercise of options.
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INFORMATION CONCERNING AVS
DESCRIPTION OF BUSINESS
AVS is a global provider of data visualization solutions. AVS software and
services help companies transform massive quantities of data into visual
representations. AVS provides tools for developers who build customized
visualization software, as well as ready-to-use applications for end users who
analyze information contained in graphical representations. Products are
deployed in Microsoft Windows, UNIX, Intranet, and Internet environments. AVS
provides comprehensive product support and the professional services required
to build customer solutions. AVS markets its products and services through a
direct sales force in North America and Europe and through indirect channels
such as distributors and independent software vendors worldwide. Kubota
Corporation, a significant stockholder of AVS, has distribution rights in Japan
to AVS products through its subsidiary KGT Inc.
As of September 1, 2000, AVS employed 81 individuals.
DESCRIPTION OF PROPERTY
AVS's executive and corporate offices comprise 14,429 square feet of a
facility at 300 Fifth Avenue, Waltham, Massachusetts under lease agreements
that expire on December 31, 2002. In addition, AVS has a lease for and has
sub-leased 10,770 square feet of the Waltham facility to two other companies.
AVS also maintains a total of eight leased sales offices in the following
locations: United Kingdom, France, Germany, Italy, Denmark, California and
Virginia. AVS believes that its facilities are adequate for its current
operations.
LEGAL PROCEEDINGS
From time to time, AVS is involved in litigation relating to claims
arising out of its operations in the normal course of business. AVS is not a
party to any legal proceedings which, if decided adversely to the company, in
management's opinion would have a material adverse effect on AVS's results of
operations or financial position.
AVS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following presentation of management's discussion and analysis of the
financial condition and results of operations of AVS should be read in
conjunction with the Consolidated Financial Statements of AVS, the accompanying
notes thereto and other financial information appearing elsewhere in this proxy
statement/prospectus. This section and other parts of this proxy
statement/prospectus contain forward-looking statements that involve risks and
uncertainties. The actual results of AVS may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed in the
section entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operation -- Factors Affecting Operating Results" and "Risk
Factors."
OVERVIEW
AVS was incorporated in November 1991 and commenced operations in January
1992. AVS is a global provider of data visualization solutions. AVS's software
and services help its customers transform massive quantities of data into
visual representations. AVS provides tools for developers who build customized
visualization software, as well as ready-to-use applications for end users who
analyze information contained in graphical representations.
Prior to 1999, AVS derived revenue from product, consulting and
maintenance services related to five product lines: AVS5, AVS/Express,
Viz/Express, Toolmaster and Gsharp. In 1997 AVS began development of a suite of
software components, which support both the Microsoft Component Object
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Model, the JavaBean model and are web-deployable, to allow developers to extend
commercial and custom-developed business intelligence solutions to encompass
business-class data visualization. In 1999 AVS introduced these software
components to the market, and started to derive revenue from this new product
line named OpenViz. AVS believes that as the markets for AVS5, AVS/Express,
Viz/Express, Toolmaster and Gsharp continue to mature, the continued growth of
AVS will require the successful introduction of new products and further
enhancements to its existing products. There can be no assurance that AVS will
continue to design, develop, and release successful new product offerings in
the future.
During 1997 AVS changed its marketing strategy from a products oriented
sale strategy to a consulting services oriented sale strategy. The majority of
the increase in revenue in 1997 and the beginning of 1998 was from two
customers, and as those projects were completed in early 1998, AVS was unable
to replace such accounts, and had expanded its operations significantly during
1998. As a result of the change of strategy and the inability to secure enough
consulting work and related revenue to support its expanded workforce, AVS
reduced its workforce in July 1998, and again in November 1998. The 1998
reductions included a complete turnover in the executive management team. Under
new leadership in November 1998 AVS resumed its prior strategy of a product
oriented sale strategy with related consulting services to support the sale
strategy. AVS incurred $1.4 million in expenses related to the reduction of the
workforce in 1998. The failure of this sales strategy, and the related use of
company resources, significantly limited AVS's ability to invest in sales and
marketing needed to increase revenue in 1998 and 1999. In addition AVS's
product lines that existed prior to 1999 are maturing, and limited product
development resources were directed to AVS's new product line, OpenViz.
Management anticipates that the OpenViz product line, with an increase in sales
and marketing expenditures, will lead to an increase in revenue in the future.
However, there can be no assurance that the anticipated demand for OpenViz will
materialize or lead to an increase in revenue.
Kubota Corporation, together with its subsidiary, KGT Inc., is AVS's
largest customer, accounting for approximately 15% of AVS's revenues in fiscal
1999. No other customer accounted for more than 10% of AVS's revenues in fiscal
1999. In September 1999, AVS entered into an agreement with KGT, Inc., a
subsidiary of Kubota, which agreement granted KGT a perpetual royalty free
license to sell certain products in Japan. AVS recognized $1.1 million of
revenue in 1999 related to this license and will continue to receive royalty
revenue in the future.
On May 4, 2000, AVS entered into a letter of intent to be acquired by
MUSE, a company in the business of developing and marketing software products
designed to enhance the user's ability to integrate, present, analyze and
better understand complex types of data and information and to provide
comprehensive software and hardware solutions, systems integration and training
and support services, through a stock-for-stock exchange. Pursuant to the
merger agreement, MUSE will issue a maximum of 2.1 million shares of common
stock in exchange for all the common and preferred shares of AVS, a maximum of
1.3 million shares of common stock subject to employee stock options and the
assumption of approximately $2 million in debt. It is anticipated that the
acquisition will be completed during AVS's fourth fiscal quarter. The
acquisition is subject to a number of conditions and there can be no assurance
that it will be successfully consummated.
RESULTS OF OPERATIONS
AVS receives revenues from sales and licensing of its products and
providing consulting and maintenance services related thereto. The license
agreements are generally for perpetual licenses, related consulting services
and annual maintenance services. Revenue from software license agreements is
recognized upon execution of a contract and shipment of the software provided
that no significant post delivery obligations remain and the related receivable
is deemed collectible by management. Revenue from consulting services is
recognized when the services are delivered. If an acceptance period is required
for products or services, revenue is recognized upon the earlier of customer
acceptance or the expiration of the acceptance period, unless some additional
performance target is mandated, in which case revenue is recognized upon
satisfaction of that target, as defined in the applicable software licensing
and services agreement. Revenue from maintenance services is
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recognized ratably over the term of the related contracts. There can be no
assurance that AVS will be able to enter into new license agreements at the
current rate or to maintain the current pricing for its products and services.
The following table sets forth, for the fiscal periods indicated, certain
items from the statement of operations data in dollars and as a percentage of
revenues for fiscal years ended December 31, 1997, 1998, and 1999. The
historical results are not necessarily indicative of results to be expected for
any future period. All dollar amounts are in thousands.
<TABLE>
<CAPTION>
1997 1998 1999
------------------------ ------------------------ ------------------------
AMOUNT % REVENUE AMOUNT % REVENUE AMOUNT % REVENUE
---------- ----------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenue ............................... $18,575 100% $15,396 100% $13,775 100%
Cost of software licenses ............. 1,320 7% 426 3% 148 1%
Cost of support and other ............. 1,365 7% 1,116 7% 630 5%
Cost of professional services ......... 1,814 10% 3,533 23% 1,640 12%
Sales and marketing ................... 9,011 49% 8,250 54% 5,938 43%
Product development ................... 4,029 22% 4,439 29% 3,079 22%
General and administrative ............ 1,771 10% 2,098 14% 1,673 12%
Restructuring ......................... -- 0% 1,423 9% -- 0%
Interest income, net .................. 224 1% 180 1% 82 1%
Other expense, net .................... 39 0% 204 1% 507 4%
Provision for income taxes ............ 268 1% 249 2% 158 1%
Net income (loss) ..................... (819) -4% (6,162) -40% 84 1%
</TABLE>
The following table sets forth, for the fiscal periods indicated, certain
items from the statement of operations data in dollars and as a percentage of
revenues for the six month period ended June 30, 1999 and 2000. The historical
results are not necessarily indicative of results to be expected for any future
period. All dollar amounts are in thousands.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1999 JUNE 30, 2000
------------------ -------------------
AMOUNT % REV AMOUNT % REV
-------- ------- -------- --------
<S> <C> <C> <C> <C>
Revenue ............................... 6,453 100% 5,787 100%
Cost of software licenses ............. 86 1% 154 3%
Cost of support and other ............. 310 5% 333 6%
Cost of professional services ......... 869 13% 729 13%
Sales and marketing ................... 2,962 46% 2,840 49%
Product development ................... 1,404 22% 1,347 23%
General and administrative ............ 717 11% 1,134 20%
Restructuring ......................... -- 0% -- 0%
Interest income, net .................. 23 0% 115 3%
Other expense, net .................... 258 4% 316 6%
Provision for income taxes ............ 90 1% 26 0%
Net income (loss) ..................... (220) -3% (977) -17%
</TABLE>
REVENUE
Revenue decreased 17% from $18.6 million in 1997 to $15.4 million in 1998
and 11% to $13.8 million in 1999. The decrease in revenue from 1997 to 1998 was
primarily due to a change in company strategy in 1997 that focused sales from a
product oriented sale with related consulting services, to a consulting
services oriented sale with related product and to maturation of the existing
products. The resulting 30% decrease in product revenue was offset in part by
an 8% increase in consulting services revenue. In addition there was an 11%
decrease in maintenance revenue primarily due to lower product revenue and to
maturing products. The decrease in revenue from 1998 to 1999 was primarily due
to a 49% decrease in consulting services revenue due to AVS's change in focus
back
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<PAGE>
to a product oriented sale, and a 12% decrease in maintenance revenue due to
maturing products and a related decrease in product revenue from the direct
sales channel. Product revenue increased 9% from 1998 to 1999. The increase in
product revenue includes $1.1 million related to a licensing agreement with
KGT. Excluding the KGT agreement, product revenue would have decreased 9% from
1998 to 1999. In August 1999, AVS announced and started to market its new
product line OpenViz. The decrease in product revenue from 1998 to 1999 is
primarily due to maturing product revenues decreasing faster than new product
line revenue has increased.
Revenue for the six month period ended June 30, 2000 was $5,787,000
compared to revenue of $6,453,000 for the six month period ended June 30, 1999.
The decrease in overall revenue of 10% was due primarily to a 3%, or $72,000,
decrease in product sales revenue, a 23%, or $653,000, decrease in support and
other revenue offset in part by a 7%, or $59,000, increase in professional
services revenue. Product revenues from our distributor in Japan, KGT Inc.,
were lower by $490,000 for the six month period ended June 30, 2000, due to the
licensing agreement entered into with KGT in September 1999.
OPERATING EXPENSES
Operating expenses increased 10% from $19.3 million in 1997 to $21.3
million in 1998 and decreased 38% to $13.1 million in 1999. The build up in
expense during 1997 and through July 1998 was due to building the workforce to
support anticipated revenue from a strategic focus on consulting oriented
sales. In 1998 AVS incurred $1.4 million in expense related to the reduction of
the workforce resulting from the lack of planned revenue. During 1997 the
workforce increased by 37 to 142 at December 31, 1997. During 1998 the
workforce increased by 19 to a high of 161 in June, then decreased by 61 to 100
at December 31, 1998. During 1999 the workforce decreased by 11 to 89 at
December 31, 1999.
For the six month period ended June 30, 2000, operating expenses increased
$189,000 (3%) to $6,537,000 compared to the six month period ended June 30,
1999. The increase in expense is primarily due to costs associated with the
pending merger with MUSE, offset in part by lower sales and marketing expenses.
The workforce decreased by 3, from 86 at June 30, 1999 to 83 at June 30, 2000.
Cost of software licenses. Cost of software licenses consists primarily of
the cost of providing electronic media, manuals and shipping costs associated
with software license sales. From 1997 to 1998, cost of software licenses
decreased $894,000 (68%) to $426,000 primarily as a result of a reduction in
headcount, lower product sales and cost savings associated with the delivery of
software products. From 1998 to 1999, cost of software licenses decreased
$278,000 (65%) to $148,000 primarily as a result of additional cost savings
associated with using more electronic media and less published texts in the
delivery of software products.
For the six month period ended June 30, 2000, cost of software licenses
increased $68,000 (79%) to $154,000 compared to the six month period ended June
30, 1999, primarily as a result of increased production and delivery costs.
Cost of professional services. Cost of professional services consists
primarily of payroll and related expenses associated with our consulting staff.
From 1997 to 1998, cost of professional services increased $1,719,000 (95%) to
$3,533,000 as a result of increases in headcount. From 1998 to 1999, cost of
professional services decreased $1,983,000 (54%) to $1,640,000 as a result of
decreases in headcount related to the restructuring of AVS.
For the six month period ended June 30, 2000, cost of professional
services decreased $140,000 (16%) to $729,000 compared to the six month period
ended June 30, 1999, primarily as a result of decreases in headcount.
Cost of support services. Cost of support services consists primarily of
payroll and related expenses associated with our customer service staff. From
1997 to 1998, cost of support services
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decreased $249,000 (18%) to $1,116,000 as a result of decreases in headcount
due to lower support revenue. From 1998 to 1999, cost of support services
decreased $486,000 (44%) to $630,000 as a result of decreases in headcount
related to the restructuring of AVS and lower support revenue.
For the six month period ended June 30, 2000, cost of support services
increased $23,000 (7%) to $333,000 compared to the six month period ended June
30, 1999.
Product development. Product development expense consists primarily of
payroll and related expenses associated with our product development staff.
Starting in the third quarter of 1997, an increasing percentage of product
development effort went towards the development of the OpenViz product. From
1997 to 1998, product development expense increased $410,000 (10%) to
$4,439,000 as a result of increases in headcount for development of OpenViz.
From 1998 to 1999, product development expense decreased $1,360,000 (31%) to
$3,079,000 as a result of decreases in headcount related to the restructuring
of AVS.
For the six month period ended June 30, 2000, product development expense
decreased $57,000 (4%) to $1,347,000 compared to the six month period ended
June 30, 1999, primarily as a result of a year over year decrease in headcount
during the first quarter of 2000 compared to the first quarter of 1999.
Sales and marketing. Sales and marketing expense consists primarily of
payroll and related expenses associated with AVS sales and marketing staff,
sales office expenses and discretionary expenses to market AVS's products. From
1997 to 1998 sales and marketing expense decreased $761,000 (8%) to $8,250,000
as a result of decreases in headcount and lower discretionary marketing
expenses. From 1998 to 1999 sales and marketing expense decreased $2,312,000
(28%) to $5,938,000 primarily as a result of decreases in headcount related to
the restructuring of AVS and lower discretionary marketing expenses.
For the six month period ended June 30, 2000, sales and marketing expense
decreased $122,000 (4%) to $2,840,000 compared to the six month period ended
June 30, 1999, primarily as a result of lower discretionary marketing expenses,
a decrease in sales commission expense and a decrease in headcount.
General and administrative. General and administrative expense consists
primarily of payroll and related expenses associated with our executive and
finance staff, and professional fees. From 1997 to 1998, general and
administrative expense increased $327,000 (18%) to $2,098,000 as a result of
increases in headcount. From 1998 to 1999, general and administrative expense
decreased $425,000 (20%) to $1,673,000 primarily as a result of decreases in
headcount related to the restructuring of AVS.
For the six month period ended June 30, 2000, general and administrative
expense increased $417,000 (58%) to $1,134,000 compared to the six month period
ended June 30, 1999, primarily as a result of $367,000 of expenses related to
the pending merger with MUSE and increases in payroll costs.
Interest income, net. Interest income, net consists of interest earned on
cash and cash equivalents and short-term investments and other income. Interest
income, net decreased $44,000 (20%) to $180,000, and $98,000 (54%) to $82,000,
from 1997 to 1998 and 1998 to 1999, respectively due to lower interest income
on lower cash and cash equivalent and short-term investment balances in each
year, and $49,000 of other income in 1999 related to a lower than expected
payment for a 1997 acquisition due to the departure of an employee.
For the six month period ended June 30, 2000, interest income, net
increased $92,000 (400%) to $115,000 compared to the six month period ended
June 30, 1999, primarily due to increases in other income.
Other expense, net. Other expense, net consists primarily of interest paid
on borrowings and foreign exchange gains and losses. Other expense, net
increased $165,000 (423%) to $204,000, and $303,000 (149%) to $507,000, from
1997 to 1998 and 1998 to 1999, respectively, due to higher interest
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<PAGE>
expense on higher borrowings in each year, and exchange losses primarily
related to receivables denominated in European currencies. Interest expense
increased $182,000 to $193,000 from 1997 to 1998, and $19,000 to $212,000 from
1998 to 1999. Exchange losses decreased $17,000 to $11,000 from 1998 to 1999
and increased $285,000 to $296,000 from 1998 to 1999 primarily as a result of a
change to invoicing in local currencies from the United States and an
unfavorable change in foreign exchange rates.
For the six month period ended June 30, 2000, other expense, net increased
$58,000 (22%) to $316,000 compared to the six month period ended June 30, 1999,
primarily due to higher exchange losses primarily related to receivables
denominated in European currencies and higher interest expense related to
increased borrowings in the second quarter.
Income taxes. Income taxes are primarily due to foreign tax treaty
withholdings and foreign income taxes. Income taxes decreased $19,000 (7%) to
$249,000, and $91,000 (37%) to $158,000, from 1997 to 1998 and 1998 to 1999,
respectively.
For the six month period ended June 30, 2000, income taxes decreased
$64,000 (71%) to $26,000 compared to the six month period ended June 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
From inception through 1997 AVS was funded through its initial investment
and cash generated from operations. During 1997 AVS changed its marketing
strategy from a products oriented sale strategy to a consulting services
oriented sale strategy. The strategic change required an investment beyond the
resources that were available and projected to be generated from operations.
AVS has been funded through a variety of debt financings since 1997.
In August 1999, AVS modified an existing loan agreement with a bank. The
new agreement is for a $1,000,000 revolving line of credit. Advances under the
revolving line of credit are based on AVS's qualified accounts receivable and
is limited by the outstanding balance under its equipment line of credit. The
line is secured by all corporate assets and was due in June 2000. $879,743 was
outstanding under this facility as of June 30, 2000.
In addition to the revolving line of credit, AVS entered into stand-by
accounts receivable purchase agreement whereby AVS can sell to the bank
$1,000,000 of additional qualified receivables. As of June 30, 2000, there were
no advances under this agreement. AVS has transferred existing borrowings under
the revolving line of credit to the accounts receivable purchase agreement that
AVS has in place with the bank. This accounts receivable purchase agreement will
be available to AVS through the planned closing of the merger with MUSE.
In December 1997, AVS entered into a convertible subordinated promissory
note agreement with Kubota. In exchange for a $2,000,000 payment, Kubota
received a convertible subordinated promissory note due December 2001. The
note, which is subordinated to all AVS's senior indebtedness, bears interest at
the rate of 5% per year, payable on January 1, 1999. Thereafter, interest is
payable quarterly in arrears. Kubota has the right to convert the Note into
fully paid shares of AVS's common stock, at a conversion price of $3 per share.
In May 1999, AVS entered into an agreement with a leasing company to
provide financing of certain equipment. AVS may finance up to $500,000 under
this agreement, of which $171,000 is outstanding as of June 30, 2000. The
amounts outstanding under this financing agreement are subordinate to any bank
debt. The term of this agreement is three years and borrowings bear interest at
16.96% per year.
In May 2000, in connection with the letter of intent with MUSE, AVS
borrowed $1,000,000 from MUSE. The note is payable on demand and bears interest
at the rate of 10% per annum, payable monthly in advance.
AVS anticipates that it will expend approximately $100,000 for the
purchase of computer hardware and software during fiscal 2000. The funds will
come from operations or the equipment lease
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line. This hardware and software is needed to update existing infrastructure
and sales demonstration equipment to meet the increasing demands of selling and
marketing AVS products and services.
AVS believes that available funds and cash generated from operations would
not be sufficient to meet AVS's operating requirements, assuming no change in
the operations of AVS's business. As a result, beginning in November 1998 AVS
has been working with an investment banker to find a strategic partner to merge
with. AVS's future liquidity and capital resources will be dependent on a
number of factors including its ability to obtain adequate financing to fund
future operations.
Net cash used in operating activities was $258,000 for the year ended
December 31, 1997, $4,500,000 for the year ended December 31, 1998, and
$1,800,000 for the year ended December 31, 1999. Cash used in operating
activities for 1997 primarily resulted from net losses and an increase in
accounts receivable and a decrease in deferred revenues, which were partially
offset by increases in accounts payable and accrued expenses. Cash used in
operating activities for 1998 primarily resulted from net losses and a decrease
in deferred revenues, which were partially offset by a decrease in accounts
receivable. Cash used in operating activities for 1999 primarily resulted from
net losses and an increase in accounts receivable, a decrease in accounts
payable and accrued expenses and deferred revenues.
Net cash used in operating activities was $924,000 for the six months
ended June 30, 1999 and $491,000 for the six months ended June 30, 2000. Cash
used in operating activities for the six months ended June 30, 1999 resulted
primarily from net losses and payments related to the 1998 restructuring of
AVS. Cash used in operating activities for the six months ended June 30, 2000
resulted primarily from net losses and a decrease in accounts payable, accrued
expenses and deferred revenues offset in part by a decrease in accounts
receivable.
Net cash provided by (used in) investing activities was $6,100,000 used
for the year ended December 31, 1997, $4,600,000 provided for the year ended
December 31, 1998, and $4,000 used for the year ended December 31, 1999. Cash
used in investing activities was primarily related to short-term investments
and purchase of equipment.
Net cash provided by investing activities was $35,000 for the six months
ended June 30, 1999 and net cash used in investing activities was $53,000 for
the six months ended June 30, 2000. Cash provided by investing activities for
the six months ended June 30, 1999 was primarily related to a decrease in
short-term investments offset by purchases of equipment. Cash used in investing
activities for the six months ended June 30, 2000 was primarily related to
purchases of equipment.
Net cash provided by (used in) financing activities was $2,200,000
provided for the year ended December 31, 1997, $379,000 used for the year ended
December 31, 1998, and $586,000 provided for the year ended December 31, 1999.
Net cash provided by financing activities in 1997 was primarily from the
issuance of a $2,000,000 convertible subordinated promissory note to Kubota
Corporation, a significant stockholder (the note bears interest at 5% and
matures in December 2001), an increase in bank financing of $984,000 and
$386,000 from the exercise of stock options, offset partially by a stock
re-purchase program that used $1,200,000. Net cash used in financing activities
in 1998 was primarily from a $456,000 net reduction in bank borrowings, offset
partially by a $77,000 increase from the exercise of stock options. Net cash
provided by financing activities in 1999 was primarily from a $330,000 advance
under an equipment lease line and a net $352,000 increase in bank borrowings,
offset partially by $96,000 of principal payments on the equipment lease line.
Net cash provided by financing activities was $561,000 for the six months
ended June 30, 1999 and $955,000 for the six months ended June 30, 2000. Net
cash provided by financing activities in the six months ended June 30, 1999 was
primarily from a $1,100,000 increase in bank and lease line borrowings,
partially offset by $549,000 of principal payments on debt. Net cash provided
by financing activities in the six months ended June 30, 2000 was primarily
from a $1,000,000 note payable to MUSE, $18,000 from the sale of common stock
and offset in part by $63,000 of principal payments on the equipment lease
line.
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In the event the merger with MUSE is consummated, AVS will be obligated to
pay certain fees to its financial advisor in the amount of $315,000.
To date inflation has not had a material impact on AVS's financial
results; however, in 1999 AVS experienced the demands of a very tight labor
market, and had to adjust salaries on several occasions to meet market demands.
There can be no assurance, however, that inflation may not adversely affect
AVS's financial results in the future.
As of December 31, 2000, AVS has a net operating loss carryforward
position fully offset by a full valuation reserve, primarily generated from its
predecessor company, Stardent Computer Inc. If and when this net operating loss
carryforward position is applied, it would yield a tax benefit of $44.5
million.
NEW ACCOUNTING STANDARDS
In June 1998 the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities. This
statement establishes accounting and reporting standards for derivative
instruments, including derivative instruments embedded in other contracts, and
for hedging activities. SFAS No. 133, as amended by SFAS No. 137, Accounting
for Derivative Instruments and Hedging Activities -- Deferral of the Effective
Date of FASB Statement No. 133, is effective for all fiscal quarters of fiscal
years beginning after June 15, 2000. SFAS No. 133 is not expected to have a
material impact on AVS's consolidated financial statements.
FACTORS AFFECTING OPERATING RESULTS
Uncertainty of Future Profitability and Substantial Retained Deficit
Any increase in revenue will be dependent upon the ability of AVS to
market its software, either directly or through distributors. AVS's quarterly
operating expenses approximate AVS's quarterly revenue with no assurance that
AVS will generate sufficient revenue to cover such expenses in the future.
Accordingly, there can be no assurance that AVS can or will ever achieve
profitable operations. At December 31, 1999 AVS had a retained deficit of
$7.4M.
Quantitative and Qualitative Disclosures About Market Risk
To date, we have not engaged in trading market risk sensitive instruments
or purchasing hedging instruments that would be likely to expose us to market
risk, whether interest rate, foreign currency exchange, commodity price or
equity price risk. We have not purchased options or entered into swaps of
forward or futures contracts. Our primary market risk exposure is that of
foreign currency fluctuation on foreign denominated accounts receivable and of
interest rate risk on borrowings under our credit lines, which are subject to
interest rates based on the banks' prime rate. A change in the value of our
accounts receivable and in the applicable interest rate would affect the rate
at which AVS could borrow funds.
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MANAGEMENT
Directors and Officers
AVS's directors and officers are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
------------------------------------ ----- ------------------------------------
<S> <C> <C>
John William Poduska, Sr. .......... 62 Chairman of the Board; Director
Russell G. Barbour ................. 49 President and Chief Executive
Officer, Director
Stig Jensen ........................ 36 Vice President, International Sales
Melanie S. Ziegler ................. 37 Vice President, Product
Development/Professional Services
Ian R. G. Edmonds .................. 60 Director
R. Douglas Kahn .................... 47 Director
Masatoshi Kumagi ................... 47 Director
David Mandelkern ................... 41 Director
Wallace E. Smith ................... 59 Director
Thomas C. Chase .................... 57 Secretary
</TABLE>
JOHN WILLIAM PODUSKA, SR. was Chairman, Chief Executive Officer and
founder of Stardent Computer Inc., a predecessor company of AVS. Prior to
founding Stardent, he was Chairman and Chief Executive Officer and President of
Apollo Computer, Inc., and founder and Vice President of Research and
Development of Prime Computer. He was also an assistant professor of electrical
engineering at Massachusetts Institute of Technology in Cambridge,
Massachusetts. In addition to his role as Chairman of the Board for AVS since
November, 1991, Mr. Poduska currently sits on the board of Cambridge Technology
Partners, Safeguard Scientifics, Union Pacific Resources, Multi Gen Inc., ICE,
Exa Corporation, XL Vision and EVS. Mr. Poduska received a Bachelor of Science
degree, a Master of Science degree and a Ph.D. in electrical engineering and
computer sciences from MIT.
RUSSELL G. BARBOUR has been the President and Chief Executive Officer and
a director of AVS since November, 1998. Mr. Barbour was the Vice President of
Product Development for AVS from April 1997 until November 1998 when he assumed
his current responsibility. Prior to joining AVS, Mr. Barbour was President of
Acuity Software, a privately held producer of software development tools. Mr.
Barbour was also a senior software executive at Apollo Computer Inc. where he
held the position of Vice President of Advanced Technology. Prior to Apollo, he
held management and technical positions at Prime Computer and Honeywell
Information Systems.
STIG JENSEN has been the Vice President, European Operations of AVS since
July, 1996 and Vice President, International Sales since January, 1999. Mr.
Jensen was employed by UNIRAS, a private graphic software company, in a variety
of sales and support functions. When UNIRAS was acquired by AVS in 1993, Mr.
Jensen was the Sales Manager for the Scandinavian region. In 1996, Mr. Jensen
was promoted to Vice President, International Sales.
MELANIE S. ZIEGLER has been the Vice President, Product Development and
General Manager, Professional Services Division of AVS since November 1998. Ms.
Ziegler was a Director of Software Engineering for AVS from August 1997 until
November 1998, when she assumed her current responsibility. Prior to joining
AVS, she was Manager of Product Development & Engineering Services at TASC for
TASC-COLD, an advanced electronic archiving and retrieval product which was
subsequently spun off as Adesso Software. Previously, she held several other
management positions at TASC and lead software engineering positions with Merit
Technology, Inc., E-Systems and Texas Instruments. Ms. Ziegler received her
Bachelor of Arts in mathematics and computer science from the University of
Rochester in Rochester.
IAN R. G. EDMONDS has been a director of AVS from November, 1991 until
July, 1996 and again from January 1999 to present. Mr. Edmonds is currently
serving as a consultant with AVS. Prior to
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that position, Mr. Edmonds was the President of SRR Solutions, Inc. SRR
Solutions provides enterprise wide client/server credit and collections
solutions to Fortune 2000 clients. Mr. Edmonds held vice president roles in
engineering, marketing and customer service with Prime Computer and Stellar
Computer. He also served as President of Stardent Computer Inc., the UNIRAS
Division of AVS Inc. and Winsbrook Software, Inc.
R. DOUGLAS KAHN has been a director of AVS since November, 1994. Mr. Kahn
is the Chief Executive Officer for PanAmSat Corporation. Prior to that
position, Mr. Kahn was Chairman and founder of MatchPoint Systems, Inc., an
Internet consulting and technology services company. He also served as
President and Chief Executive Officer of Easel Corporation, a software
development tools company, and as Vice President, International, for McCormack
& Dodge Corp. (now Dunn & Bradstreet Software) and as a management consultant
for Price Waterhouse & Co.
MASATOSHI KUMAGAI has been a director of AVS since February 1992. Mr.
Kumagai is Manager of Administration of Kubota Graphics Technologies Inc., the
Kubota Corporation subsidiary responsible for Kubota's software businesses.
DAVID MANDELKERN has been a director of AVS since June 1992. He has been
Executive Vice President, Chief Technology Officer, and a Director of Docent,
Inc., a provider of internet-based knowledge exchange infrastructure software,
since June 1997. Before co-founding Docent, Mr. Mandelkern founded and served
from July 1993 to June 1997 as Chairman, President and CEO of AlmondSeed
Software Inc., a provider of UNIX utility software and consulting services. He
is still a Director of AlmondSeed Software Inc. From February 1991 to June
1993, Mr. Mandelkern served as President, Chief Executive Officer, and as a
Director of Talarian Corporation, a supplier of real-time networking
middleware. Mr. Mandelkern has a B.S. degree with distinction in Electrical
Engineering from Stanford University and an M.S. degree in Electrical
Engineering from Stanford University.
WALLACE E. SMITH has been a director of AVS since November, 1998. Mr.
Smith is Chairman and Chief Executive Officer of Appian Graphics, a
multi-monitor solution provider specializing in the development of multiple
monitor graphics and software. Previous positions included service as President
of Ravisent Technologies, President and Chief Executive Officer of Number 9
Software Technology, President and Chief Executive Officer of Exa Corporation,
a venture funded company focused on a revolutionary new Digital Fluids Dynamics
product for the simulation of fluid flows, and Senior Vice President of
Stardent Computer Inc.
THOMAS C. CHASE is an attorney and has been a member of Hill & Barlow, a
Professional Corporation, Boston, Massachusetts, since 1992.
PRINCIPAL STOCKHOLDERS OF AVS
The following table sets forth selected ownership information with respect
to the beneficial ownership of AVS's stock as of September 12, 2000 for (1)
each of the executive officers of AVS; (2) each director of AVS; (3) all
directors and executive officers of AVS as a group; and (4) each person who is
known by AVS to own beneficially more than 5% of any class of AVS stock.
Unless otherwise indicated, each person or entity named in the table has
sole voting power and investment power or shares this power with his or her
spouse with respect to all shares of capital stock listed as owned by that
person or entity. Ownership of less than 1% is designated in the table by an
asterisk.
The percent of class reflected as owned by persons listed in the following
table is based on 3,751,612 shares of AVS common stock, 187,266 shares of AVS
Series A preferred stock, and 1,641,765 shares of AVS Series B preferred stock
outstanding as of September 12, 2000, plus individual options within each class
which are exercisable within 60 days from the date hereof.
The number of shares beneficially owned by each stockholder is determined
under rules issued by the Securities and Exchange Commission. The information
is not necessarily indicative of beneficial ownership for any other purpose.
Under these rules, beneficial ownership includes any shares as to which the
individual or entity has sole or shared voting power or investment power and
any shares as
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to which the individual or entity has the right to acquire beneficial ownership
within 60 days from the date hereof through the exercise of any stock option or
other right.
Unless otherwise indicated, the address of these individuals is 300 Fifth
Avenue, Waltham, Massachusetts 02451.
<TABLE>
<CAPTION>
NAME OF PERCENT SERIES A PERCENT
BENEFICIAL COMMON OF PREFERRED OF
OWNER STOCK CLASS STOCK CLASS
---------------------------------- ------------------ --------- ----------- ---------
<S> <C> <C> <C> <C>
Executive Officers
and Directors ...................
Russell G. Barbour ............... 200,000(2) 5.1%
John William
Poduska, Sr. .................... 117,923(4) 3.1%
Stig Jensen ...................... 100,000(6) 2.6%
Melanie S. Ziegler ............... 23,000(8) *
Ian R.G. Edmonds
68 Slough Road
Harvard, MA 01451 ...............
R. Douglas Kahn
One Pickwick Plaza
Greenwich, CT 06830 ............. 45,000(11) 1.2%
Masatoshi Kumagai
c/o KGT
2-8-8 Shinjuka-ku
Tokyo 160 Japan ................. 1 *
David Mandelkern
P.O. Box 3564
Stanford, CA 94309-3564 ......... 45,000(13) 1.2%
Wallace E. Smith
18 Hartwell Avenue
Lexington, MA 02421 ............. 7,050 *
Officers and
Directors as a Group ............ 537,974 12.7%
Thomas C. Chase
One International Place
Boston, MA 02110 ................ 480,896(16) 12.8%
Kubota Corporation
2-47 Shikitsuhigashi
1-chome
Naniwa-ku, Osaka
556-8601 Japan .................. 818,143(18) 18.5% 187,266 100%
George F. Brandt, Jr.
2881 Vallejo Street
San Francisco, CA 94123 ......... 300,000 8.0%
Henry T. Cochran
3 Union Park, #5
Boston, MA 02118 ................ 210,000(19) 5.6%
Paul J. Esdale
6 Fairway Drive
Andover, MA 02173 ............... 190,000 5.1%
<CAPTION>
AGGREGATE
PERCENT OF
OUTSTANDING
CAPITAL
NAME OF SERIES B PERCENT SERIES C PERCENT STOCK ON AN
BENEFICIAL PREFERRED OF PREFERRED OF AS CONVERTED
OWNER STOCK CLASS STOCK CLASS (1) BASIS
---------------------------------- ------------------ --------- ------------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
Executive Officers
and Directors ...................
Russell G. Barbour ............... 500,000(3) 100% 11.1%
John William
Poduska, Sr. .................... 200,000(5) 100% 5.4%
Stig Jensen ...................... 160,000(7) 100% 4.4%
Melanie S. Ziegler ............... 200,000(9) 100% 3.8%
Ian R.G. Edmonds
68 Slough Road
Harvard, MA 01451 ............... 60,000(10) 100% 1.1%
R. Douglas Kahn
One Pickwick Plaza
Greenwich, CT 06830 ............. 100,000(12) 100% 2.5%
Masatoshi Kumagai
c/o KGT
2-8-8 Shinjuka-ku
Tokyo 160 Japan ................. *
David Mandelkern
P.O. Box 3564
Stanford, CA 94309-3564 ......... 60,000(14) 100% 1.8%
Wallace E. Smith
18 Hartwell Avenue
Lexington, MA 02421 ............. 252 * 160,000(15) 100% 2.9%
Officers and
Directors as a Group ............ 252 * 1,440,000 100% 28.0%
Thomas C. Chase
One International Place
Boston, MA 02110 ................ 128,292(17) 7.8% 10.9%
Kubota Corporation
2-47 Shikitsuhigashi
1-chome
Naniwa-ku, Osaka
556-8601 Japan .................. 1,024,383 62.4% 32.5%
George F. Brandt, Jr.
2881 Vallejo Street
San Francisco, CA 94123 ......... 5.4%
Henry T. Cochran
3 Union Park, #5
Boston, MA 02118 ................ 832 * 3.8%
Paul J. Esdale
6 Fairway Drive
Andover, MA 02173 ............... 3.4%
</TABLE>
----------
(1) No shares of Class C Preferred Stock have been issued.
(2) Includes options to purchase 200,000 shares of common stock, of which
160,000 will be vested within 60 days hereof, and 40,000 will
automatically vest at closing.
(3) Includes options to purchase 500,000 shares of Class C preferred stock,
of which 250,000 will be vested within 60 days hereof, and 250,000 will
automatically vest at closing.
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(4) Includes options to purchase 60,000 shares of common stock, of which
53,800 will be vested within 60 days hereof, and 6,200 will automatically
vest at closing.
(5) Includes options to purchase 200,000 shares of Class C preferred stock,
of which 100,000 will be vested within 60 days hereof, and 100,000 will
automatically vest at closing.
(6) Includes options to purchase 100,000 shares of common stock, of which
87,250 will be vested within 60 days hereof, and 12,750 will
automatically vest at closing.
(7) Includes options to purchase 160,000 shares of Class C preferred stock,
of which 80,000 will be vested within 60 days hereof, and 80,000 will
automatically vest at closing.
(8) Includes options to purchase 23,000 shares of common stock, of which
16,030 will be vested within 60 days hereof, and 6,970 will automatically
vest at closing.
(9) Includes options to purchase 200,000 shares of Class C preferred stock,
of which 100,000 will be vested within 60 days hereof, and 100,000 will
automatically vest at closing.
(10) Includes options to purchase 60,000 shares of Class C preferred stock, of
which 42,500 will be vested within 60 days hereof, and 17,500 will
automatically vest at closing.
(11) Includes options to purchase 45,000 shares of common stock, of which
40,500 will be vested within 60 days hereof, and 4,500 will automatically
vest at closing.
(12) Includes options to purchase 100,000 shares of Class C preferred stock,
of which 50,000 will be vested within 60 days hereof, and 50,000 will
automatically vest at closing.
(13) Includes options to purchase 45,000 shares of common stock, of which
41,350 will be vested within 60 days hereof, and 3,650 will automatically
vest at closing.
(14) Includes options to purchase 60,000 shares of Class C preferred stock, of
which 30,000 will be vested within 60 days hereof, and 30,000 will
automatically vest at closing.
(15) Includes options to purchase 160,000 shares of Class C preferred stock,
of which 80,000 will be vested within 60 days hereof, and 80,000 will
automatically vest at closing.
(16) Includes 412,105 shares of common stock held in trusts of which Mr. Chase
is either sole trustee, in which case he has sole voting and investment
power, or a co-trustee, in which case he shares the voting and investment
power. Mr. Chase disclaims beneficial ownership in these shares. Also
includes 2,256 shares of common stock held by Mr. Chase's spouse. Mr.
Chase is Secretary of AVS.
(17) Includes 66,890 shares of Class B preferred stock held in trusts of which
Mr. Chase is a co-trustee. Mr. Chase disclaims beneficial ownership in
these shares.
(18) Includes 666,667 shares of common stock issuable pursuant to a
Convertible Subordinated Promissory Note dated December 29, 1997.
(19) Includes 10,000 shares of common stock held in an insurance trust for the
benefit of Mr. Cochran.
MARKET PRICE OF AND DIVIDENDS ON AVS'S CAPITAL STOCK AND RELATED STOCKHOLDER
MATTERS
There is no established public market for AVS's capital stock.
AVS has never declared or paid cash dividends on its capital stock. AVS
expects to retain future earnings, if any, for the development of its business
and does not anticipate paying cash dividends in the foreseeable future.
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DESCRIPTION OF MUSE CAPITAL STOCK
This section of this proxy statement/prospectus describes the material
terms of our capital stock under the certificate of incorporation and bylaws
that will be in effect immediately after the merger is completed. The following
also summarizes relevant provisions of the Delaware General Corporation Law,
which we refer to as "Delaware law". The terms of our certificate of
incorporation and bylaws, as well as the terms of Delaware law, are more
detailed than the general information provided below. Therefore, you should
carefully consider the actual provisions of these documents
GENERAL
Our authorized capital stock consists of 50,000,000 shares of common
stock, par value $.015 per share. As of July 31, 2000, 10,808,882 shares of our
common stock were outstanding. Following the completion of the merger, we
anticipate that approximately 12,908,882 shares of our common stock will be
outstanding.
MUSE COMMON STOCK
Voting Rights. The holders of our common stock have the right to cast one
vote for each share of our common stock they hold of record on all matters on
which stockholders are generally entitled to vote.
Dividends. The holders of our common stock are entitled to receive
dividends or other distributions when, as and if declared by our board of
directors out of funds legally available for the dividends or other
distributions.
Preemptive And Other Rights. The holders of our common stock have no
preemptive or cumulative voting rights and no rights to convert their shares of
common stock into any other securities. All of the outstanding shares of our
common stock are, and the shares of common stock being offered hereby will be,
fully paid and non-assessable.
Liquidation Rights. On liquidation, dissolution or winding up of MUSE, the
holders of common stock are entitled to receive pro rata the net assets of MUSE
remaining after the payment of all creditors and liquidation preferences, if
any.
Listing. MUSE common stock is quoted on the Nasdaq SmallCap under the
symbol "MUZE" and the Boston Stock Exchange under the symbol "MZE".
Transfer Agent. The transfer agent for our common stock is American Stock
Transfer & Trust Company, 40 Wall Street, New York, New York 10005.
Director's Liability. Our certificate of incorporation provides that, to
the fullest extent permitted by Delaware law, a director will not be liable to
MUSE or its stockholders for monetary damages for breach of fiduciary duty as a
director. Under current Delaware law, liability of a director may not be
limited:
(1) for any breach of the director's duty of loyalty to MUSE or its
stockholders;
(2) for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
(3) in respect of certain unlawful dividend payments or stock redemptions
or repurchases; and
(4) for any transaction from which the director derives an improper
personal benefit.
The effect of this provision of our certificate of incorporation is to
eliminate the rights of MUSE and its stockholders to recover monetary damages
against a director for breach of his or her fiduciary duty of care, including
breaches resulting from negligent or grossly negligent behavior, except in the
situations described in clauses (1) through (4) above. This limitation on
liability does not apply to violations of the federal securities laws. This
provision also does not limit or eliminate the rights of MUSE or any
stockholder to seek non-monetary relief such as an injunction or rescission in
the event
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of a breach of a director's duty of care. In addition, our certificate of
incorporation provides that we will indemnify our directors and executive
officers to the fullest extent permitted by Delaware law.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW. MUSE is subject to
Section 203 of the Delaware General Corporation Law. Section 203 relates to an
"interested stockholder," defined by the Delaware General Corporation Law as a
person who is the owner of 15% or more of a corporation's voting stock, or who
is an affiliate or associate of a corporation, and was the owner of 15% or more
of that corporation's voting stock within the prior three years. In general,
Section 203 prevents an interested stockholder from engaging in a business
combination with a Delaware corporation for three years following the date the
person became an interested stockholder unless:
(1) before the person became an interested stockholder, the board of
directors of the corporation approved the transaction or the business
combination in which the interested stockholder became an interested
stockholder;
(2) upon consummation of the transaction in which the interested
stockholder became an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced. This excludes
shares owned by persons who are both officers and directors of the
corporation and shares held by certain employee stock ownership plans
in which employee participants do not have the right to determine
confidentially whether shares held subject to the plan will be
tendered in a tender or exchange offer; or
(3) following the transaction in which the person became an interested
stockholder, the business combination is approved by the board of
directors of the corporation and authorized at a meeting of
stockholders by the affirmative vote of the holders of at least
two-thirds of the outstanding voting stock of the corporation not
owned by the interested stockholder.
A "business combination" generally includes mergers, stock or asset sales and
other transactions resulting in a financial benefit to the interested
stockholder.
WARRANTS
There are outstanding warrants to purchase 460,888 shares of our common
stock at an exercise price of $7.60 per share, which expire in April 2001.
On July 15, 1998, we issued to Continuum Resources a warrant to purchase
1,000,000 shares of our common stock at an exercise price of $9.60 per share.
This warrant expires on June 30, 2003.
On November 19, 1998, we issued to HD Brous & Co., Inc., the underwriter
of our initial public offering, a unit purchase option to purchase 120,000
units at an exercise price of $13.20 per unit, such units, in the aggregate,
consisting of (i) 120,000 shares of our common stock and (ii) class B
redeemable common stock purchase warrant to purchase 60,000 shares of common
stock. The unit purchase option expires on November 18, 2003.
On December 1, 1999, we issued to Josephthal a warrant to purchase 82,500
shares of our common stock at an exercise price of $3.90 per share. This
warrant expires on November 30, 2002.
On June 1, 2000, in connection with the equity line agreement, we issued
to Kingsbridge a warrant to purchase 200,000 shares of our common stock at an
exercise price of $3.76 per share This warrant is exercisable commencing
November 28, 2000 and expires on November 27, 2004.
On August 7, 2000, in connection with the convertible note, we issued
to Kingsbridge a warrant to purchase 75,000 shares of our common stock at an
exercise price of $2.6125 per share. This warrant is exercisable commencing on
August 7, 2001 and expires on August 6, 2005.
The warrants contain provisions that protect the holders thereof against
dilution by adjustment of the exercise price in certain events, including stock
dividends, stock splits, recapitalizations, and for other extraordinary events.
Certain of the warrants and the unit purchase option have demand and/or
piggyback registration rights with respect to the underlying shares of common
stock.
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CLASS A REDEEMABLE COMMON STOCK PURCHASE WARRANTS
There are outstanding Class A Redeemable Common Stock Purchase Warrants to
purchase an aggregate of 600,000 shares of our common stock, which warrants
were registered in our initial public offering. The holder of each warrant is
entitled to purchase one share of common stock at an aggregate exercise price
of $9.60 per share. The warrants terminate on November 15, 2003. Holders of the
warrants will only be able to exercise the warrants if (a) a current prospectus
under the Securities Act relating to the shares of common stock issuable upon
exercise of the warrants is then in effect, and (b) such securities are
qualified for sale or exemption from qualification under the applicable
securities laws of the states in which the various holders of warrants reside.
The public warrants are subject to redemption by MUSE, on not more than 60
nor less than 30 days' written notice, at a price of $.01 per warrant, if the
average closing price per share of the common stock is at least $12.00, subject
to adjustment, for the twenty day period ending not earlier than five days
prior to the date the warrants are called for redemption. Holders of warrants
will automatically forfeit their rights to purchase the shares of common stock
issuable upon exercise of such warrants unless the warrants are exercised
before the close of business on the business day immediately prior to the date
set for redemption. All of the outstanding warrants must be redeemed. The
warrants can only be redeemed if, on the date the warrants are called for
redemption, there is an effective registration statement covering the shares of
common stock issuable upon exercise of the warrants and the common stock is
listed on the Nasdaq Stock Market or such other stock market which is
acceptable to the underwriter of our initial public offering.
The holders of the outstanding warrants have been given the opportunity to
profit from a rise in the market for the shares of our common stock with a
resulting dilution in the interests of stockholders. The holders of the
outstanding warrants can be expected to exercise them at a time when we would,
in all likelihood, be able to obtain equity capital, if then needed, by a new
equity offering on terms more favorable than those provided by the outstanding
warrants. Such facts may adversely affect the terms on which we could obtain
additional financing.
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COMPARISON OF STOCKHOLDERS' RIGHTS
GENERAL
MUSE and AVS are both organized under the laws of the State of Delaware.
Any differences, therefore, in the rights of holders of MUSE capital stock and
AVS capital stock arise primarily from differences in their respective
certificates of incorporation and bylaws. Upon completion of the merger,
holders of AVS capital stock will become holders of MUSE common stock and their
rights will be governed by Delaware law, MUSE's certificate of incorporation
and MUSE's bylaws.
This section of this proxy statement/prospectus describes the material
differences between the rights of MUSE stockholders and AVS stockholders. This
section does not include a complete description of all differences among the
rights of these stockholders, nor does it include a complete description of the
specific rights of these stockholders. In addition, the identification of some
of the differences in the rights of these stockholders as material is not
intended to indicate that other differences that are equally important do not
exist. All MUSE stockholders and AVS stockholders are urged to read carefully
the relevant provisions of Delaware law, as well as the certificates of
incorporation and bylaws of both MUSE and AVS. Copies of the certificates of
incorporation and bylaws of MUSE and AVS will be sent to MUSE stockholders and
AVS stockholders, as applicable, upon request. See "Where you can find more
information."
AUTHORIZED CAPITAL STOCK
MUSE. MUSE's total number of authorized shares of capital stock is
50,000,000 shares of common stock, par value $0.015 per share.
AVS. AVS's total number of authorized shares of capital stock is
17,000,000, consisting of 12,000,000 shares of common stock, par value $0.01
per share, and 5,000,000 shares of preferred stock, par value $0.10 per share,
divided into three series of preferred stock: 190,000 shares of Series A stock,
convertible into shares of common stock, 1,775,000 shares of Series B stock,
also convertible into shares of common stock, and 2,000,000 shares of Series C
stock. The number of authorized shares of AVS's preferred or common stock may
be increased or decreased, but not below the number of shares then outstanding,
by the affirmative vote of the holders of a majority in voting power of AVS's
stock entitled to such vote. This vote will not require the holders of the
preferred stock and common stock to vote separately as a class.
PREEMPTIVE RIGHTS
Under Delaware law, stockholders have no preemptive rights unless these
rights are provided for in the corporation's certificate of incorporation.
Neither MUSE's nor AVS's certificate of incorporation provides for preemptive
rights.
QUORUM
MUSE. MUSE's bylaws provide that, at any stockholders' meeting, the
holders of a majority of the issued and outstanding shares of the company
entitled to vote at the meeting must be present or represented by proxy to
constitute a quorum for the transaction of any business. In the absence of a
quorum, a majority of the shares entitled to vote which is present or by proxy
at such meeting may adjourn the meeting in the manner provided by MUSE's
bylaws, until holders of the amount of shares required to constitute a quorum
are present in person or by proxy.
AVS. AVS's bylaws provide that a majority of all then issued and
outstanding shares of voting stock entitled to vote, represented in person or
by proxy, constitutes a quorum at a stockholders' meeting, except where a
larger vote is required by law, by the certificate of incorporation or by the
bylaws. In the absence of a quorum, a less interest may adjourn any meeting in
the manner provided by AVS's bylaws, until holders of the amount of shares
required to constitute a quorum are present in person or by proxy.
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STOCKHOLDER VOTING
MUSE. MUSE's bylaws provide that each share of MUSE common stock entitles
the stockholder to one vote per share on all matters submitted to a vote of
stockholders. MUSE's bylaws also provide that at any meeting, whenever any
corporate action is to be taken by vote of the stockholders, such action will
be authorized by a majority of the votes cast at a meeting of stockholders,
except that all elections will be decided by a plurality of the votes cast.
Delaware law provides a procedure for obtaining the written consent of
stockholders in lieu of a meeting.
AVS. AVS's certificate of incorporation provides that the holders of AVS
common stock are entitled to one vote for each share held at all meetings of
stockholders. The certificate of incorporation also provides that the holders
of AVS preferred stock are entitled to the number of votes equal to the number
of shares of AVS common stock into which each share of preferred stock could be
converted on the record date for the vote or written consent of stockholders.
AVS's certificate of designation, number, voting powers, preferences and rights
of Series C preferred stock provides that the holders of the Series C preferred
stock have no rights to convert Series C shares into any other securities of
the company. Therefore, Series A and Series B preferred shares have voting
rights derived from their potential conversion into common shares as indicated
above, but Series C preferred shares have no voting power except with respect
to actions which materially and adversely affect the rights of the Series C as
a class. However, as stated in AVS's certificate of incorporation, any action
of the company that materially and adversely alters or changes the rights,
preferences or privileges of a series of preferred stock requires the approval
of the holders of more than a majority of the outstanding shares of such
affected series.
The AVS bylaws provide that any action required or permitted to be taken
by the stockholders may be taken without a meeting, without prior notice and
without a vote, if a consent in writing, setting forth the action to be taken,
is signed by the holders of outstanding stock having not less than the minimum
number of votes that would be necessary to authorize or take such action at a
meeting at which all shares entitled to vote were present and voted.
AVS's certificate of incorporation does not permit cumulative voting.
SPECIAL MEETINGS OF STOCKHOLDERS
MUSE. MUSE's bylaws provide that a special meeting of stockholders for any
purpose or purposes may be held at any time. A special meeting may be called at
any time by MUSE's president or by a majority of the directors then in office,
and will be called by MUSE's secretary at the written request of stockholders
holding of record (in the aggregate) at least 10% of the issued and outstanding
shares of the company entitled to vote at such meeting. Special meetings may be
held within or without the State of Delaware at such place and time and on such
date as is specified in the secretary's call.
AVS. AVS's bylaws provide that a special meeting of stockholders may be
called by the board of directors or by a writing filed with the AVS secretary
signed by either the AVS president or by a majority of the directors. A special
meeting may be held either within or without the State of Delaware at such time
and place and for such purposes as are specified in the call.
DIRECTORS
MUSE. MUSE's bylaws provide that the number of directors constituting the
MUSE board is one or more members, the number to be fixed by the board.
Directors need not be MUSE stockholders. Each director serves until his or her
successor is elected and qualified or until his or her earlier death,
resignation or removal. The MUSE certificate of incorporation gives the board
the authority to confer the power to appoint one member to the board to the
holders of any bonds, debentures or other obligations issued or to be issued by
MUSE.
AVS. AVS's bylaws provide that the number of directors that constitutes
the AVS board is not fewer than one nor more than nine, as may be fixed for any
corporate year and elected by the
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<PAGE>
stockholders at the annual meeting. During any year, the board may be enlarged
and additional directors elected to complete the enlarged number by the
stockholders at any meeting or by a vote of a majority of the directors then in
office. The stockholders may, at any meeting held for the purpose during such
year, decrease, to not fewer than one, the number of directors as fixed or
enlarged and remove directors to the decreased number. Each director serves
until his or her successor is elected and qualified or until his or her earlier
resignation or removal. Directors need not be AVS stockholders
REMOVAL OF DIRECTORS
MUSE. MUSE's bylaws provide that any director or the entire board may be
removed, with or without cause, by the holders of a majority of the shares then
entitled to vote at an election of directors. Directors may resign at any time
upon written notice to MUSE.
AVS. AVS's bylaws provide that a director may be removed from office by
vote of a majority of the capital stock issued and outstanding and entitled to
vote thereon.
VACANCIES ON THE BOARD OF DIRECTORS
MUSE. MUSE's bylaws provide that vacancies and newly created directorships
resulting from any increase in the authorized number of directors may be filled
by the vote of a majority of directors then in office (though less than a
quorum) or by a sole remaining director. When one or more directors resign from
the board, effective at a future date, a majority of the directors then in
office, including those who have resigned, have the power to fill such vacancy
or vacancies, with the vote to take effect when such resignation or
resignations become effective. A director elected to fill a vacancy holds
office for the unexpired term of his or her predecessor.
AVS. AVS's bylaws provide that any vacancy occurring in any directorship
and newly created directorships resulting from any increase in the authorized
number of directors may be filled by the vote of a majority of the directors
then in office (though less than a quorum) or by a sole remaining director.
Each replacement director will serve for the unexpired term of his or her
predecessor and until his or her successor has been duly elected and qualified
or for a shorter period to be specified at the filling of the vacancy or until
a successor has been chosen by the stockholders.
AMENDMENT TO CERTIFICATE OF INCORPORATION
Generally. Delaware law provides that amendments to a corporation's
certificate of incorporation must be approved by the board of directors and by
the affirmative vote of the holders of at least a majority of the outstanding
shares entitled to vote upon the proposed amendment, unless a higher vote is
required by the company's certificate of incorporation.
MUSE. As MUSE's certificate of incorporation is silent on the subject,
Delaware law will govern any amendments to MUSE's certificate of incorporation.
AVS. AVS's certificate of incorporation explicitly reserves the
corporation's right to amend, alter, change or repeal any provisions in its
certificate of incorporation in the manner now or later permitted by Delaware
law.
AMENDMENT OF BYLAWS
Generally. Under Delaware law, stockholders entitled to vote have the
power to adopt, amend or repeal bylaws. In addition, a corporation may, in its
certificate of incorporation, confer this power on the board of directors. The
stockholders always have the power to adopt, amend or repeal the bylaws, even
though the board also may be delegated the power by the corporation's
certificate of incorporation.
MUSE. MUSE's certificate of incorporation authorizes the board to adopt,
amend or repeal MUSE's bylaws. MUSE's bylaws provide that the bylaws may be
amended or repealed, and any new by-law may be adopted, by the stockholders
entitled to vote or by the board.
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AVS. AVS's certificate of incorporation authorizes the board to make
bylaws, and from time to time alter, amend or repeal any bylaws. Any bylaws
made by the board may be altered, amended or repealed by the stockholders at
any meeting of stockholders by the affirmative vote of the holders of a
majority of the stock present and voting at such meeting, provided that notice
that an amendment is to be considered and acted upon is inserted in the notice
or waiver of notice of such meeting.
STATE ANTI-TAKEOVER STATUTES
General. Under the business combination statute of Delaware law, a
corporation is prohibited from engaging in any business combination with an
interested stockholder who, together with its affiliates or associates, owns,
or within a three-year period did own, 15% or more of the corporation's voting
stock, unless:
o prior to the time the stockholder became an interested stockholder, the
board of directors of the corporation approved either the business
combination or the transaction which resulted in the stockholder becoming
an interested stockholder;
o the interested stockholder owned at least 85% of the voting stock of the
corporation, excluding specified shares, upon consummation of the
transaction which resulted in the stockholder becoming an interested
stockholder; or
o at or subsequent to the time the stockholder became an interested
stockholder, the business combination is approved by the board of
directors of the corporation and authorized by the affirmative vote, at
an annual or special meeting and not by written consent, of at least 66%
of the outstanding voting shares of the corporation, excluding shares
held by that interested stockholder.
A business combination generally includes:
o mergers, consolidations and sales or other dispositions of 10% or more
of the assets of a corporation to or with an interested stockholder;
o specified transactions resulting in the issuance or transfer to an
interested stockholder of any capital stock of the corporation or its
subsidiaries; and
o other transactions resulting in a disproportionate financial benefit to
an interested stockholder.
The provisions of the Delaware business combination statute do not apply
to a corporation if, subject to certain requirements, the certificate of
incorporation or bylaws of the corporation contain a provision expressly
electing not to be governed by the provisions of the statute or the corporation
does not have voting stock listed on a national securities exchange, authorized
for quotation on the NASDAQ Stock Market or held of record by more than 2,000
stockholders.
MUSE. Because MUSE has not adopted any provision in its certificate of
incorporation or bylaws to "opt-out" of the Delaware business combination
statute, the Delaware business combination statute applies to MUSE.
AVS. Because AVS has not adopted any provision in its certificate of
incorporation or bylaws to "opt-out" of the Delaware business combination
statute, the statute is applicable to business combinations involving AVS.
APPRAISAL/DISSENTERS' RIGHTS
Under Delaware law, no appraisal rights are granted to stockholders who
dissent from a sale, lease or exchange of all or substantially all of the
assets of a corporation. Delaware law further provides that generally no
appraisal rights are granted to stockholders who dissent from a merger or
consolidation for which a stockholder vote is required if the shares of the
class of stock voting are listed on a national securities exchange or the
Nasdaq National Market System or held of record by more than 2,000
stockholders. However, stockholders will have appraisal rights if they are
required in connection with the merger or consolidation to accept for their
stock anything other than:
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(1) stock of the corporation surviving or resulting from the merger or
consolidation;
(2) stock of any other corporation listed on a national securities
exchange or the Nasdaq National Market System or held of record by
more than 2,000 stockholders;
(3) cash in lieu of fractional shares; or
(4) any combination of (1), (2) and (3) above.
Under the merger agreement, the stockholders of AVS are entitled to appraisal
rights.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Generally. Delaware law grants each corporation the power to indemnify any
or all of its directors, officers, employees or agents who were or are a party
or are threatened to be made parties to an action of any kind by reason of the
fact of such persons' connection with the corporation but only when such
persons' conduct is determined to be worthy of indemnification. To the extent
that a director or officer of a corporation has been successful in defense of
any action, suit or proceeding, he or she will be indemnified against all
costs, charges and expenses, including attorneys' fees, actually and reasonably
incurred by him or her or on his or her behalf.
MUSE. MUSE's certificate of incorporation provides that MUSE will
indemnify, to the fullest extent permitted by the Delaware law, any and all
persons whom it has the power to indemnify. It also provides that no director
will be personally liable to MUSE or MUSE's stockholders for monetary damages
for breach of fiduciary duty as a director, except that a director will be so
liable if he or she (i) breached the director's duty of loyalty to MUSE or
MUSE's stockholders, (ii) intentionally acted, or omitted to act, in bad faith,
(iii) paid dividends or purchased stock unlawfully, or (iv) derived an improper
personal benefit from any transaction. MUSE's bylaws reiterate the Delaware
statute and MUSE's certificate of incorporation and provide additional
information concerning indemnification.
AVS. AVS's certificate of incorporation provides that no director will be
personally liable to AVS or AVS's stockholders for monetary damages for breach
of fiduciary duty as a director, except that a director will be so liable if he
or she (i) breached the director's duty of loyalty to AVS or AVS's
stockholders, (ii) intentionally acted, or omitted to act, in bad faith, (iii)
paid dividends or purchased stock unlawfully, or (iv) derived an improper
personal benefit from any transaction. Modification or repeal of this provision
will not increase the personal liability of any AVS director for any act taking
place prior to such modification or repeal.
INSURANCE
Delaware law authorizes a corporation to purchase and maintain insurance
on behalf of any person who is or was a director, officer, employee or agent of
the corporation, whether or not the corporation would have the power to
indemnify such person against any particular act.
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OTHER MATTERS
As of the date of this proxy statement/prospectus, the AVS board knows of
no matters that will be presented for consideration at the AVS meeting, other
than as described in this proxy statement/ prospectus. If any other matters
properly come before the AVS meeting and are voted upon, the enclosed proxies
will be deemed to confer discretionary authority on the individuals named as
proxies therein to vote the shares represented by such proxies as to any such
matters. The individuals named as proxies intend to vote or not to vote in
accordance with the recommendation of the management of AVS.
EXPERTS
The consolidated financial statements of MUSE and its subsidiaries as of
September 30, 1999, and for each of the years in the two-year period ended
September 30, 1999, have been audited by Feldman Sherb & Co., P.C. independent
certified public accountants, as set forth in their report with respect to
these financial statements. These financial statements are included in MUSE's
Annual Report on Form 10-KSB for the fiscal year ended September 30, 1999, and
are included elsewhere in this proxy statement/prospectus in reliance upon the
report given and upon the authority of Feldman Sherb & Co., P.C. as experts in
accounting and auditing.
The financial statements of Virtual Presence Limited and its subsidiaries
as of March 31, 1999 and 1998 and for each of the years in the two-year period
ended March 31, 1999 have been audited by Pridie Brewster, independent
chartered accountants and registered auditors, as set forth in their report
with respect to these financial statements. The financial statements are
included elsewhere in this proxy statement/prospectus in reliance upon the
report given and upon the authority of Pridie Brewster as experts in accounting
and auditing.
The financial statements of AVS and its subsidiaries as of December 31,
1999 and 1998, and for each of the years in the three-year period ended
December 31, 1999, have been audited by Arthur Andersen LLP, independent
certified public accountants, as set forth in their report with respect to
these financial statements. These financial statements are included elsewhere
in this proxy statement/prospectus in reliance upon the report given and upon
the authority of Arthur Andersen LLP as experts in accounting and auditing.
LEGAL MATTERS
The validity of the MUSE common stock issuable under the merger and
certain legal matters relating to the merger and the transactions contemplated
thereby have been passed upon for MUSE by Proskauer Rose LLP, New York, New
York. Hill & Barlow, a Professional Corporation, Boston, Massachusetts, is
acting as counsel to AVS in connection with the merger and the transactions
contemplated thereby.
Hill & Barlow, a Professional Corporation, Boston, Massachusetts, counsel
to AVS, will pass upon for AVS the material federal income tax consequences
relating to the merger.
RELATIONSHIP WITH INDEPENDENT AUDITORS
Representatives of Arthur Andersen LLP will be present at the AVS meeting
and will be available to respond to appropriate questions and have the
opportunity to make a statement if they desire.
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WHERE YOU CAN FIND MORE INFORMATION
MUSE files annual, quarterly and special reports, proxy statements and
other information with the Securities and Exchange Commission under the
Securities Exchange Act of 1934. You may read and copy this information at the
following locations of the Securities and Exchange Commission:
<TABLE>
<S> <C> <C>
Judiciary Plaza, Room 1024 Seven World Trade Center Citicorp Center
450 Fifth Street, N.W. Suite 1300 500 West Madison Street, Suite 1400
Washington, D.C. 20549 New York, New York 10048 Chicago, Illinois 60661
</TABLE>
You can also obtain copies of this information by mail from the Public
Reference Section of the Securities and Exchange Commission, 450 Fifth Street,
N.W., Room 1024, Washington D.C. 20549, at prescribed rates.
The Securities and Exchange Commission also maintains an Internet world
wide web site that contains reports, proxy statements and other information
about issuers, like MUSE, who file electronically with the Securities and
Exchange Commission. The address of that site is http://www.sec.gov.
MUSE has filed with the Securities and Exchange Commission a registration
statement on
Form S-4 that registers the shares of MUSE common stock to be issued in
exchange for shares of AVS capital stock upon completion of the merger. That
registration statement, including the attached exhibits and schedules, contains
additional relevant information about MUSE and the MUSE common stock. The rules
and regulations of the Securities and Exchange Commission allow us to omit
certain information included in the registration statement from this proxy
statement/prospectus.
If you would like to request documents, please do so by October 6, 2000 to
receive them before the stockholders' meeting.
WE HAVE NOT AUTHORIZED ANYONE TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATION ABOUT THE MERGER OR OUR COMPANIES THAT IS DIFFERENT FROM, OR IN
ADDITION TO, THAT CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS OR IN ANY OF THE
MATERIALS THAT WE HAVE INCORPORATED BY REFERENCE INTO THIS DOCUMENT. THEREFORE,
IF ANYONE DOES GIVE YOU INFORMATION OF THIS SORT, YOU SHOULD NOT RELY ON IT. IF
YOU ARE IN A JURISDICTION WHERE OFFERS TO EXCHANGE OR SELL, OR SOLICITATIONS OF
OFFERS TO EXCHANGE OR PURCHASE, THE SECURITIES OFFERED BY THIS DOCUMENT OR THE
SOLICITATION OF PROXIES IS UNLAWFUL, OR IF YOU ARE A PERSON TO WHOM IT IS
UNLAWFUL TO DIRECT THESE TYPES OF ACTIVITIES, THEN THE OFFER PRESENTED IN THIS
DOCUMENT DOES NOT EXTEND TO YOU. THE INFORMATION CONTAINED IN THIS DOCUMENT
SPEAKS ONLY AS OF THE DATE OF THIS DOCUMENT, UNLESS THE INFORMATION
SPECIFICALLY INDICATES THAT ANOTHER DATE APPLIES.
FORWARD-LOOKING STATEMENTS
This proxy statement/prospectus contains forward-looking statements. These
statements relate to future events or the future financial performance of MUSE
and AVS. In some cases, you can identify forward-looking statements by
terminology such as "may," "will," "should," "expects," "plans," "anticipates,"
"believes," "estimates," "predicts," "potential" or "continue" or the negative
of such terms and other comparable terminology. These statements only reflect
management's expectations and estimates. Actual events or results may differ
materially. In evaluating these statements, you should specifically consider
various factors, including the risks outlined on pages 16 to 26 under "Risk
Factors." These factors may cause our actual results to differ materially from
any forward-looking statements. We are not undertaking any obligations to
update any forward-looking statements contained in this proxy
statement/prospectus to reflect any future events or developments.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
MUSE TECHNOLOGIES, INC.
CONSOLIDATED FINANCIAL STATEMENTS
<S> <C>
Report of Feldman Sherb Horowitz & Co., P.C., Independent Auditors.........................................F-2
Balance Sheets.............................................................................................F-3
Statements of Operations...................................................................................F-4
Statements of Stockholders' Equity.........................................................................F-5
Statements of Cash Flows...................................................................................F-6
Notes to Financial Statements..............................................................................F-7
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheet.............................................................................................F-15
Statements of Operations..................................................................................F-16
Statements of Cash Flows..................................................................................F-17
Notes to Financial Statements.............................................................................F-18
VIRTUAL PRESENCE LIMITED REPORT AND ACCOUNTS
General Information.......................................................................................F-22
Directors' Report.........................................................................................F-23
Report of Independent Auditors............................................................................F-24
Profit and Loss Account...................................................................................F-25
Balance Sheet.............................................................................................F-26
Cashflow Statement........................................................................................F-27
Notes to the Accounts.....................................................................................F-28
Pro Forma Financial Information...........................................................................F-33
Notes to the Pro Forma Financial Statements...............................................................F-36
ADVANCED VISUAL SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
Report of Arthur Andersen LLP, Independent Public Accountants............................................F-37
Balance Sheets...........................................................................................F-38
Statements of Operations.................................................................................F-39
Statements of Stockholders' Equity.......................................................................F-40
Statements of Cash Flows.................................................................................F-41
Notes to Financial Statements............................................................................F-42
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheets...........................................................................................F-53
Statements of Operations.................................................................................F-54
Statements of Cash Flows.................................................................................F-55
Notes to Financial Statements............................................................................F-56
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
Balance Sheet.............................................................................................F-58
Statements of Operations..................................................................................F-59
Notes to Condensed Combined Financial Statements..........................................................F-63
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders and
Board of Directors of
MUSE Technologies, Inc.
Albuquerque, New Mexico
We have audited the accompanying balance sheet of MUSE Technologies, Inc. as of
September 30, 1999, and the related statements of operations, stockholders'
equity and cash flows, for the years ended September 30, 1999 and 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of MUSE Technologies, Inc. as of
September 30, 1999, and the results of their operations and their cash flows,
for the years ended September 30, 1999 and 1998 in conformity with generally
accepted accounting principles.
/s/Feldman Sherb Horowitz & Co., P.C.
Feldman Sherb Horowitz & Co., P.C.
Certified Public Accountants
New York, New York
December 3, 1999
F-2
<PAGE>
MUSE TECHNOLOGIES, INC.
BALANCE SHEET
SEPTEMBER 30, 1999
ASSETS
CURRENT ASSETS
Cash $12,064,734
Accounts Receivable 667,593
Note receivable-related parties (including
interest receivable of $90,922) 1,145,922
Other Current Assets 117,870
-----------
TOTAL CURRENT ASSETS 13,996,119
PROPERTY AND EQUIPMENT - NET 1,162,797
NOTES RECEIVABLE - RELATED PARTIES
(including interest receivable of $9,955) 284,955
OTHER ASSETS 81,574
-----------
TOTAL ASSETS $15,525,445
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable $ 23,165
Accrued Liabilities 922,751
Current lease - current portion 16,478
-----------
TOTAL CURRENT LIABILITES 962,394
CAPITAL LEASE, less current portion 49,150
-----------
TOTAL LIABILITIES 1,011,544
-----------
STOCKHOLDERS' EQUITY
Common stock, $.015 par value, authorized 50,000,000 shares
authorized, issued and outstanding 10,333,148 154,997
Additional Paid in Capital 23,609,620
Stock Subscription Receivable (87,500)
Treasury Stock - 155,263 shares, at cost (776,315)
Accumulated Deficit (8,386,901)
-----------
TOTAL STOCKHOLDERS' EQUITY 14,513,901
-----------
$ 15,525,445
===========
See notes to financial statements
F-3
<PAGE>
MUSE TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
Years Ended September 30,
----------------------------
1999 1998
------------ ------------
REVENUES $ 1,723,267 $ 6,206,135
------------ ------------
EXPENSES:
Selling, general and administrative expenses 4,180,717 2,702,359
Research and development 2,302,885 956,946
Non-cash imputed compensation expense -- 948,355
Depreciation 487,360 475,928
------------ ------------
TOTAL EXPENSES 6,970,962 5,083,588
------------ ------------
NET OPERATING INCOME (LOSS) (5,247,695) 1,122,547
------------ ------------
OTHER INCOME (EXPENSE):
Costs in excess of value of repurchased stock (563,636) --
Interest income 729,061 --
Interest expense (30,678) (798,653)
------------ ------------
TOTAL OTHER INCOME (EXPENSE): 134,747 (798,653)
------------ ------------
NET INCOME (LOSS) $ (5,112,948) $ 323,894
============ ============
NET INCOME (LOSS) PER SHARE:
Basic $ (0.51) $ 0.04
============ ============
Diluted $ (0.51) $ 0.04
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES:
Basic 10,048,842 7,672,010
============ ============
Diluted 10,048,842 8,654,838
============ ============
See notes to financial statements.
F-4
<PAGE>
MUSE TECHNOLOGIES, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional Stock
Paid-in Subscription Treasury
Shares Amount Capital Receivable Stock
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE - October 1, 1997 7,278,279 $ 109,174 $ 3,518,471 $ (87,500) $ --
Issuance of common stock pursuant to
consulting agreements 4,058 61 30,780 -- --
Sale of common stock pursuant to
private placements 1,412,566 21,188 9,637,285 -- --
Conversion of notes into
common stock 68,880 1,033 308,927 -- --
Exercise of stock options 110 2 273 -- --
Non-cash imputed compensation
expense -- -- 948,355 -- --
Net income -- -- -- -- --
------------ ------------ ------------ ------------ ------------
BALANCE - September 30, 1998 8,763,893 131,458 14,444,091 (87,500) --
Issuance of common stock pursuant to
initial public offering 1,380,000 20,700 9,083,393 -- --
Purchase of common shares for treasury -- -- -- -- (776,315)
Issuance of common stock pursuant to
exercise of cash-less options 155,265 2,329 (2,329) -- --
Exercise of stock options 33,990 510 84,465 -- --
Net loss -- -- -- -- --
------------ ------------ ------------ ------------ ------------
BALANCE - September 30, 1999 10,333,148 $ 154,997 $ 23,609,620 $ (87,500) $ (776,315)
============ ============ ============ ============ ============
<CAPTION>
Total
Accumulated Stockholders'
Deficit Equity
------------ ------------
<C> <C>
$ (3,597,847) $ (57,702)
-- 30,841
-- 9,658,473
-- 309,960
-- 275
-- 948,355
323,894 323,894
------------ ------------
(3,273,953) 11,214,096
-- 9,104,093
-- (776,315)
-- --
-- 84,975
(5,112,948) (5,112,948)
------------ ------------
$ (8,386,901) $ 14,513,901
============ ============
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
MUSE TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
Years Ended September 30
--------------------------------------
1999 1998
------------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (5,112,948) $ 323,894
Adjustment to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation 487,360 475,928
Amortization of discount 25,521 585,886
Amortization of finance cost - 138,421
Non-cash imputed compensation expense - 948,355
Repurchase of common shares for treasury (776,315) -
Issuance of common shares for consulting expense - 30,841
Issuance of common shares for interest expense - 9,960
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 3,696,407 (4,148,551)
Decrease in prepaid assets 22,877 377
Increase in interest receivable (100,877) -
Increase in other current assets (117,870) -
Increase in other assets (52,332) (6,590)
Decrease in accounts payable (111,934) (76,893)
Increase in accrued liabilities 71,093 647,971
------------------- -----------------
CASH USED IN OPERATING ACTIVITIES (1,969,018) (1,070,401)
------------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (1,143,672) (147,521)
------------------- -----------------
CASH USED IN INVESTING ACTIVITIES (1,143,672) (147,521)
------------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of stock 9,104,093 5,411,561
Receipt of stock subscription receivable 4,000,000 -
Net proceeds from exercise of stock options 84,975 275
Net proceeds from issuance of notes payable - 677,241
Deferred offering cost 363,860 (363,860)
Issuance of notes receivable (1,275,000) -
Principal payments of capital lease obligations (14,907) (17,828)
Borrowings - line of credit - (50,000)
Repayments of notes payable (625,000) (1,187,500)
------------------- -----------------
CASH PROVIDED BY FINANCING ACTIVITIES 11,638,021 4,469,889
------------------- -----------------
NET INCREASE IN CASH 8,525,331 3,251,967
CASH - Beginning of year 3,539,403 287,436
------------------- -----------------s
CASH - End of year $ 12,064,734 $ 3,539,403
=================== =================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 30,678 $ 59,778
=================== =================
Non-cash financing and investing activities:
(1) Issuance of common shares pursuant 2,329 -
to exercise of cash-less options
(2) Convertible notes converted to common stock - 300,000
(3) Reclass of stock subscription receivable
to note receivable - 87,500
(4) Common stock issued in conjunction with note issuance - 306,250
(5) Purchase of equipment through leases payable 68,321 4,398
</TABLE>
F-6
<PAGE>
MUSE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1999 AND 1998
1. THE COMPANY
MUSE Technologies, Inc. (the "Company") was incorporated in Delaware on
October 24, 1995 to develop and market software products, designed to
enhance the user's ability to understand and analyze data and
information and to provide solutions to complex data integration and
data management problems. The multisensory capabilities of the software
("MuSE"), enables the user to present information in real time using
visual, auditory, tactical and other analytical tools. The Company has
also developed a proprietary software product, "Continuum", designed
for multiuser, real-time collaboration within the MuSE environment.
In December, 1995 the Company acquired substantially all assets and
liabilities from Viga Technologies Corporation ("Viga"), an affiliate
with common ownership. As part of the acquisition Viga agreed to
transfer the License Agreement to the Company.
The Company commenced operations in December 1995. Prior to entering
into an exclusive marketing agreement in June 1998 (see note 14), the
majority of the Company's revenue had been generated from products
utilizing the MuSE technology and applied research and development
services for customers in the Federal, corporate and nonprofit markets
of the United States. Sales to the United States government represented
$830,242 or 48%, and $906,055 or 15%, of revenue in 1999 and 1998,
respectively. Accounts receivable from the United States government
were $346,086 and $361,000 at September 30, 1999 and 1998,
respectively. The Company does not require collateral on its accounts
receivable.
In November 1998, the Company completed an initial public offering of
its securities. A total of 1,200,000 units were sold for $8.00 per unit
for a total of $9,600,000. Each unit consists of one share of the
Company's common stock and warrants to purchase common stock equal to
one-half share of common stock for each warrant. Warrants can be used
to purchase only whole shares of common stock. The warrants are
exercisable upon issuance until November 13, 2003 at $9.60 per share of
common stock. Net proceeds after underwriting commissions and other
related fees were approximately $7,900,000.
In December 1998, an additional 180,000 shares were subsequently issued
pursuant to the underwriter's over allotment option. Net proceeds after
underwriting commissions and other related fees were approximately
$1,300,000.
In July 1999 the Company created a whole owned subsidiary, MUSE Federal
Systems Group Systems Group, Inc. (the "Subsidiary") to market the
Company's software to various agencies of the federal government.
Activity for the Subsidiary has not commenced as of September 30, 1999.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. 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
amount of assets and liabilities, and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
b. Revenue Recognition - The Company licenses software to end users under
license agreements. The Company recognizes revenues in accordance with
Statement of Position 97-2 ("SOP 97-2"), issued by the American Institute
of Certified Accountants. SOP 97-2, is effective on a prospective basis
for fiscal years beginning after December 15, 1997. The adoption of the
new SOP is not expected to have a material effect on the Company's
financial statements.
c. Research and Development - Research and development expenditures are
charged to operations as incurred. Statement of Financial Accounting
Standards No. 86, "Accounting for the Costs of
F-7
<PAGE>
Computer Software to Be Sold, Leased or Otherwise Marketed," requires
capitalization of certain software development costs subsequent to the
establishment of technological feasibility. Based on the Company's product
development process, technological feasibility is established upon
completion of a working model. Costs incurred by the Company between
completion of the working model and the point at which the product is
ready for general release have been immaterial.
d. Property and Equipment - Property and equipment are stated at cost.
Depreciation is calculated on the straight-line method over three years,
which is the estimated useful life of the assets.
e. Net Income (Loss) Per Share - Basic earnings (loss) per share is
computed using the weighted average number of shares of outstanding common
stock. Diluted per share amounts also include the effect of dilutive
common stock equivalents from the assumed exercise of stock options.
f. Income Taxes - Income taxes are accounted for under Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes,"
which is an asset and liability approach that requires the recognition of
deferred tax assets and liabilities for the expected future tax
consequences of events that have been recognized in the Company's
financial statements or tax returns.
g. Stock Based Compensation - The Company accounts for its stock option
plans under APB Opinion No. 25, "Accounting for Stock Issued to
Employees," ("APB 25"), under which no compensation cost is recognized. In
fiscal 1997, the Company adopted SAS No. 123, "Accounting for Stock-Based
Compensation," ("SAS 123") for disclosure purposes, and has adopted the
proforma disclosure requirements of SAS 123.
h. Fair Value of Financial Instruments - The Company's financial
instruments under Statement of Financial Accounting Standards No. 107
("SFAS 107") "Disclosures About Fair Value of Financial Instruments,"
includes cash, accounts receivable, notes receivable, and accounts
payable. The Company believes that the carrying amounts of these accounts
are a reasonable estimate of their fair value because of the short-term
nature of such instruments.
i. Impairment of Long-Lived Assets - The Company reviews long-lived assets
and certain identifiable assets on a quarterly basis for impairment
whenever circumstances and situations change such that there is an
indication that the carrying amounts may not be recovered. At September
30, 1999, the Company does not believe that any impairment has occurred.
3. PROPERTY AND EQUIPMENT
Property and equipment at September 30, 1999 is as follows:
<TABLE>
<CAPTION>
<S> <C>
Computer equipment $ 2,603,453
Furniture and fixtures 196,102
-----------------
2,799,555
Less: accumulated depreciation 1,636,758
-----------------
$ 1,162,797
=================
</TABLE>
4. ISSUANCES OF STOCK AND DEBT
(i) During June 1997, the Company issued $1,237,500 principal
amount of, 8% promissory notes and shares of the Company's
common stock for which it received net proceeds of $1,113,750.
The principal balance and accrued interest were due and
payable upon the earlier of the one year anniversary of the
date of the note or seven days after the consummation of an
initial public offering. During the year ended September 30,
1998, $937,500 of such notes were repaid and $300,000 plus
accrued interest of $9,960 was converted into common stock.
(ii) In September 1997, the Company sold to an officer 11,513
shares of Common Stock at a purchase price of $7.60 per share
for an aggregate of $87,500. Payment of the purchase price was
made by issuance of a non-recourse promissory note secured by
a pledge of the shares
F-8
<PAGE>
purchased. The officer had agreed to pay such loan within six
months of the effective date of the Company's initial public
offering. Subsequent to September 30, 1999 the promissory note
was paid in full.
(iii) In April and May 1998, the Company received net proceeds of
$1,411,500 from the sale in a private placement of 35.5 units
at $45,000 per unit. Each unit consisted of 10,000 shares of
the Company's common stock and a series A common stock
purchase warrant to purchase 10,000 shares of common stock.
(iv) During the year ended September 30, 1998, the Company issued
$875,000 of promissory notes at 8% interest, attached with
shares of the Company's common stock for which it received net
proceeds of $688,131. The principal balance and accrued
interest were payable upon the earlier of the one year
anniversary of the date of the note or seven days after the
consummation of an initial public offering. For valuation
purposes, $306,250 debt discount was allocated to the common
stock, less $48,448 attributed to offering costs. A total of
57,566 shares of the Company's common stock was issued. The
Company repaid $625,000 and $250,000 of such notes during the
years ended September 30, 1999 and 1998, respectively.
(v) On July 15, 1998, the Company sold 1,000,000 shares of common
stock and common stock purchase warrants for the purchase up
to 1,000,000 shares of common stock at $9.60 per share. Such
warrants are exercisable upon issuance through June 30, 2003.
The common stock and the warrants were sold as a unit for
$8,000,000. The Company received $4,000,000 as of September
30, 1998 with respect to such sale. The remaining $4,000,000
was received in November 1998.
The Company paid its Vice President of Sales and Marketing and
two other executives a commission of $520,000 in connection
with this investment. The warrants are redeemable by the
Company at any time after December 31, 1998 at $.01 per
warrant upon 30 days prior notice, provided that the following
criteria are satisfied: (a) with respect to redemption of up
to 50% of the warrants, the average closing price of the
Common Stock as listed on the Nasdaq Stock Market (or other
securities exchange) is at least $14.40 for the twenty day
period ending at least two days before the redemption date, or
(b) with respect to redemption of up to 100% of the warrants,
the average closing price of the Common Stock as listed on the
Nasdaq Stock Market (or other securities exchange) is at least
$19.20 for the twenty day period at least two days before the
redemption date, and the Company is engaged in a subsequent
underwritten public offering of its securities in which the
managing underwriter thereof requires redemption of such
warrants.
(vi) In November 1998, the Company completed an initial public
offering of its securities. A total of 1,200,000 units were
sold for $8.00 per unit for a total of $9,600,000. Each unit
consists of one share of the Company's common stock and
warrants to purchase common stock equal to one-half share of
common stock for each warrant. Warrants can be used to
purchase only whole shares of common stock. The warrants are
exercisable upon issuance until November 13, 2003 at $9.60 per
share of common stock. Net proceeds after underwriting
commissions and other related fees were approximately
$8,360,000.
In December 1998 an additional 180,000 shares were
subsequently issued pursuant to the underwriters over
allotment option. Net proceeds after underwriting commissions
and other related fees was approximately $1,253,000.
(vii) In March 1999, the Company's Chief Technical Officer resigned
as an employee of the Company and entered into a consulting
arrangement with the Company. Pursuant to the terms of an
Employment Termination Agreement, the Company paid this
officer an aggregate of $1,340,000 in exchange for, among
other things: a non-compete agreement, repurchase of 155,263
shares of common stock, and the right of first refusal on
future sales of common stock. The Company charged $563,685 of
the consideration paid as costs in excess of the value of
repurchased stock on the Statements of Operations. The balance
of the payment is accounted for as the repurchase
F-9
<PAGE>
of treasury stock for $776,315, representing a market value of
$5.00 per share. In addition, this officer exercised on a
cashless basis, options to purchase an aggregate of 310,526
shares of common stock at an exercise price of $2.50 per
share.
(viii) In the year ended September 30, 1999 the Company issued 33,990
shares of common stock, pursuant to the exercise of stock
options at an exercise price of $2.50 per share.
5. STOCK OPTIONS AND WARRANTS
The Company currently has two stock option plans with essentially
identical terms and conditions. Under the 1995 Stock Option Plan, the
Company may grant non-qualified stock options to purchase up to
3,586,513 shares of common stock. Under the 1996 Stock Option Plan, the
Company may grant non-qualified or incentive stock options to purchase
up to 1,644,737 shares of common stock. Options may be granted to
employees, officers, directors, consultants and independent
contractors. Under the Plans, options may be issued for periods up to
ten years and become exercisable in varying amounts based on a vesting
schedule. Generally, options are granted at prices equal to market
value on the date of the grant.
For disclosure purposes the fair value of each stock option grant is
estimated on the date of grant using the Black-Scholes option-pricing
model with the following weighted average assumptions used for stock
options granted during the years ended September 30, 1999 and 1998: (i)
annual dividends of $0.00,(ii) expected volatility of 68% and 50% for
the years ended September 30, 1999 and 1998, respectively, (iii)
risk-free interest rate of 5.7%, and (iv) expected option lives of five
and six years for the years ended September 30, 1999 and 1998,
respectively. The weighted average fair value of the stock options
granted for the years ended September 30, 1999 and 1998 was $5.61 and
$2.79, respectively.
See Note 4 with respect to the issuance of warrants by the Company.
The following table summarizes the changes in options and warrants
outstanding, and the related exercise price for shares of the Company's
common stock:
<TABLE>
<CAPTION>
STOCK OPTIONS WARRANTS
--------------------------------------- ---------------------------------------
EXERCISE EXERCISE
SHARES PRICE (1) EXERCISABLE SHARES PRICE EXERCISABLE
----------- ------------ ------------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at October 1,
1997..................... 1,066,446 $2.50-7.60 307,610 445,362 $ 7.60 445,362
=============
Granted.................. 689,804 2.50 -- 423,881 4.50 --
Granted.................. 727,500 7.50 -- 1,000,000 9.60 --
Canceled................. (24,671) 2.50 -- -- -- --
Exercised................ (329) 2.50 -- -- -- --
----------- ------------ ------------- ----------- ------------ -------------
Outstanding at September
30, 1998................. 2,458,750 2.50-7.60 1,426,035 1,869,243 4.50-9.60 1,869,243
=============
Granted.................. 545,850 3.50-9.89 -- -- -- --
Canceled................. (171,711) 2.50 -- -- -- --
Canceled................. (102,000) 7.50 -- -- -- --
Exercised................ (189,253) 2.50 -- -- -- --
----------- ------------ ------------- ----------- ------------ -------------
Outstanding at September
30, 1998................. 2,541,636 $2.50-7.60 1,372,417 1,869,243 $4.50-9.60 1,869,243
=========== ============ ============= =========== ============ =============
</TABLE>
(1) As a result of the March 5, 1998 1-for-3.04 reverse stock split, the
exercise price of the options under the Company's 1995 and 1996 stock
option plans was $7.60. In April 1998, the exercise price of the
options was reduced to $2.50 per share. The above table reflects such
repricing. The Company incurred a non-cash compensation expense of
$948,355 related to such repricing.
F-10
<PAGE>
Had compensation cost for the Company's two option plans been determined
in accordance with SFAS 123, the Company's net income (loss) and income
(loss) per share would have been decreased (increased) to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
----------------------------
1999 1998
-------------- ------------
<S> <C> <C> <C>
Net income (loss):........... As reported $(5,112,948) $ 323,894
Pro forma $(7,047,379) $(127,077)
Net income (loss) per share
Basic As reported $ (0.51) $ 0.04
Pro forma $ (0.70) $ (0.02)
Diluted As reported $ (0.51) $ 0.04
Pro forma $ (0.70) $ (0.01)
</TABLE>
6. EMPLOYMENT AGREEMENTS
Effective June 1, 1998 the Company has entered into three year
employment agreements with various officers of the Company as follows:
- The President of the Company receives an annual base salary of
$215,000 and a bonus of up to $134,000 upon the Company
achieving certain performance objectives. The President also
received options to purchase Common Stock of the Company at an
exercise price of $7.50 per share, which vests as follows:
100,000 shares on June 1, 1999, 125,000 shares on June 1, 2000
and 150,000 shares on June 1, 2001. The President, as part of
the agreement, received on December 2, 1998 a five year loan
in the amount of $150,000 bearing interest at 5% per year, in
connection with his relocation to New Mexico. The note is
secured by options to acquire 21,249 shares of common stock.
- The Vice-President of Sales and Marketing receives an annual
base salary of $150,000. This officer will receive commissions
under the Company's Sales Compensation Plan. The officer also
received options to purchase Common Stock of the Company at an
exercise price of $7.50 per share, which vests as follows:
30,000 shares on June 1, 1999, 37,500 shares on June 1, 2000
and 50,000 shares on June 1, 2001.
- The Chief Financial Officer receives an annual base salary of
$150,000 and a bonus of up to $65,000 upon the Company
achieving certain performance objectives. This officer also
received options to purchase Common Stock of the Company at an
exercise price of $7.50 per share, which vests as follows:
30,000 shares on June 1, 1999, 37,500 shares on June 1, 2000
and 50,000 shares on June 1, 2001. Such officer, as part of
the agreement, received on January 20, 1999 a five year loan
in the amount of $75,000 bearing interest at 5% per year, in
connection with his relocation to New Mexico. The note is
secured by options to acquire 10,715 shares of common stock.
Under the above agreements, if such officer is terminated by the
Company other than for cause (as defined in each employment agreement),
or if the officer dies or becomes permanently disabled, all stock
options held by such officer shall immediately vest upon such
termination and such officer shall receive severance payments in an
amount equal to one year's base salary. Each of the employment
agreements also contain provisions relating to severance payments equal
to the salary and bonus for the remainder of the employment term plus
an additional one year's base salary in the event of a change in
control (as defined in the employment agreement). In addition to the
above agreements, effective August 1, 1998 the Company entered into a
three year employment agreement with an employee to serve as the
Company's Director of Product Development at an annual salary of
$90,000. During the year ended September 30, 1999, this employee's
title changed to Managing Director of Strategic Development, with an
amended annual salary of $117,000.
- The employment agreement with the Chief Technical Officer of
the Company was terminated in March 1999 (see Note 4-(viii)).
As of the date of the termination agreement, the officer
entered
F-11
<PAGE>
into a consulting agreement with the Company until December
31, 1999 for: (i) $3,000 per month from the date of the
termination agreement until June 30, 1999 and (ii) from July
1, 1999 until December 31, 1999 at an annualized rate of
$175,000, based upon days actually employed.
7. RETIREMENT PLAN
In October 1996, the Company established a defined contribution plan
(SARSEP plan) covering substantially all employees. Under the terms of
the plan, eligible employees may contribute up to fifteen percent of
their compensation, subject to statutory limitations. The Company
charged to operations $47,995 and $27,759, representing 3% and 2%
percent of eligible employees compensation, for their contribution to
the plan for the years ended September 30, 1999 and 1998 respectively.
8. LICENSE AGREEMENT
The Company's license agreement, for the "MuSE" technology grants the
Company exclusive rights to develop and commercialize MuSE until
October 2005 and thereafter provides a non-exclusive right through
2015. At the end of such ten year period of exclusivity, the Company
may request the licensor to extend exclusivity through 2015, which
determination shall be made in the licensor's sole discretion. The
licensor has the right to terminate the license or make the license
non-exclusive in the event the Company fails to pay the required
royalties under the license agreement, with an annual minimum royalty
of $20,000 through the year ended December 31, 2006. The Company is
also obligated to pay an annual license fee of $10,000 through the year
ending December 31, 1999 and a one-time payment of $20,000 prior to
July 1999.
9. NOTES RECEIVABLE - RELATED PARTIES
Notes receivable consists of the following as of September 30, 1999:
<TABLE>
<CAPTION>
<S> <C> <C>
a. Employee Shareholders - Two notes each for $25,000 bearing
interest at 5% per annum, with principal and interest due upon
maturity at December 2, 2001. The notes are each secured by
10,000 shares of the Company's common stock. $ 50,000
b. Shareholder:
- In October 1998 and November 1998, respectively, the Company
issued two notes in the principal amounts of $250,000 and
$750,000. The maker of the note is the entity that
purchased 1,000,000 shares of the Company's common stock in
July 1998. The notes, which are payable upon demand, are
interest free for the first sixty days from issuance and
after such period bear interest at 12% per year. As of
September 30, 1999, demand for payment has not been made
by the Company. 1,000,000
- In 1997 Viga reduced by $55,000 the purchase price that the
Company had paid to acquire the assets and rights to the
license agreement for the MuSE Technology. Viga issued a
note for the $55,000, bearing interest at 6.50% due in
November 2001. Subsequent to September 30, 1999, this note
plus accrued interest has been satisfied. Approximately
$2,600 of accrued interest due the Company was forgiven,
upon repayment. 55,000
c. Officers - In conjunction with employment agreements (see Note 6),
the Company's President and Chief Financial Officer were issued
notes in the principal amounts of $150,000 and $75,000,
respectively, bearing interest at 5% per year. The note principal
and accrued interest are due upon maturity on December 2, 2003.
The notes are secured by options to acquire 21,249 and 10,715
shares, respectively, of the Company's common stock. 255,000
---------
$1,330,000
===========
</TABLE>
F-12
<PAGE>
10. INCOME TAXES
A reconciliation between the federal statutory tax rate and the
effective income tax rate for the years ended September 30, 1999 and
1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Statutory Federal income tax rate (34%) 34%
Benefit of operating loss carry forwards -- (34%)
Losses for which no benefit is provided 34%
---------- ----------
Effective income tax rate 0% 0%
========== ==========
</TABLE>
As of September 30, 1999 the Company had net operating loss carry
forwards of approximately $6,700,000 for federal tax purposes,
$1,800,000 expiring in 2012 and $4,900,000 expiring in 2019. The
resulting tax deferred tax asset of approximately $2,400,000 has been
offset by a corresponding valuation allowance.
11. LEASES
The Company leases its laboratory and office facilities under
non-cancelable lease arrangements. Rent expense for 1999 and 1998 was
$114,579 and $104,712 respectively.
In June 1999, the Company entered into a sublease agreement with a
stockholder to lease office space in Houston, Texas at a monthly rental
of $3,000, expiring in June 2000.
Future minimum lease payments under noncancellable operating leases
include: a lease for the facility of MUSE Federal Systems Group Systems
whose operations have not commenced as of September 30, 1999 and the
existing and expanded lease on the Albuquerque facility. Expansion at
Albuquerque occurred subsequent to September 30, 1999.
2000 $221,096
2001 70,316
--------
$291,412
========
12. GOVERNMENT CONTRACTS
The Company derives a portion of its revenue from contracts with the
Federal government. Recognition of revenue is generally conditioned
upon compliance with terms and conditions of the contracts and
applicable Federal regulations. Substantially all contracts are subject
to audit by agencies of the Federal government or their designees.
Disallowances by Federal officials as a result of these audits may
become liabilities of the Company. The Company has not recorded any
liability for disallowances which may be determined in the future.
13. CONCENTRATION OF CREDIT RISK
During the year ended September 30, 1999 the Company maintained cash at
financial institutions in excess of the Federal Depository Insurance
Corp. ("FDIC") limit of $100,000. At September 30, 1999 cash deposits
exceed the FDIC limit by approximately $11,964,000.
14. MARKETING AGREEMENTS
- In June 1998, the Company entered into an agreement with an
entity which grants them the rights to market, sell and
distribute the Company's products. This entity is the same
that purchased 1,000,000 shares of the Company's common stock
in July 1998.
Under the terms of the agreement, the Company received a
$5,000,000 non-refundable fee granting the entity exclusive
worldwide selling rights of the Company's products in the oil
and gas industry for three years.
F-13
<PAGE>
The agreement is for an initial term of three years with a
provision for three successive three year renewal periods. The
agreement provides for the Company to receive a minimum of
$12,000,000 from the entity for the sale of MuSE software over
the initial term of the agreement. As of September 30, 1999,
the Company is in the process of modifying the terms of the
agreement, due to the entity not having attained its sales
commitment under the agreement.
- In December 1998, the Company entered into a non-exclusive
agreement with an entity which grants them the rights to
market, sell and distribute the Company's products, in
exchange for minimum annual sales commitments aggregating
$4,000,000 through 2001.
- In February 1999, the Company entered into two non-exclusive
agreements with two entities, that primarily service the
Federal government, that grants them the rights to market,
sell and distribute the Company's products, in exchange for
minimum annual sales commitments for each agreement
aggregating $3,000,000 through the three year term of the
agreements.
- In June 1999, the Company entered into an agreement with an
entity to provide software, system design, consulting and
technical services on a project by project basis. The
agreement is for three years, and provided exclusivity for
consulting or application designs, within the entity's
industry of specialization, provided that minimum annual
project commitments are satisfied.
15. SUBSEQUENT EVENTS
On November 16, 1999 the Company completed the acquisition of Virtual
Presence Limited ("VPL"), a private company incorporated in the United
Kingdom. VPL is a provider of interactive visualization solutions for
companies in the European defense, medical and manufacturing
industries. The Company acquired VPL for a total of $600,000 in cash
payable over a nine month period and 430,839 shares of the Company's
common stock valued at approximately $1,300,000, subject to certain
restrictions. Of such shares, 205,522 are subject to adjustment in the
event that the price of the common stock over the twenty trading days
prior to November 15, 2000 is less than $4.41 per share.
F-14
<PAGE>
MUSE TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEET
JUNE 30, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
CURRENT ASSETS
Cash $ 2,438,542
Accounts Receivable 3,926,608
Inventory 180,420
Prepaids 429,364
------------
TOTAL CURRENT ASSETS 6,974,934
------------
PROPERTY AND EQUIPMENT - NET 1,872,718
------------
NOTES RECEIVABLE (including $75,000 due from an officer) 2,100,699
------------
OTHER ASSETS
Goodwill-Net 3,079,986
Capitalized Development Costs-Net 2,259,630
Other Assets 367,044
------------
TOTAL OTHER ASSETS 5,706,660
------------
TOTAL ASSETS $ 16,655,011
============
LIABILITIES & STOCKHOLDERS EQUITY
CURRENT LIABILITIES
Accounts Payable $ 1,477,393
Accrued Liabilities 1,893,729
Note Payable 406,326
Current Portion Lease Payable 40,325
------------
TOTAL CURRENT LIABILITIES 3,817,773
LONG-TERM LIABILITIES
Lease Payable-less current portion 102,852
------------
TOTAL LIABILITIES 3,920,625
------------
STOCKHOLDERS EQUITY
Common stock, par value $.015, authorized 50,000,000 shares;
issued and outstanding 10,808,882 162,133
Additional Paid in Capital 25,289,941
Accumulated Deficit (11,941,373)
Less: Treasury Stock at Cost (776,315)
------------
TOTAL STOCKHOLDERS EQUITY 12,734,386
------------
TOTAL LIABILITIES & EQUITY $ 16,655,011
============
</TABLE>
See notes to consolidated financial statements.
F-15
<PAGE>
MUSE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30,
-----------------------------
2000 1999
------------ -------------
<S> <C> <C>
REVENUE $ 6,542,545 $ 1,113,206
------------ -------------
EXPENSES:
Cost of products sold 2,526,236 --
Selling, general and administrative
expenses 4,246,968 3,168,169
Research and Development 1,585,874 949,547
Officer Severance Costs 994,062 --
Amortization 292,919 --
Depreciation 558,372 395,669
------------ -------------
TOTAL OPERATING EXPENSES 10,204,431 4,513,385
------------ -------------
NET OPERATING LOSS (3,661,886) (3,400,179)
------------ -------------
OTHER INCOME (EXPENSE)
Loss on Foreign Currency Transactions (146,757) --
Cost in excess of value of repurchased stock -- (563,685)
Merger/acquisition Costs (403,677) --
Interest Expense (25,315) 29,903
Interest Income 705,310 553,515
------------ -------------
TOTAL OTHER INCOME (EXPENSE) 129,561 (40,073)
------------ -------------
NET LOSS $ (3,352,325) $ (3,440,252)
============ =============
NET LOSS PER SHARE
Basic and assuming dilution $ (0.33) ($0.35)
============ =============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING: 10,717,311 9,892,069
============ =============
</TABLE>
See notes to consolidated financial statements.
F-16
<PAGE>
MUSE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED JUNE 30
------------------------------------------------
2000 1999
----------------------- ---------------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net Loss $ (3,532,325) $ (3,440,252)
Adjustments to reconcile net loss to net
cash (used in) provided by operating activities:
Depreciation 558,372 395,669
Amortization 289,852 25,521
Warrants issued for services 113,000 -
Cost in excess of repurchased stock - 563,685
Changes in Assets and Liabilities
(Increase)/Decrease in Accounts Receivable (3,259,015) 3,860,872
Increase in Inventory (180,420) -
Increase in Prepaid Assets (311,494) (96,543)
Increase in Other Assets (2,545,100) (53,095)
Increase (Decrease) in Accounts Payable 1,454,228 (56,999)
Increase (Decrease) in Accrued Liabilities 970,978 (608,100)
----------------------- ---------------------
NET CASH (USED IN) PROVIDED BY
OPERATING ACTIVITIES (6,438,857) 590,758
----------------------- ---------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of Property and Equipment (1,190,744) (930,638)
Acquisition of Subsidiaries (1,820,595) -
----------------------- ---------------------
CASH USED IN INVESTING ACTIVITIES (3,011,339) (930,638)
----------------------- ---------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from sale of stock - 9,553,167
(Increase)/Decrease In Notes Receivable (819,822) -
Collection of Stock Subscription Receivable 87,500 4,000,000
Loans to officers and stockholders 150,000 (1,275,000)
Acquisition of Treasury Stock - (740,000)
Principal payments on capital leases - 48,711
Repayments of notes payable affiliates - (625,000)
Borrowings-line of credit 406,326 -
----------------------- ---------------------
NET CASH (USED IN) PROVIDED BY
FINANCING ACTIVITIES (175,996) 10,961,878
----------------------- ---------------------
NET (DECREASE) INCREASE IN CASH (9,626,192) 10,621,998
CASH - BEGINNING OF PERIOD 12,064,734 3,539,403
----------------------- ---------------------
CASH - END OF PERIOD $ 2,438,542 $ 14,161,401
======================= =====================
</TABLE>
See notes to consolidated financial statements.
F-17
<PAGE>
MUSE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
NINE MONTHS ENDED JUNE 30, 2000 AND 1999
1. THE COMPANY
MUSE Technologies, Inc. (the "Company") was incorporated in Delaware on
October 24, 1995 to develop and market software products designed to enhance the
user's ability to understand and analyze data and information and to provide
solutions to complex data integration and data management problems. The
multisensory capabilities of the software ("MUSE"), enables the user to present
information in real time using visual, auditory, tactical and other analytical
tools. MUSE is based on software licensed to the Company by Sandia Corporation
("Sandia") pursuant to a license agreement dated October 9, 1995 (the "License
Agreement"). The Company has also developed a proprietary software product,
"Continuum", designed for multiuser, real-time collaboration within the MUSE
environment. As described in Note 4 below, on November 16, 1999, the Company
purchased all of the outstanding stock of Virtual Presence, Ltd., a U.K.
company, and on March 17, 2000, the Company purchased all of the outstanding
stock of Simulation Solutions, Ltd., also a U.K. company. On March 28, 2000, the
Company completed an asset purchase of the VRsource.com, an e-commerce website.
2. BASIS OF PRESENTATION
In the opinion of management, the Company's unaudited financial
statements contain all adjustments (consisting of only normal recurring
accruals) necessary to present fairly the financial position, and results of
operations for the periods presented. The results have been determined on the
basis of generally accepted accounting principles applied consistently with the
Form 10-KSB for the year ended September 30, 1999.
Certain information and footnote disclosures normally included in
financial statements presented in accordance with generally accepted accounting
principles have been condensed or omitted. The accompanying consolidated
financial statements should be read in conjunction with the financial statements
and notes thereto included in the Company's Form 10-KSB for the year ended
September 30, 1999 and included elsewhere in this proxy statement/prospectus.
3. NOTES RECEIVABLE
In December 1998 and January 1999, the Company loaned an aggregate of
$225,000 to two executive officers pursuant to their employment contracts in
connection with their relocation to New Mexico. As of June 30, 2000, $75,000
remained outstanding from one executive officer. Notes receivable also includes
two demand notes in the aggregate principal amount of $1,000,000 due from
Continuum Resources International, ASA, plus accrued interest thereon, and
$1,000,000 demand note bearing interest at 10% per annum loaned to Advanced
Visual Systems Inc. in May 2000.
4. ACQUISITIONS
On November 16, 1999, the Company completed its acquisition of Virtual
Presence, Ltd., a U.K. company, and all its subsidiaries for cash, notes and
issuance of stock.
On March 17, 2000, the Company acquired all of the stock of Simulation
Solutions, Ltd. ("Simulation Solutions"), an advanced software and consulting
firm specializing in manufacturing simulation for plant and equipment. The
Company acquired Simulation Solutions for a total of $117,333 in cash and 44,895
shares of the Company's common stock. Simulation Solutions will be incorporated
into the Company's existing European operations.
On March 28, 2000, the Company purchased certain assets from the
VRSource, Inc., a Colorado corporation, for $400,000 in cash and notes. The
assets include a website, the VRsource.com, a prominent e-commerce site for
advanced visualization and virtual reality hardware.
F-18
<PAGE>
The following table gives an aggregate summary of the acquisitions in
financial terms:
Purchase Price (including value of stock) $ 2,293,792
Acquisition Costs 182,240
Fair Value of Assets Acquired (1,516,280)
Fair Value of Liabilities Assumed 2,212,455
-----------
Goodwill $ 3,172,207
===========
The detailed components consist of the following:
Purchase Price
Cash $ 417,333
Notes 300,000
Common Stock (475,734 shares) 1,576,459
-----------
$ 2,293,792
===========
Fair Value of Assets Acquired
Accounts Receivable $ 175,186
Inventory 50,345
Property, Plant and Equipment 776,162
Intangible Assets 339,048
Other 184,539
-----------
$ 1,516,280
===========
Fair Value of Liabilities Assumed
Accounts Payable $ 974,660
Accrued Liabilities 879,745
Assumed Notes 358,050
-----------
$ 212,455
===========
The following table summarizes pro forma consolidated results of
operations (unaudited) of the Company, and the above acquisitions as though the
acquisitions had been consummated at October 1, 1998. The pro forma amounts give
effect to the appropriate adjustments for the fair value of assets acquired and
amortization of goodwill, depreciation and debt incurred and resulting interest
expense.
Nine Months Ended
-----------------------------
June 30, 2000 June 30, 1999
------------- -------------
Total Revenue $ 7,524,084 $ 2,267,305
Net (Loss) (3,351,465) (3,721,579)
Net (Loss) per share (0.31) (0.36)
Weighted Average Number of Shares 10,808,882 10,367,803
5. FINANCIAL ADVISORY AGREEMENT
In December 1999, the Company entered into a one year agreement with an
entity for financial advisory services. The Company paid $75,000 and granted
three year warrants to purchase 82,500 shares of common stock at an exercise
price of $3.90 per share. The Company recorded a charge to operations of
$113,000 in connection with the granting of such warrants.
F-19
<PAGE>
6. NOTES PAYABLE
On June 16, 2000, the Company secured a $1,000,000 line of credit with
the Bank of Albuquerque to provide interim working capital. The agreement is for
a one year period and expires on June 16, 2001. The interest rate is 0.5% above
the Chase Manhattan Bank prime rate. The initial rate was 10% per annum and
interest is payable monthly. The line of credit balance at June 30, 2000 was
$400,000 and interest expense of $1,524 was accrued at June 30, 2000.
7. RESIGNATION OF OFFICER
On May 4, 2000, the Company's CEO and Chairman resigned from both
positions. As a result of certain severance arrangements and repurchase of stock
options to purchase 750,000 shares of the Company's common stock in connection
with his resignation, the Company incurred a charge to earnings of $994,000. As
part of the resignation arrangement, the Company will make certain of these
payments in varying amounts over a two-year period.
8. POTENTIAL ACQUISITION
On May 5, 2000, the Company announced that it had entered into a letter
of intent to acquire Advanced Visual Systems Inc. ("AVS"), a company in the
business of data visualization, through stock-for-stock exchange. Definitive
merger documents were executed on July 18, 2000. Pursuant to the merger
agreement, the Company will issue a maximum of 2.1 million shares of common
stock in exchange for all the common and preferred shares of AVS and up to 1.3
million shares of common stock subject to stock options in exchange for AVS
stock options. It is anticipated that the acquisition will be completed during
the Company's first quarter of fiscal 2001. The acquisition is subject to a
number of conditions and there can be no assurance that it will be successfully
consummated.
In addition, in May 2000, the Company loaned AVS $1,000,000 payable on
demand bearing interest at 10% per annum.
9. EQUITY LINE AGREEMENT
On June 1, 2000, the Company entered into an equity line agreement with
Kingsbridge Capital Limited. The equity line agreement entitles the Company to
sell and obligates Kingsbridge to purchase, from time to time, up to $18,000,000
of the Company's common stock. The Company's ability to require Kingsbridge to
purchase its common stock is subject to certain limitations based on the market
price and trading volume of the Company's common stock. The Company also issued
to Kingsbridge warrants to purchase 200,000 shares of the Company's common stock
in connection with the equity line agreement exercisable at $3.76 per share over
the four-year period commencing on November 28, 2000.
10. CONVERTIBLE NOTE
On September 7, 2000, the Company sold to Kingsbridge Capital Limited a
convertible note in the principal amount of $1,000,000 with interest at the
annual rate of 10%. The note is convertible into shares of the Company's common
stock after the first anniversary of the issuance of such note at the per share
rate of the lower of $2.375 or 88% of the average closing bid price for the five
trading days prior to conversion. The Company also issued to Kingsbridge
warrants to purchase 75,000 shares of the Company's common stock exercisable at
$2.6125 per share over the four-year period commencing on September 7, 2001.
F-20
<PAGE>
VIRTUAL PRESENCE LIMITED
REPORT AND ACCOUNTS
31ST MARCH 1999
PRIDIE BREWSTER
CHARTERED ACCOUNTANTS
CAROLYN HOUSE
29-31, GREVILLE STREET
LONDON EC1N 8RB
ENGLAND
F-21
<PAGE>
VIRTUAL PRESENCE LIMITED
DIRECTORS: J.E. Hough
D.E. Hendon
R.J. Stone
J.D. Gregory
R.H. Allardice (Appointed 13th July 1998)
M.J. Walker (Appointed 19th July 1999)
N.A. Eldred (Appointed 13th July 1998)
J. Cumberland (Appointed 8th June 1999)
SECRETARY: T.M.S. Jenkins
REGISTERED OFFICE Canvas House
AND PRINCIPAL PLACE Jubilee Yard
OF BUSINESS: Queen Elizabeth Street
London SE1
England.
AUDITORS: Pridie Brewster
Chartered Accountants
Carolyn House
29-31, Greville Street
London EC1N 8RB
England.
COMPANY NUMBER: 2632764
F-22
<PAGE>
VIRTUAL PRESENCE LIMITED
DIRECTORS' REPORT
The directors present their report and audited accounts for the year ended 31st
March 1999.
ACTIVITIES
The principal activity of the company during the year was the retailing of
computer software and hardware.
ACQUISITION
On 1st April 1998 the company acquired 76% of the issued share capital of Sim
Team SARL.
RESULTS
The results for the year are set out on page 3.
DIRECTORS' RESPONSIBILITIES
Company law requires the directors to prepare financial statements for each
financial year which give a true and fair view of the state of affairs of the
company and of the profit or loss of the company for that year. In preparing
those financial statements, the directors are required to:
select suitable accounting policies and then apply them consistently;
make judgements and estimates that are reasonable and prudent;
prepare the financial statements on the going concern basis unless it
is inappropriate to presume that the company will continue in business.
The directors are responsible for keeping proper accounting records which
disclose with reasonable accuracy at any time the financial position of the
company and enable them to ensure that the financial statements comply with the
Companies Act 1985. They are also responsible for safeguarding the assets of the
company and hence for taking reasonable steps for the prevention and detection
of fraud and other irregularities.
DIRECTORS
The directors who served during the year, and their interests in the ordinary
shares of the company, were as follows:-
31.3.99 31.3.98
------- -------
Ordinary(pound)1 Ordinary(pound)1
---------------- ----------------
J.D. Gregory - -
D.E. Hendon - -
J.E. Hough 95,000 95,000
R.J. Stone - -
R.H. Allardice - -
N.A. Eldred - -
AUDITORS
The auditors, Pridie Brewster, Chartered Accountants, have signified their
willingness to continue in office and a motion for their re-appointment will be
put before the annual general meeting.
BY ORDER OF THE BOARD
N.A. ELDRED
SECRETARY
F-23
<PAGE>
VIRTUAL PRESENCE LIMITED
REPORT OF INDEPENDENT AUDITORS
TO THE BOARD OF DIRECTORS
We have audited the accompanying balance sheet of Virtual Presence Limited as of
31st March 1999 and the related profit and loss account and statement of cash
flows for the year ended 31st March 1999, and the comparative figures for the
year ended 31st March 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with United Kingdom auditing standards
which do not differ in any significant respect from United States 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 audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of the Virtual
Presence Limited at 31st March 1999 and the results of its operation and its
cash flows for the year ended 31st March 1999, and the comparative figures for
the year ended 31st March 1998, in conformity with accounting principles
generally accepted in the United Kingdom.
Pridie Brewster Carolyn House
Chartered Accountants 29-31 Greville Street
Registered Auditor London EC1N 8RB
27th January 2000 England
F-24
<PAGE>
VIRTUAL PRESENCE LIMITED
PROFIT AND LOSS ACCOUNT
FOR THE YEARS ENDED 31ST MARCH 1999 AND 1998
<TABLE>
<CAPTION>
Notes 1999 1999 1998
----- ---- ---- ----
(pound) $ (pound)
<S> <C> <C> <C> <C>
TURNOVER 1 1,952,141 3,145,290 1,288,977
Cost of sales (1,370,325) (2,207,868) (839,919)
-------------- ------------- ------------
GROSS PROFIT 581,816 937,422 449,058
Administrative expenses (540,063) (870,150) (344,171)
-------------- ------------- ------------
OPERATING PROFIT 41,753 67,272 104,887
Permanent diminution in value of investment (157,246) (253,355) -
Write off of inter group debt (163,537) (263,491) -
-------------- ------------- ------------
(Loss)/profit on ordinary activities before interest (279,030) (449,574) 104,887
Interest receivable - - 72
Interest payable and similar charges (71,565) (115,306) (22,168)
-------------- ------------- ------------
(Loss)/profit on ordinary activities before tax (350,595) (564,880) 82,791
Tax on profit on ordinary activities - - (2,500)
-------------- ------------- ------------
(DEFICIT)/RETAINED PROFIT AT END OF YEAR (350,595) (564,880) 80,291
-------------- ------------- ------------
</TABLE>
There were no other recognized gains or losses in the year other than those
shown above.
F-25
<PAGE>
VIRTUAL PRESENCE LIMITED
BALANCE SHEET AS AT 31ST MARCH 1999 AND 1998
<TABLE>
<CAPTION>
ASSETS
Notes 1999 1999 1998
----- ---- ---- ----
(pound) $ (pound)
CURRENT ASSETS
<S> <C> <C> <C> <C>
Stocks 5 24,006 38,678 13,202
Debtors 6 401,958 647,635 356,440
Cash at bank and in hand 8,065 12,995 15,125
------------- ------------ ------------
434,029 699,308 384,767
FIXED ASSETS
Intangible assets 1,2 138,680 223,441 90,000
Tangible assets 1,3 423,276 681,982 216,049
Investments 4 41,677 67,150 157,246
------------- ------------ ------------
603,633 972,573 463,295
------------- ------------ ------------
Total Assets 1,037,662 1,671,881 848,062
============= ============ ============
LIABILITIES AND EQUITY
CREDITORS (amounts falling due within one year) 7 992,922 1,599,796 419,411
CREDITORS (amounts falling due after more
than one year) 8 41,617 67,053 74,933
CAPITAL AND RESERVES
Called up share capital 9 304,727 490,976 304,727
Share premium account 6,009 9,682 6,009
Profit and loss account (307,613) (495,626) 42,982
------------ ------------ ------------
Shareholder's funds 11 3,123 5,032 353,718
------------ ------------ ------------
1,037,662 1,671,881 848,062
============ ============ ============
</TABLE>
F-26
<PAGE>
VIRTUAL PRESENCE LIMITED
CASHFLOW STATEMENT
FOR THE YEARS ENDED 31ST MARCH 1999 AND 1998
<TABLE>
<CAPTION>
1999 1999 1998
Reconciliation of operating profit to net (pound) $ (pound)
cashflow from operating activities
<S> <C> <C> <C> <C> <C>
Operating profit 41,753 67,272 105,040
Depreciation of tangible assets 115,631 186,305 61,579
Amortisation of intangible assets 20,920 33,706 10,015
Profit on disposal of tangible assets (10,560) (17,014) (19,390)
Decrease in stock (10,804) (17,407) 3,341
Increase in debtors (45,518) (73,339) (164,397)
Increase In creditors 568,875 916,572 129,869
--------- --------- ---------
Net cashflow from operating activities 680,297 1,096,095 126,057
--------- --------- ---------
Net cash inflow from operating activities 680,297 1,096,095 126,057
Returns on investments and servicing of finance
Interest received - - 73
Interest paid (71,565) (115,306) (22,362)
--------- --------- ---------
Net cash outflow for returns on investments and
servicing of finance (71,565) (115,306) (22,289)
Taxation 2,500 4,028 -
Capital expenditure and financial investment
Payments to acquire intangible assets (69,600) (112,140) (50,436)
Payments to acquire tangible assets (72,251) (116,411) (150,234)
Payments to acquire investments (41,677) (67,150) (136,127)
Receipts from sales of tangible assets 25,599 41,245 66,510
--------- --------- ---------
Net cashflow for capital expenditure (157,929) (254,456) (270,287)
--------- -------- ---------
Net cashflow before management of liquid resources and
financing 453,303 730,361 (166,519)
Financing
Issue of share capital - - 116,002
Issue of loan capital - - 50,436
Issue of loan stock - - 10,087
Bank loan repayments - - (25,432)
Capital element of finance leases (10,799) (17,399) (11,648)
--------- --------- ---------
Net cashflow from financing (10,799) (17,399) 139,445
Decrease in cash in the year 442,504 712,962 (27,074)
</TABLE>
F-27
<PAGE>
VIRTUAL PRESENCE LIMITED
NOTES TO THE ACCOUNTS
FOR THE YEARS ENDED 31ST MARCH 1999 AND 1998
1. ACCOUNTING POLICIES
The principal accounting policies which are adopted in the preparation
of the company's accounts are as follows:-
Accounting Convention
The accompanying financial statements have been prepared in accordance
with United Kingdom generally accepted accounting principles which do
not differ in any significant aspect from United States generally
accepted accounting policies.
Turnover
Turnover consists of amounts receivable for work carried out during the
year, less credit notes on completed contracts, net of trade discounts
and value added tax.
No deferrals of maintenance contracts have been made in these accounts
since it is viewed by the directors that no future material expenditure
will be incurred.
Depreciation
Depreciation has been provided at the following rates, in order to
write off the assets over their estimated useful lives:-
Land and Buildings Leasehold - 50% straight line
Plant and Machinery - 25% straight line
Fixtures and Fittings - 15% straight line
- 15% - 20% Reducing Balance
Motor Vehicles - 25% straight line
Stocks
Stock has been valued at the lower of cost and net realisable value.
Deferred Taxation
Provision is made at the current corporation tax rate for deferred
taxation, calculated by the liability method, on all timing
differences, to the extent that it is probable that the tax will become
payable.
Leasing and Hire Purchase Commitments
Assets held under finance leases and hire purchase contracts are
capitalised in the balance sheet and are depreciated over their useful
lives. The interest element of the rental obligations is charged to the
profit and loss account over the year of the contract.
Foreign Currency
Foreign currency transactions were translated into sterling in the
original UK accounts at the exchange rate in operation on the date on
which the transaction occurred.
Development Expenditure
Development costs have been capitalised in accordance with SSAP 13.
F-28
<PAGE>
VIRTUAL PRESENCE LIMITED
NOTES TO THE ACCOUNTS
FOR THE YEARS ENDED 31ST MARCH 1999 AND 1998
1. ACCOUNTING POLICIES
Cashflow
The cashflow statement has been prepared in accordance with IAS 7.
2. INTANGIBLE ASSETS
Development
Costs
(pound)
COST
At beginning of year 100,000
Capitalised during year - additions 69,600
--------------
At end of year 169,600
--------------
AMORTISATION
At beginning of year 10,000
Amortisation for year 20,920
--------------
At end of year 30,920
==============
NET BOOK VALUE
At 31.3.99 138,680
==============
At 31.3.98 90,000
==============
3. TANGIBLE ASSETS
<TABLE>
<CAPTION>
Land and Other Tangible
Buildings Fixed assets Total
(pound) (pound) (pound)
COST
<S> <C> <C> <C>
At beginning of year 24,105 338,627 362,732
Transferred from group
Company 245,651 245,651
Additions 9,922 82,324 92,246
Disposals (16,022) (16,022)
----------------------------------------------------------
At end of year 34,027 650,580 684,607
==========================================================
DEPRECIATION
At beginning of year 7,202 139,481 146,683
Charge for year 7,202 108,429 115,631
Adjustment on disposal (983) (983)
----------------------------------------------------------
At end of year 14,404 246,927 261,331
==========================================================
NET BOOK VALUE
At 31.3.99 19,623 403,653 423,276
==========================================================
At 31.3.98 16,903 199,146 216,049
==========================================================
</TABLE>
F-29
<PAGE>
VIRTUAL PRESENCE LIMITED
NOTES TO THE ACCOUNTS
FOR THE YEARS ENDED 31ST MARCH 1999 AND 1998
3. TANGIBLE ASSETS (CONTINUED)
The net book value of fixed assets includes an amount of (pound)81,701
(1998 - (pound)71,826) in respect of assets held under hire purchase
contracts. The depreciation charge in respect of such assets amounted
to (pound)29,870 (1998 - (pound)47,796) for the year.
4. FIXED ASSETS INVESTMENT
<TABLE>
<CAPTION>
$ Shares in
subsidiary
undertakings
(pound)
COST
<S> <C>
At beginning of year 157,246
Additions 41,677
-------------
At end of year 198,923
=============
PROVISION FOR DIMINUTION IN VALUE
At beginning of year -
Charge for year 157,246
-------------
At end of year 157,246
=============
NET BOOK VALUE
At 31.3.99 41,677
=============
</TABLE>
5. STOCKS
<TABLE>
<CAPTION>
1999 1998
---- ----
(pound) (pound)
Finished goods 24,006 13,202
============ ============
6. DEBTORS
1999 1998
---- ----
(pound) (pound)
<S> <C> <C>
Trade debtors 332,910 296,445
Amount due from subsidiary undertaking 3,863 5,188
Other debtors 1,733 1,726
Prepayment and accrual income 63,452 53,081
------------ --------------
401,958 356,440
============ ============
F-30
<PAGE>
VIRTUAL PRESENCE LIMITED
NOTES TO THE ACCOUNTS
FOR THE YEARS ENDED 31ST MARCH 1999 AND 1998
7. CREDITORS (amounts falling due within one year)
1999 1998
---- ----
(pound) (pound)
Bank loans and overdrafts 29,383 41,879
Net obligations under finance lease and hire purchase agreements 13,687 9,055
Trade creditors 264,717 186,799
Taxation and social security 69,565 44,901
Payments received on account 122,896 54,936
Other creditors 492,674 81,841
------------ --------------
992,922 419,411
============ ============
8. CREDITORS (amounts falling due after more than one year) 1999 1998
---- ----
(pound) (pound)
Bank loans 10,881 38,861
Net obligations under finance leases and hire purchase consultants 30,736 26,072
Other Creditors - 10,000
------------ --------------
41,617 74,933
============ ============
</TABLE>
9. CALLED UP SHARE CAPITAL
Authorised Allotted and fully paid
------------- --------------
1999 1998 1999 1998
---- ---- ---- ----
Ordinary shares of(pound)1 each 95,000 95,000 95,000 95,000
Cumulative convertible participating
preferred ordinary shares
of(pound) 1 each 77,727 77,727 77,727 77,727
Preference shares of(pound)1 each 132,000 132,000 132,000 132,000
------- ------- ------- -------
304,727 304,727 304,727 304,727
======= ======= ======= =======
10. EMPLOYEES
There were no employees during the year apart from directors.
<TABLE>
<CAPTION>
1999 1998
---- ----
The costs were:
(pound) (pound)
<S> <C> <C>
Salaries 474,782 303,255
Social security costs 55,172 38,007
---------- ----------
529,954 341,262
========== ==========
F-31
<PAGE>
VIRTUAL PRESENCE LIMITED
NOTES TO THE ACCOUNTS
FOR THE YEARS ENDED 31ST MARCH 1999 AND 1998
11. RECONCILIATION OF MOVEMENTS ON SHAREHOLDERS' FUNDS
1999 1998
---- ----
(pound) (pound)
(Loss)/Profit for the financial year (350,595) 80,291
Opening shareholders' funds 353,718 273,427
---------- ----------
Closing shareholders' funds 3,123 353,718
========== ==========
12. DIRECTORS' EMOLUMENTS
1999 1998
---- ----
(pound) (pound)
Emoluments for qualifying services 141,000 117,557
========== ==========
</TABLE>
F-32
<PAGE>
PRO FORMA FINANCIAL INFORMATION
Introduction
On November 16, 1999, MUSE Technologies, Inc., a Delaware corporation (the
"Registrant"), acquired all the issued and outstanding capital stock and
preference shares of Virtual Presence, Ltd., a company organized under the
laws of England, from the shareholders of Virtual Presence in exchange for
$600,000 cash payable over a nine month period and 430,839 shares of the
Company's common stock, subject to certain restrictions. Of such shares,
205,522 are subject to adjustment in the event that the price of the common
stock over the twenty trading days prior to November 15, 2000 is less than
US $4.41 per share.
The accompanying unaudited pro forma consolidated balance sheet is
presented to illustrate the effect of the Transaction on the financial
statements, and assumes the Transaction was completed on October 1, 1998.
The unaudited pro forma financial statements are included for informational
purposes only and are not necessarily indicative of the future financial
position or future results of operations of the combined company, or of the
financial position or results of operations of the combined company that
would have actually occurred had the Transaction taken place as of the date
or for the periods presented. These unaudited pro forma financial
statements and the accompanying notes may not be indicative of future
financial position. The unaudited pro forma information should be read in
conjunction with the historical financial statements of Virtual Presence,
Ltd., a company organized under the laws of England, and the Registrant
presented herein. In the opinion of management, all adjustments have been
made that are necessary to present fairly the pro forma data.
F-33
<PAGE>
MUSE TECHNOLOGIES, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
(Unaudited)
MUSE VPL
September 30 September 30 Pro Forma Pro Forma
1999 1999 Adjustments Balance Sheet
------------------- ---------------- --------------------- ----------------
ASSETS
CURRENT ASSETS:
<S> <C> <C> <C> <C>
Cash and equivalents $12,064,734 $9,662 (402,588) (A) $11,671,808
Accounts receivable, net 667,593 732,440 1,400,033
Notes receivable - related parties 1,145,922 - 1,145,922
Inventories - 52,126 52,126
Other current assets 117,870 125,611 243,481
------------------- ---------------- --------------------- ----------------
Total current assets 13,593,531 919,839 (402,585) 14,513,370
Intangible assets - 333,967 333,967
Property, plant and equipment 1,162,797 732,218 1,895,015
Notes receivable - related parties 284,955 - 284,955
Other assets 81,574 68,593 150,167
Goodwill - - 2,351,313 (A) 2,351,313
------------------- ---------------- --------------------- ----------------
Total assets $15,525,445 $2,054,617 1,948,725 $19,528,787
=================== ================ ===================== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable $23,165 $817,684 $840,849
Accrued liabilities 922,751 1,437,410 300,000 (A) 2,660,161
Capital lease - current portion 16,478 22,526 39,004
Bank loans - 40,028 40,028
------------------- ---------------- --------------------- ----------------
Total current liabilities 962,394 2,317,648 300,000 3,580,042
LONG-TERM LIABILITIES:
Capital lease - less current portion 49,150 39,321 88,471
------------------- ---------------- --------------------- ----------------
Total Liabilities 1,011,544 2,356,970 3,668,514
STOCKHOLDERS' EQUITY:
Common stock 154,997 501,520 (501,520) (A) 161,460
6,463 (A)
Additional paid-in capital 23,609,620 - 1,339,909 (A) 24,949,529
Share premium account - 9,890 (9,890) (A) -
Stock subscription receivable (87,500) - (87,500)
Treasury stock (776,315) - (776,315)
Accumulated deficit (8,386,901) (813,763) 813,763 (A) (8,386,901)
------------------- ---------------- --------------------- ----------------
Total stockholders' equity 14,513,901 (302,353) 1,648,725 15,860,273
------------------- ---------------- --------------------- ----------------
$15,525,445 $2,054,617 $1,948,725 $19,528,787
=================== ================ ===================== ================
</TABLE>
The accompanying notes are an integral part of these statements.
F-34
<PAGE>
MUSE TECHNOLOGIES, INC.
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
MUSE
September VPL Pro Forma
30 September 30 Pro Forma Statement of
1999 1999 Adjustments Operations
------------- ---------------- ----------------- -----------------
Sales:
<S> <C> <C> <C>
Total sales $1,723,267 $3,859,506 $5,582,773
Cost of Sales:
Total cost of sales - 1,954,166 1,954,166
------------- ---------------- ----------------- -----------------
Gross margin 1,723,267 1,905,340 3,628,607
Selling, general and administrative 4,180,717 1,947,562 6,128,279
Research and development 2,302,885 - 2,302,885
Depreciation 487,360 193,590 680,950
Amortization of goodwill - - 109,655 (B) 109,655
------------- ---------------- ----------------- -----------------
Total operating expenses 6,970,962 2,141,152 109,655 9,221,769
------------- ---------------- ----------------- -----------------
Operating income (5,247,695) (235,812) (109,655) (5,593,162)
Other income (expense):
Costs in excess of value of repurchased
stock (563,636) - (563,636)
Interest income 729,061 - 729,061
Interest expense (30,678) (115,081) (145,759)
Other, net - 4,386 4,386
------------- ---------------- ----------------- -----------------
Total other (expenses) income 134,747 (110,695) - 24,052
------------- ---------------- ----------------- -----------------
Net Loss ($5,112,948) ($346,507) ($109,655) ($5,569,110)
============= ================ ================= =================
Net loss per common and common Equivalent shares:
Basic ($0.51) ($0.53)
============ =================
Diluted ($0.51) ($0.53)
============ =================
Weighted average common and common Equivalent
shares used in computing per Share amounts:
Basic 10,048,842 430,839 10,479,681
============ ================= =================
Diluted 10,048,842 430,839 10,479,681
============ ================= =================
</TABLE>
The accompanying notes are an integral part of these statements.
F-35
<PAGE>
NOTES TO THE PRO FORMA FINANCIAL STATEMENTS
1. Pro Forma Balance Sheet Adjustments
A. Recording the acquisition of Virtual Presence and
consolidation with MUSE Technologies, Inc.
2. Pro Forma Statement of Operations Adjustments
B. Recording of amortization expenses
F-36
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Advanced Visual Systems Inc.:
We have audited the accompanying consolidated balance sheets of Advanced Visual
Systems Inc. (a Delaware corporation) and subsidiaries as of December 31, 1999
and 1998 and the related consolidated statements of operations, stockholders'
equity (deficit) and cash flows for each of the three years in the period ended
December 31, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Advanced Visual Systems Inc.
And subsidiaries as of December 31, 1999 and 1998 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with accounting principles generally accepted in
the United States.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations
and has a net capital deficiency that raises substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ Arthur Andersen LLP
-----------------------
Arthur Andersen LLP
Boston, Massachusetts
March 17, 2000
F-37
<PAGE>
ADVANCED VISUAL SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS--DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
ASSETS 1999 1998
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 826,920 $ 2,027,789
Short-term investments - 120,886
Accounts receivable, less allowance for doubtful accounts
of $156,452 and $330,000 in 1999 and 1998, respectively 3,583,150 2,521,640
Inventories 8,104 41,101
Other current assets 234,745 173,161
--------------- ---------------
Total current assets 4,652,919 4,884,577
--------------- ---------------
PROPERTY AND EQUIPMENT, AT COST:
Computer equipment and software 3,372,350 3,353,480
Office equipment 723,933 733,647
Leasehold improvements 250,778 241,697
--------------- ---------------
4,347,061 4,328,824
Less--Accumulated depreciation and amortization 3,706,115 3,166,197
--------------- ---------------
640,946 1,162,627
--------------- ---------------
OTHER ASSETS 118,041 111,167
--------------- ---------------
$ 5,411,906 $ 6,158,371
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current portion of long-term debt $ 1,008,488 $ 275,316
Accounts payable 850,063 841,640
Accrued expenses 2,677,550 3,629,128
Deferred revenues 2,038,492 2,502,137
--------------- ---------------
Total current liabilities 6,574,593 7,248,221
--------------- ---------------
LONG-TERM DEBT, NET OF CURRENT PORTION 105,100 252,376
--------------- ---------------
CONVERTIBLE NOTE PAYABLE TO KUBOTA 2,000,000 2,000,000
--------------- ---------------
COMMITMENTS (Note 8)
STOCKHOLDERS' DEFICIT:
Convertible preferred stock, $0.10 par value-
Authorized--5,000,000 shares
Series A, designated 190,000 shares-
Issued and outstanding--187,266 shares in 1999 and 18,727 18,727
Series B, designated 1,775,000 shares-
Issued and outstanding--1,641,765 shares in 1999 and 164,176 164,176
Common stock, $0.01 par value-
Authorized--12,000,000 shares
Issued and outstanding--3,640,862 shares in 1999 and 1998 36,409 36,409
Paid-in capital 3,973,950 3,973,950
Retained deficit (7,402,082) (7,486,089)
Cumulative translation adjustment (58,967) (49,399)
--------------- ---------------
Total stockholders' deficit (3,267,787) (3,342,226)
--------------- ---------------
$ 5,411,906 $ 6,158,371
=============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-38
<PAGE>
ADVANCED VISUAL SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
1999 1998 1997
REVENUES:
<S> <C> <C> <C>
Software licenses $ 6,760,846 $ 6,213,980 $ 8,824,927
Support and other 5,532,896 6,251,971 7,040,427
Professional services 1,481,522 2,930,352 2,709,525
-------------- -------------- --------------
13,775,264 15,396,303 18,574,879
-------------- -------------- --------------
COSTS AND EXPENSES:
Cost of software licenses 148,387 425,750 1,319,694
Cost of support and other 629,679 1,116,050 1,365,118
Cost of professional services 1,640,397 3,533,128 1,813,783
Sales and marketing 5,937,575 8,249,075 9,011,356
Product development 3,078,755 4,439,292 4,029,321
General and administrative 1,673,485 2,098,215 1,771,214
Restructuring - 1,423,410 -
-------------- -------------- --------------
13,108,278 21,284,920 19,310,486
-------------- -------------- --------------
Income (loss) from operations 666,986 (5,888,617) (735,607)
INTEREST INCOME, NET 82,307 179,867 223,923
OTHER EXPENSE, NET (507,122) (204,067) (39,359)
-------------- -------------- --------------
Net income (loss) before provision for income taxes 242,171 (5,912,817) (551,043)
PROVISION FOR INCOME TAXES 158,164 249,121 268,320
-------------- -------------- --------------
Net income (loss) $ 84,007 $ (6,161,938) $ (819,363)
============== ============== ==============
BASIC NET INCOME (LOSS) PER SHARE $ 0.02 $ (1.73) $ (0.21)
============= ============== ==============
DILUTED NET INCOME (LOSS) PER SHARE $ 0.02 $ (1.73) $ (0.21)
============= ============== ==============
BASIC WEIGHTED AVERAGE SHARES OUTSTANDING 3,640,862 3,572,008 3,882,033
============== ============== ==============
DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 5,510,723 3,572,008 3,882,033
============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-39
<PAGE>
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK COMMON STOCK
----------------------------------------- ----------------------
SERIES A SERIES B
-------------------- --------------------
NUMBER $0.10 PAR NUMBER OF $0.10 PAR NUMBER OF $0.01 PAR
OF SHARES VALUE SHARES VALUE SHARES VALUE
--------- --------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31,
1996................. 187,266 $18,727 1,774,792 $177,479 4,176,052 $ 41,761
Sale of common stock.. -- -- -- -- 417,575 4,176
Repurchase and
retirement of
preferred stock...... -- -- (133,027) (13,303) -- --
Repurchase and
retirement of common
stock................ -- -- -- -- (1,035,393) (10,354)
Cumulative translation
adjustment........... -- -- -- -- -- --
Net loss.............. -- -- -- -- -- --
--------- --------- --------- --------- ----------- ---------
Total comprehensive
loss................ -- -- -- -- -- --
========= ========= ========= ========= =========== =========
BALANCE, DECEMBER 31,
1997................. 187,266 18,727 1,641,765 164,176 3,558,234 35,583
Sale of common stock.. -- -- -- -- 82,628 826
Cumulative translation
adjustment........... -- -- -- -- -- --
Net loss.............. -- -- -- -- -- --
--------- --------- --------- --------- ----------- ---------
Total comprehensive
loss................ -- -- -- -- -- --
========= ========= ========= ========= =========== =========
BALANCE, DECEMBER 31,
1998................. 187,266 18,727 1,641,765 164,176 3,640,862 36,409
Cumulative translation
adjustment........... -- -- -- -- -- --
Net income............ -- -- -- -- -- --
--------- --------- --------- --------- ----------- ---------
Total comprehensive
income.............. -- -- -- -- -- --
========= ========= ========= ========= =========== =========
BALANCE, DECEMBER 31,
1999................. 187,266 $18,727 1,641,765 $164,176 3,640,862 $ 36,409
========= ========= ========= ========= =========== =========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
TOTAL
RETAINED CUMULATIVE STOCKHOLDERS' COMPREHENSIVE
PAID-IN EARNINGS TRANSLATION EQUITY INCOME
CAPITAL (DEFICIT) ADJUSTMENT (DEFICIT) (LOSS)
----------- ------------ ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31,
1996................... $ 4,666,211 $ (504,788) $ 56,798 $ 4,456,188 $ --
Sale of common stock ... 382,230 -- -- 386,406 --
Repurchase and
retirement of
preferred stock........ (126,375) -- -- (139,678) --
Repurchase and
retirement of common
stock.................. (1,025,039) -- -- (1,035,393) --
Cumulative translation
adjustment............. -- -- (144,550) (144,550) (144,550)
Net loss................ -- (819,363) -- (819,363) (819,363)
----------- ------------ ----------- ------------- -------------
Total comprehensive
loss.................. -- -- -- -- $ (963,913)
=========== ============ =========== ============= =============
BALANCE, DECEMBER 31,
1997................... 3,897,027 (1,324,151) (87,752) 2,703,610 $ --
Sale of common stock ... 76,923 -- -- 77,749 --
Cumulative translation
adjustment............. -- -- 38,353 38,353 38,353
Net loss................ -- (6,161,938) -- (6,161,938) (6,161,938)
----------- ------------ ----------- ------------- -------------
Total comprehensive
loss.................. -- -- -- -- $(6,123,585)
=========== ============ =========== ============= =============
BALANCE, DECEMBER 31,
1998................... 3,973,950 (7,486,089) (49,399) (3,342,226) $ --
Cumulative translation
adjustment............. -- -- (9,568) (9,568) (9,568)
Net income.............. -- 84,007 -- 84,007 84,007
----------- ------------ ----------- ------------- -------------
Total comprehensive
income................ -- -- -- -- $ 74,439
=========== ============ =========== ============= =============
BALANCE, DECEMBER 31,
1999................... $ 3,973,950 $(7,402,082) $ (58,967) $(3,267,787)
=========== ============ =========== =============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-40
<PAGE>
ADVANCED VISUAL SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
1999 1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income (loss) $ 84,007 $ (6,161,938) $ (819,363)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization 618,120 470,315 1,022,414
Changes in assets and liabilities-
Accounts receivable, net (1,061,510) 1,789,907 (450,889)
Inventories 32,997 5,886 35,895
Other current assets (61,584) 135,370 14,572
Accounts payable and accrued expenses (925,475) (83,045) 549,600
Accrued royalty obligations (17,680) (93,930) 25,886
Deferred revenues (463,645) (551,055) (636,437)
--------------- --------------- ---------------
Net cash used in operating activities (1,794,770) (4,488,490) (258,322)
--------------- --------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (117,634) (303,968) (1,074,747)
Decrease/(increase) in short-term investments, net 120,886 4,901,443 (5,022,329)
Increase in other assets (6,874) (10,383) -
--------------- --------------- ---------------
Net cash (used in) provided by investing activities (3,622) 4,587,092 (6,097,076)
--------------- --------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt 1,210,145 527,692 983,954
Payments on debt (624,249) (983,954) -
Proceeds from issuance of convertible note payable to Kubota - - 2,000,000
Sale of common stock - 77,749 386,406
Repurchase and retirement of common stock - - (1,035,393)
Repurchase and retirement of preferred stock - - (139,678)
--------------- --------------- ---------------
Net cash provided by (used in) financing activities 585,896 (378,513) 2,195,289
--------------- --------------- ---------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 11,627 38,353 (144,550)
--------------- --------------- ---------------
DECREASE IN CASH AND CASH EQUIVALENTS (1,200,869) (241,558) (4,304,659)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 2,027,789 2,269,347 6,574,006
--------------- --------------- ---------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 826,920 $ 2,027,789 $ 2,269,347
=============== =============== ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for-
Interest $ 287,155 $ 93,533 $ 2,500
=============== =============== ===============
Income taxes $ 234,356 $ 182,544 $ 111,650
=============== =============== ===============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-41
<PAGE>
ADVANCED VISUAL SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(1) ORGANIZATION
Advanced Visual Systems Inc. (the Company) develops and delivers
visual information solutions. The Company's products are sold through
a direct sales force in North America and Europe and through such
indirect channels as distributor networks and independent software
vendors. Kubota Corporation (Kubota), which owns 151,476 shares of the
Company's common stock, 187,266 shares of the Series A convertible
preferred stock and 1,024,383 shares of the Series B convertible
preferred stock, has distribution rights in Japan. In 1997, the
Company issued a $2,000,000 convertible promissory note payable to
Kubota (see Note 4(b)).
Principal risks to the Company include the ability to obtain adequate
financing to fund future operations, dependence on key individuals,
competition from substitute products and larger companies and the need
for successful development and marketing of products to obtain
profitable operations. On December 31, 1999, the Company had a working
capital deficit of approximately $2,000,000 and will need to extend
the bank line of credit that expires in June, 2000 or obtain
additional adequate financing, if available, to fund future
operations.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries.
Significant intercompany accounts and transactions have been
eliminated in consolidation.
(b) Revenue Recognition
The Company recognizes software license revenue in accordance
with the provisions of Statement of Position (SOP) No. 97-2,
Software Revenue Recognition. Revenue from software licensing
is recognized upon shipment of the software provided that the
fee is fixed or determinable and that collectibility of the
revenue is probable. If an acceptance period is required,
revenues are recognized upon the earlier of customer
acceptance or the expiration of the acceptance period, unless
some additional performance target is mandated, in which case
revenue is recognized upon satisfaction of that target, as
defined in the applicable software license agreement.
The Company also offers support contracts and consulting and
training services. Support revenues are recognized ratably
over the term of the related contracts. Consulting and
training revenues are recognized in the period the services
are performed. If the Company estimates a loss relating to a
contract or project, the loss is recorded immediately. Amounts
received in advance for support contracts are recorded as
deferred revenues in the accompanying consolidated balance
sheets.
(c) Cash Equivalents and Short-Term Investments
Cash equivalents include highly liquid investments purchased
with maturities of less than 90 days. As of December 31, 1999,
cash equivalents consist primarily of investments secured by
U.S. government obligations and deposits in money market
funds. In accordance with Statement of Financial Accounting
Standards (SFAS) No. 115, Accounting for Certain Investments
in Debt and Equity Securities, the Company considers its
investments as held to maturity and, accordingly, carries its
investments at amortized cost. Short-term investments have
maturities greater than 90 days but less than a year and
consist primarily of Treasury securities.
(d) Inventories
Inventories are stated at the lower of cost (first-in,
first-out) or market.
F-42
<PAGE>
ADVANCED VISUAL SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(Continued)
(e) Property and Equipment
The costs of additions and improvements are capitalized, while
maintenance and repairs are charged to expense as incurred.
The Company provides for depreciation using the straight-line
method over the estimated useful lives of the related assets,
which are between two and five years. Leasehold improvements
are amortized in accordance with the lesser of their estimated
useful lives or the remaining term of the facility lease.
(f) Management Estimates and Financial Instruments
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 disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates. The estimated fair value of the Company's financial
instruments, which include cash and cash equivalents, accounts
receivable and accounts payable, approximates their reported
amounts.
(g) Research and Development Costs
The Company has historically capitalized computer software
development costs in accordance with SFAS No. 86, Accounting
for the Costs of Computer Software to Be Sold, Leased or
Otherwise Marketed. Capitalization of computer software
development costs begins upon the establishment of
technological feasibility. The establishment of technological
feasibility and the ongoing assessment of recoverability
require considerable judgment by management with respect to
certain external factors, including anticipated future
revenues, estimated economic life and changes in software and
hardware technology. The Company has historically amortized
computer software development costs over the lesser of their
expected product lives or three years.
In 1997, the Company determined that it could not substantiate
the future realization of its capitalized software development
costs and purchased computer software. Therefore, the Company
charged approximately $405,000 to cost of software licenses in
1997, which represents the net book value of the previously
capitalized software development costs and purchased software.
(h) Income Taxes
Income taxes are provided in accordance with SFAS No. 109,
Accounting for Income Taxes. The Company recognizes a current
tax liability or asset for current taxes payable or refundable
and a deferred tax liability or asset for the estimated future
tax effects of temporary differences and carryforwards to the
extent that they are realizable (see Note 6).
(i) Comprehensive Income
In June 1997, the Financial Accounting Standards Board (FASB)
issued SFAS No. 130, Reporting Comprehensive Income. SFAS No.
130 requires disclosure of all components of comprehensive
income on an annual and interim basis. Comprehensive income is
defined as the change in equity of a business enterprise
during a period from transactions and other events and
circumstances from nonowner sources. The Company's
comprehensive income (loss) for the years ended December 31,
1999, 1998 and 1997 are $74,439, $(6,123,585) and $(963,913),
respectively. The primary difference between net income (loss)
and comprehensive income (loss) is the Company's cumulative
translation adjustment.
F-43
<PAGE>
ADVANCED VISUAL SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(j) Concentrations of Credit Risk
Financial instruments that subject the Company to credit risk
consist of cash and cash equivalents and accounts receivable.
The Company maintains the majority of its cash balances with
financial institutions. Concentrations of credit risk with
respect to accounts receivable is limited to certain customers
to whom the Company makes substantial sales. To reduce risk,
the Company routinely assesses the financial strength of its
customers and, as a consequence, believes that its accounts
receivable credit risk exposure is limited.
One customer accounted for 17% of total revenue for the year
ended December 31, 1999. No customers accounted for greater
than 10% of total revenues for the years ended December 31,
1997 and 1998. In addition, no customers accounted for greater
than 10% of the total accounts receivable balance as of
December 31, 1999 and 1998.
(k) Net Income (Loss) per Share
Basic net income (loss) per common share was computed by
dividing net income (loss) by the weighted average number of
common shares outstanding during the period. Diluted net
income per common share was computed by dividing net income
(loss) by weighted average number of common shares outstanding
during the year, assuming dilution. Common stock equivalents
consist of common stock issuable on the exercise of
outstanding options and conversion of redeemable convertible
preferred stock.
Calculations of basic and diluted weighted average per common
shares and potential common share are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1999 1998 1997
<S> <C> <C> <C>
Net income (loss) $ 84,007 $ (6,161,938) $ (819,363)
============ ============= ============
Weighted average
number of common
shares outstanding 3,640,862 3,572,008 3,882,033
Potential common
shares pursuant to
convertible preferred
stock 1,829,031 - -
Potential common
shares pursuant to
stock options and
warrants 40,830 - -
------------ ------------- ------------
Diluted weighted
average shares 5,510,723 3,572,008 3,882,033
============ ============= ============
Basic net income (loss)
per share $ 0.02 $ (1.73) $ (0.21)
============ ============= ============
Diluted net income
(loss) per share $ 0.02 $ (1.73) $ (0.21)
============ ============= ============
</TABLE>
For the years ended December 31, 1998 and 1997, diluted net
loss per common share is the same as basic net loss per common
share, since the effects of the Company's potentially dilutive
securities are antidilutive. Antidilutive securities, which
consist of options to purchase common stock, warrants, and
potential common shares pursuant to redeemable convertible
preferred stock that are not included in diluted net loss per
share were 4,391,681 and 4,669,081 as of December 31, 1998 and
1997, respectively.
(l) Stock-Based Compensation for Employees
The Company has adopted SFAS No. 123, Accounting for
Stock-Based Compensation. SFAS No. 123 defines a
fair-value-based method of accounting for employee stock
options and other stock-based compensation. Compensation
expense related to employee stock-based compensation arising
from this
F-44
<PAGE>
ADVANCED VISUAL SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
method of accounting can be reflected in the financial
statements or, alternatively, the pro forma net income (loss)
and income (loss) per share effect of the fair-value-based
accounting can be disclosed in the financial footnotes. The
Company has adopted the disclosure-only alternative (see Note
5(c)).
(m) New Accounting Standards
In June 1998, the FASB issued SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. This statement
establishes accounting and reporting standards for derivative
instruments, including derivative instruments embedded in
other contracts, and for hedging activities. SFAS No. 133, as
amended by SFAS No. 137, Accounting for Derivative Instruments
and Hedging Activities--Deferral of the Effective Date of FASB
Statement No. 133, is effective for all fiscal quarters of
fiscal years beginning after June 15, 2000. SFAS No. 133 is
not expected to have a material impact on the Company's
consolidated financial statements.
(3) ACCRUED LIABILITIES
Accrued liabilities consist of the following:
DECEMBER 31
1999 1998
Payroll and fringe benefits $ 823,527 $ 976,865
Accrued reorganization 230,894 878,487
Accrued other 1,623,129 1,773,776
------------- ------------
$ 2,677,550 $ 3,629,128
============= ============
(4) LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1999 1998
--------------- ---------------
<S> <C> <C>
Revolving line of credit for borrowings up to $1,000,000 that bears $ - $ 527,692
interest at a rate of prime (7.75% at December 31, 1998) plus 1.75%
Revolving line of credit for borrowings up to $1,000,000 that bears 879,743 -
interest at a rate of prime (8.50% at December 31, 1999) plus 1.50%
Equipment lease that bears interest at 16.96% per annum and matures 233,845 -
on November 13, 2001
Convertible promissory note payable for $2,000,000 to Kubota Corporation
that bears interest at 5% and matures in December, 2001 2,000,000 2,000,000
--------------- ---------------
3,113,588 2,527,692
Less--Current portion 1,008,488 275,316
--------------- ---------------
$ 2,105,100 $ 2,252,376
=============== ===============
</TABLE>
(a) Lines of Credit
In August 1999, the Company modified an existing loan
agreement with a bank. The new agreement is for a $1,000,000
revolving line of credit. Advances under the revolving line of
credit are based on the Company's qualified accounts
receivable as defined and is limited by the outstanding
balance under its equipment line of credit. The line is
secured by all corporate assets and is due in June 2000. The
Company must meet certain financial covenants, as defined,
under this line of credit.
F-45
<PAGE>
ADVANCED VISUAL SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
In addition to the revolving line of credit, the Company
entered into a stand-by accounts receivable purchase agreement
whereby the Company can sell to the bank $1,000,000 of
additional qualified receivables. As of December 31, 1999,
there were no advances under this agreement.
In connection with the line of credit amendment, the Company
issued warrants to purchase 10,000 shares of the Company's
common stock to the bank at a price of $0.01 per share. The
Company computed the value of these warrants using the
Black-Scholes option pricing model, noting the charge to be
immaterial to the consolidated financial statements.
(b) Convertible Note Payable to Kubota
On December 26, 1997, the Company entered into a convertible
subordinated promissory note agreement with Kubota
Corporation, a related party (see Note 1). In exchange for a
$2,000,000 payment, Kubota received a convertible subordinated
promissory note (the Note) due December 2001. The Note, which
is subordinated to all the Company's senior indebtedness,
bears interest at the rate of 5% per year, payable January 1,
1999; thereafter, it is payable quarterly in arrears. After
February 1, 1999, Kubota has the right to convert the Note
into fully paid shares of the Company's common stock, at a
conversion price of $3 per share based on a formula relating
to the Company's revenues for the year ended December 31,
1998. Kubota has not exercised its right to convert. The Note
will automatically be converted into shares of common stock
immediately before the Company is consolidated or merged into
any other corporation in which the Company is not the
continuing entity, a sale of substantially all the assets of
the Company, or the closing of a public offering of at least
$5,000,000.
(c) Leasing Agreement
On May 6, 1999, the Company entered into an agreement with a
leasing company to provide financing of certain equipment. The
Company may finance up to $500,000 under this agreement, of
which $233,845 is outstanding as of December 31, 1999. The
amounts outstanding under this financing agreement are
subordinate to any bank debt (see Note 3(a)). The term of this
agreement is three years and borrowings bear interest at
16.96% per year.
(d) Maturities of long-term debt are approximately as follows as
of December 31, 1999:
YEARS ENDING
DECEMBER 31 AMOUNT
2000 $ 1,008,000
2001 2,105,000
---------------
$ 3,113,000
===============
(5) STOCKHOLDERS' EQUITY
(a) Convertible Preferred Stock
In general, holders of convertible preferred shares have
voting rights equal to the number of shares of common stock
into which their preferred shares are convertible and vote in
a single class with the holders of common stock. Convertible
preferred shares are convertible into common shares at any
time based on the conversion ratios defined in the Company's
certificate of incorporation. As of December 31, 1999, the
outstanding preferred shares were convertible at a ratio of
one to one. Pursuant to the Company's certificate of
incorporation, the conversion ratios are subject to adjustment
upon the declaration of a stock dividend payable in shares of
common stock or by a subdivision of common stock, a
combination of the outstanding shares of common stock or any
capital reorganization or reclassification of the stock of the
Company.
F-46
<PAGE>
ADVANCED VISUAL SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
In the event of liquidation, the holders of the Series A
convertible preferred shares (Series A) have a liquidation
preference equal to $24.03 per share plus any declared and
unpaid dividends. This preference entitles the holders to its
liquidation preference in full, prior to payments to the other
holders of preferred shares. The Series B convertible
preferred shares (Series B) have a liquidation preference
equal to $0.10 per share plus any declared but unpaid
dividends. Generally, upon liquidation and after the payment
of the Series A and the Series B liquidation preferences, the
holders of the preferred shares and common shares will receive
all of the remaining assets of the Company on a pro rata
basis.
Holders of convertible preferred shares participate with the
holders of common shares in any dividends paid or set aside
for payment. No dividends have been declared through December
31, 1999. In 1997, the Company repurchased 133,027 shares of
Series B preferred stock for $139,678 and 1,035,393 shares of
common stock for $1,035,393.
(b) Nonconvertible Preferred Stock
In January 1999, the Company designated 2,000,000 shares as
Series C Preferred Stock. There are no shares of Series C
Preferred Stock outstanding as of December 31,1999. The Series
C Preferred Stock is not convertible and does not have a
liquidation preference. Holders of Series C Preferred Stock
participate with the holders of common shares in voting and
dividend rights.
(c) Stock Plans
The Company accounts for its stock-based compensation plans
under Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, and has adopted for
fiscal years beginning after December 15, 1995 the
disclosure-only alternative under SFAS No. 123, Accounting for
Stock-Based Compensation, which requires disclosure of the pro
forma effects on earnings and earnings per share as if SFAS
No. 123 had been adopted, as well as certain other
information.
The Company has adopted two stock plans that, in the
aggregate, authorize the granting of up to 9,095,000 common
shares and 2,000,000 Series C preferred shares in the form of
stock options, purchase authorizations or bonuses. The Board
of Directors may, from time to time, reallocate available
shares among the two plans.
1992 STOCK OPTION PLAN
The AVS 1992 Stock Option Plan provides for the granting of
options to purchase up to 6,100,000 common shares and
2,000,000 Series C preferred shares, as amended in March 1999.
The options either qualify as incentive stock options under
the Internal Revenue Code or are nonqualified stock options
that are not intended to so qualify. Options under this plan
may be granted to key employees, directors and other
individual contributors. Options granted under this plan will
be exercisable at such intervals as the Board of Directors
determines at the time of grant. In any event, options granted
under this plan will be exercisable no later than nine years
from the date of grant (five years for incentive stock options
held by any 10% stockholder). Options granted under this plan
are subject to certain transfer restrictions and, under
certain circumstances, repurchase by the Company at the
exercise price. The exercise price will be determined by the
Board of Directors at the time of grant. In general, the
exercise price will not be less than 100% or 85% of the fair
market value of common stock, as determined by the Board of
Directors, on the date of grant for incentive stock options
and nonqualified stock options, respectively, and not less
than 110% of fair market value of common stock in the case of
incentive stock options granted to 10% stockholders.
F-47
<PAGE>
ADVANCED VISUAL SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(Continued)
The following table summarizes the AVS 1992 Stock Option Plan
activity:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE
SHARES OPTION PRICE EXERCISE PRICE
<S> <C> <C> <C>
Outstanding, December 31, 1996 2,574,850 $ 0.10-$2.10 $ 1.05
Granted 1,050,050 1.00 1.00
Exercised (217,575) 0.40-1.70 0.85
Canceled (567,275) 0.70-2.10 0.99
------------- --------------- --------------
Outstanding, December 31, 1997 2,840,050 0.10-2.10 1.01
Granted 299,400 1.00 1.00
Exercised (19,605) 0.70-1.00 0.93
Canceled (557,195) 0.70-1.00 0.78
------------- ---------------
Outstanding, December 31, 1998 2,562,650 0.10-2.10 1.06
Granted 4,889,180 .20 0.20
Canceled (1,341,200) 0.20-2.10 0.67
------------- --------------- -----------
Outstanding, December 31, 1999 6,110,630 $ 0.10-$2.00 $ 0.43
============= =============== =========
Exercisable, December 31, 1999 1,946,557 $ 0.10-$2.00 $ 0.58
============= =============== =========
</TABLE>
The Company has computed the pro forma disclosures required
under SFAS No. 123 for all stock options granted under the 1992
AVS Stock Option Plan during 1999, 1998 and 1997 using the
Black-Scholes option pricing model prescribed by SFAS No. 123.
The assumptions used, weighted average information and the pro
forma effect of applying SFAS No. 123 for the years ended
December 31, 1999, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- --------------
<S> <C> <C> <C>
Risk-free interest rates 4.8%-6.38% 5.50%-5.74% 5.80%-6.95%
Expected dividend yield - - -
Expected lives 7 years 7 years 7 years
Expected volatility - - -
Weighted average grant-date fair value of
options granted during the period, net
of an estimated termination rate of 40% $0.13 $0.32 $0.38
Weighted average exercise price of
options granted during the period, net of
an estimated termination rate of 40% $0.20 $1.00 $1.00
Weighted average remaining contractual
life of options outstanding 7.39 years 7.24 years 7.99 years
Weighted average exercise price of
1,946,557, 832,156, and 806,518
options exercisable at December 31,
1999, 1998, and 1997, respectively $0.58 $0.97 $0.99
Pro forma net loss $(18,550) $(6,326,516) $(970,796)
</TABLE>
STOCK PURCHASE PLAN
The AVS 1992 Stock Purchase Plan provides for purchase
authorizations or bonuses of up to 2,995,000 common shares.
Purchase authorizations or bonuses under this plan may be granted
to key employees,
F-48
<PAGE>
ADVANCED VISUAL SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
directors and other individual contributors. Purchase
authorizations granted under this plan will be exercisable no
later than 60 days from the date of grant. Common stock purchased
or bonused under this plan is subject to certain transfer
restrictions and, under certain circumstances, repurchase by the
Company at the purchase or bonus price. The purchase price will be
determined by the Board of Directors at the time of grant. The
purchase price will be no less than 85% of the fair market value
of common stock, as determined by the Board of Directors, on the
date of grant. At December 31, 1999, there are 2,202,620 vested
shares outstanding under the plan.
(6) INCOME TAXES
Net income (loss) before provision for income taxes for the three
years ended December 31, 1999, 1998 and 1997 was as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Domestic $ 393,405 $ (5,582,494) $ (781,416)
Foreign (151,234) (330,323) 230,373
-------------- -------------- --------------
Total pretax income (loss) $ 242,171 $ (5,912,817) $ (551,043)
============== ============== ==============
The provision for income taxes for the three years ended December 31,
1999, 1998 and 1997 consisted of the following:
1999 1998 1997
-------------- -------------- --------------
Current tax expense-
Federal $ - $ - $ -
State - 5,000 10,000
Foreign income 65,329 69,983 65,343
Foreign withholding 92,835 174,138 192,977
-------------- -------------- --------------
158,164 249,121 268,320
-------------- -------------- --------------
Deferred tax expense-
Federal 102,957 (1,756,211) (348,886)
State 8,969 (526,110) 171,024
-------------- -------------- --------------
111,926 (2,282,321) (177,862)
-------------- -------------- --------------
Change in valuation reserve (111,926) 2,282,321 177,862
-------------- -------------- --------------
$ 158,164 $ 249,121 $ 268,320
============== ============== ==============
</TABLE>
The income tax provision is different from the amount that results
from applying the federal statutory rate of 34% to pretax earnings as
a result of the following:
<TABLE>
<CAPTION>
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Tax at federal statutory rate $ 82,343 $ (2,010,357) $ (187,000)
Differences due to-
State income taxes, net of federal benefit 5,920 (343,933) 119,000
Foreign withholding taxes 92,835 182,292 193,000
Foreign taxes 116,744 174,138 (13,000)
Other taxes provided (27,752) (35,340) (21,542)
(Decrease)/increase in valuation reserve (111,926) 2,282,321 177,862
-------------- -------------- --------------
$ 158,164 $ 249,121 $ 268,320
============== ============== ==============
</TABLE>
F-49
<PAGE>
ADVANCED VISUAL SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
The approximate income tax effect of each type of temporary difference
and carryforward is as follows:
<TABLE>
<CAPTION>
1999 1998
--------------- ---------------
<S> <C> <C>
Net operating loss carryforwards $ 44,539,000 $ 44,483,000
Acquired research and development 338,000 375,000
Nondeductible reserves 223,000 200,000
Nondeductible accruals 339,000 509,000
Other temporary differences 227,000 212,000
Valuation reserve (45,666,000) (45,779,000)
--------------- ---------------
$ - $ -
=============== ===============
</TABLE>
At December 31, 1999, the Company has net operating loss carryforwards
of approximately $129,982,000, a significant portion of which was
generated by its predecessor, Stardent Computer Inc. The net operating
losses are subject to expiration at various dates from 2001 to 2008.
The amount of net operating loss carryforwards that may be used to
offset future taxable income may be limited due to expiration and
possible ownership changes. As a result, the Company carries a 100%
valuation reserve against its otherwise recognizable net deferred tax
asset.
(7) RESTRUCTURING CHARGES
In 1998, the Company recorded approximately $1,423,000 of
restructuring costs as a result of a corporate downsizing. These
charges met the criteria set forth in Emerging Issues Task Force Issue
94-3, Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (Including Certain Costs Incurred
in a Restructuring).
The components of the restructuring costs during the year ended
December 31, 1998 are as follows:
COST
Severance, benefits and associated costs $ 870,000
Lease termination costs 323,000
Closed facilities 75,000
Legal and other professional fees 155,000
---------------
$ 1,423,000
===============
As of December 31, 1999, the Company has approximately $230,000 of
remaining accrual related to the restructuring. The remaining costs
are primarily related to lease termination costs, the majority of
which will be utilized during 2000.
F-50
<PAGE>
ADVANCED VISUAL SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(8) COMMITMENTS
(a) Leases
The Company leases its facilities under noncancelable
operating leases. Future minimum lease payments under all
operating leases at December 31, 1999 are approximately as
follows:
<TABLE>
<CAPTION>
OPERATING LEASE
YEARS ENDING COMMITMENTS
<S> <C>
2000 $ 1,315,000
2001 1,244,000
2002 1,195,000
2003 159,000
----------------
Total minimum lease payments $ 3,913,000
=============
</TABLE>
Rent expense recorded by the Company in the accompanying
consolidated statements of operations for the years ended
December 31, 1999, 1998 and 1997 was approximately $1,595,000,
$1,225,000 and $821,000, respectively.
(b) Royalty Obligations
The Company has entered into technology and marketing
agreements with several organizations that require the Company
to make royalty payments based on a percentage of net revenues
of certain products sold.
(9) CAPITAL ACCUMULATION PLAN
The Company maintains the AVS Employees' Capital Accumulation Plan
(the Plan), covering all eligible employees, as defined by the Plan.
In 1999, 1998 and 1997, the Company contributed approximately $32,000,
$135,000 and $83,000, respectively, to the Plan.
(10) SEGMENT AND GEOGRAPHIC INFORMATION
The Company has adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. SFAS No. 131 establishes standards
for reporting information regarding operating segments in annual
financial statements and requires selected information for those
segments to be presented in interim financial reports issued to
stockholders. SFAS No. 131 also establishes standards for related
disclosures about products and services and geographic areas.
Operating segments are identified as components of an enterprise about
which separate, discrete financial information is available for
evaluation by the chief operating decision maker, or decision-making
group, in making decisions how to allocate resources and assess
performance. The Company's chief decision maker, as defined under SFAS
No. 131, is the chief executive officer.
The Company measures operating results as a single reportable segment,
which provides data visualization solutions to enable companies to
transform massive quantities of data into visual representations. The
Company's approach is based on the way that management organizes the
business within the Company for making operating decisions and
assessing performance.
F-51
<PAGE>
ADVANCED VISUAL SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
Revenues, operating income (loss) and identifiable assets for the
Company's domestic and foreign operations for the years ended December
31, 1999, 1998 and 1997 are summarized as follows:
<TABLE>
<CAPTION>
FOREIGN
UNITED STATES OPERATIONS ELIMINATIONS CONSOLIDATED
Fiscal 1999-
<S> <C> <C> <C> <C>
Sales to unaffiliated customers $ 11,753,296 $ 1,762,968 $ 259,000 $ 13,775,264
Transfers between geographic locations (2,808,821) - 2,808,821 -
--------------- --------------- --------------- ---------------
Total sales $ 8,944,475 $ 1,762,968 $ 3,067,821 $ 13,775,264
=============== =============== =============== ===============
Income (loss) from operations $ 3,500,898 $ (3,092,912) $ 259,000 $ 666,986
=============== =============== =============== ===============
Identifiable assets $ 6,614,744 $ 2,928,212 $ (4,131,050) $ 5,411,906
=============== =============== =============== ===============
Fiscal 1998-
Sales to unaffiliated customers $ 6,896,754 $ 8,408,248 $ 91,301 $ 15,396,303
Transfers between geographic locations 3,514,886 1,424,307 (4,939,193) -
--------------- --------------- --------------- ---------------
Total sales $ 10,411,640 $ 9,832,555 $ (4,847,892) $ 15,396,303
=============== =============== =============== ===============
(Loss) income from operations $ (7,665,817) $ 1,685,900 $ 91,300 $ 5,888,617
=============== =============== =============== ===============
Identifiable assets $ 5,218,919 $ 5,355,940 $ (4,416,488) $ 6,158,371
=============== =============== =============== ===============
Fiscal 1997-
Sales to unaffiliated customers $ 8,839,556 $ 9,735,323 $ - $ 18,574,879
Transfers between geographic locations 4,230,193 1,569,271 (5,799,464) -
--------------- --------------- --------------- ---------------
Total sales $ 13,069,749 $ 11,304,594 $ (5,799,464) $ 18,574,879
=============== =============== =============== ===============
(Loss) income from operations $ (1,081,980) $ 346,373 $ - $ (735,607)
=============== =============== =============== ===============
Identifiable assets $ 9,084,547 $ 4,303,948 $ - $ 13,388,495
=============== =============== =============== ===============
</TABLE>
F-52
<PAGE>
ADVANCED VISUAL SYSTEMS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
Amounts in ($000)
ASSETS
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
--------------- -------------------
CURRENT ASSETS:
<S> <C> <C>
Cash and Cash Equivalents $ 1,285 $ 827
Accounts Receivable Trade - Net 2,372 3,583
Inventories 8 8
Prepaid Expenses 131 235
--------------- -------------------
Total Current Assets 3,796 4,653
PROPERTY AND EQUIPMENT - NET 408 641
OTHER ASSETS 111 118
--------------- -------------------
Total Assets $ 4,315 $ 5,412
=============== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
June 30, 2000 December 31, 1999
--------------- -------------------
CURRENT LIABILITIES:
Short-term Senior Debt $ 2,004 $ 1,008
Accounts Payable 596 850
Accrued Expenses 2,428 2,678
Deferred Support Revenue 1,417 2,039
--------------- -------------------
Total Current Liabilities 6,445 6,575
LONG-TERM DEBT
Capital Equipment Financing 48 105
Subordinated Debt 2,000 2,000
--------------- -------------------
Total Long-term Debt 2,048 2,105
STOCKHOLDERS' DEFICIT (4,178) (3,268)
--------------- -------------------
Total Liabilities and Stockholders'
Equity (Deficit) $ 4,315 $ 5,412
=============== ===================
</TABLE>
See notes to financial statements.
F-53
<PAGE>
ADVANCED VISUAL SYSTEMS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Amounts in ($000)
except per share data
FOR THE SIX MONTHS ENDED JUNE 30,
1999 2000
-------------- ----------------
REVENUES
<S> <C> <C>
Software Licenses $ 2,798 $ 2,726
Support and other 2,801 2,148
Professional services 854 913
-------------- ----------------
6,453 5,787
-------------- ----------------
COSTS AND EXPENSES
Cost of software licenses 86 154
Cost of support and other 310 333
Cost of professional services 869 729
Sales and marketing 2,962 2,840
Product development 1,404 1,347
General and administrative 717 1,134
-------------- ----------------
6,348 6,537
-------------- ----------------
Income from operations 105 (750)
-------------- ----------------
Interest income, net 23 115
Other expense, net 258 316
-------------- ----------------
Net income (loss) before
provision for income taxes (130) (951)
-------------- ----------------
Provision for income taxes 90 26
-------------- ----------------
Net income (loss) $(220) $(977)
============== ================
Basic net income (loss) per share $(0.06) $(0.26)
============== ================
Diluted net income (loss) per share $(0.06) $(0.26)
============== ================
Basic weighted average shares outstanding 3,641 3,641
============== ================
Diluted weighted average shares outstanding 3,641 3,641
============== ================
</TABLE>
See footnotes to financial statements.
F-54
<PAGE>
ADVANCED VISUAL SYSTEMS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Amounts in ($000)
FOR THE SIX MONTHS ENDED JUNE 30,
1999 2000
---------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) $ (220) $ (977)
Adjustments to reconcile net loss to net cash provided from
(used in) operating activities
Depreciation 370 293
Changes in assets and liabilities-
Accounts receivable, net 242 1,212
Inventories 9 -
Other current assets (20) 103
Accounts payable and accrued expenses (1,176) (713)
Deferred revenues (129) (409)
---------- -------------
Net cash (used in) provided by operating activities (924) (491)
---------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (46) (60)
Decrease/(increase) in short-term investments, net 101
Increase in other assets (20) 7
---------- -------------
Net cash (used in) provided by investing activities 35 (53)
---------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt 1,110 1,000
Payments on debt (549) (63)
---------- -------------
Net cash provided by (used in) financing activities 561 955
---------- -------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 14 48
---------- -------------
(DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS (314) 458
---------- -------------
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,028 827
---------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,714 $ 1,285
========== =============
</TABLE>
See footnotes to financial statements.
F-55
<PAGE>
ADVANCED VISUAL SYSTEMS INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2000
1. ORGANIZATION
Advanced Visual Systems Inc. (AVS) develops and delivers visual
information solutions. AVS's products are sold through a direct sales force in
North America and Europe and through such indirect channels as distributor
networks and independent software vendors. Kubota Corporation (Kubota), which
owns 151,476 shares of AVS's common stock, 187,266 shares of the Series A
convertible preferred stock and 1,024,383 shares of the Series B convertible
preferred stock, has distribution rights in Japan. In 1997, the AVS issued a
$2,000,000 convertible promissory note payable to Kubota.
Principal risks to AVS include the ability to obtain adequate financing
to fund future operations, dependence on key individuals, competition from
substitute products and larger companies and the need for successful development
and marketing of products to obtain profitable operations. On June 30, 2000, the
Company had a working capital deficit of approximately $2,649,000 and will need
to extend the bank line of credit that expires in June 2000 or obtain additional
adequate financing, if available, to fund future operations. AVS has transferred
existing borrowings under the line of credit to the accounts receivable purchase
agreement that AVS has in place with the bank. This financing will be available
to AVS through the planned closing of the merger with MUSE.
2. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and the instructions to Form S-4 Item 17.b.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included. For
further information, refer to the financial statements and footnotes thereto
appearing elsewhere in this proxy statement/prospectus.
3. ACCCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
------------------------------- ---------------------------
<S> <C> <C>
Payroll and fringe benefits $ 727 $ 824
Accrued reorganization 50 231
Accrued other 1,651 1,623
------------------------------- ---------------------------
$ 2,428 $ 2,678
=============================== ===========================
</TABLE>
4. SUBSEQUENT EVENTS
On May 4, 2000, AVS entered into a letter of intent to be acquired by
Muse Technologies, Inc. ("MUSE"), a company in the business of developing and
marketing software products designed to enhance the user's ability to understand
and analyze data and information and to provide solutions to complex data
integration and data management problems, through a stock-for-stock exchange.
Pursuant to the letter of intent, MUSE will issue a maximum of 2.1 million
shares of common stock in exchange for all the common and preferred shares of
AVS and a maximum of 1.3 million shares of common stock subject to stock options
in exchange for AVS stock options. Definitive merger documents were executed on
July 18, 2000. The acquisition is subject to a number of conditions and there
can be no assurance that it will be successfully consummated.
F-56
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
We intend that the merger will be accounted for under the
pooling-of-interests method of accounting, which means that for accounting and
financial reporting purposes we will treat our companies as if they had always
been combined. For a more detailed description of pooling-of-interests
accounting, see "The Merger -- Accounting Treatment."
The following unaudited pro forma condensed combined financial
statements assume a business combination between MUSE and AVS accounted for as a
pooling-of-interests and are derived from the historical consolidated financial
statements and the related notes, which are included elsewhere in this proxy
statement/prospectus. The unaudited pro forma condensed combined consolidated
balance sheet combines MUSE's balance sheet as of June 30, 2000 with AVS's
balance sheet as of the same date. The unaudited pro forma condensed combined
statements of operations combine MUSE's historical results of operations for the
fiscal years ended September 30, 1999, and 1998 and the nine months ended June
30, 2000 with AVS's results of operations for the same periods. The pro forma
statement of operations data assume the combination occurred at the beginning of
the earliest period presented while the pro forma balance sheet data assume the
combination took place on June 30, 2000.
The pro forma information is presented for illustrative purposes only
and is not necessarily indicative of the operating results or financial position
that would have occurred if the merger had been consummated at the beginning of
the earliest period presented, nor is it necessarily indicative of the future
operating results or financial position of the combined companies following the
merger.
In addition, the pro forma information for the year ended September 30,
1999 and nine months ended June 30, 1999 also includes the acquisition by MUSE
of Virtual Presence, Ltd. in November 1999 as if such acquisition occurred as of
October 1, 1998. Such acquisition has been accounted for under the purchase
method of accounting.
These unaudited pro forma condensed combined financial statements are
based on, and should be read in conjunction with, the historical consolidated
financial statements and the related notes thereto of MUSE, AVS, and Virtual
Presence included elsewhere in this proxy statement/prospectus.
F-57
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET AS OF JUNE 30, 2000
(In thousands)
<TABLE>
<CAPTION>
Pro Forma Adjusted
MUSE AVS Adjustments Balance Sheet
-------- -------- -------- --------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 2,439 $ 1,285 $ 3,724
Accounts receivable, net 3,927 2,372 6,299
Notes receivable - related parties current 2,101 0 2,101
Inventories 180 8 188
Other current assets 429 131 560
-------- -------- -------- --------
Total current assets 9,076 3,796 12,872
PROPERTY AND EQUIPMENT-NET 1,872 408 2,280
OTHER ASSETS
Goodwill-Net 3,080 -- 3,080
Capitalized Development Costs-Net 2,260 -- 2,260
Other Assets 367 111 478
-------- -------- -------- --------
Total assets $ 16,655 $ 4,315 $ -- $ 20,970
======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable $ 1,478 $ 596 $ 2,074
Accrued liabilities 1,894 2,428 1,000(A) 5,322
Notes Payable-current portion 406 2,004 2,410
Capital lease - current portion 40 -- 40
Deferred Revenue -- 1,417 1,417
-------- -------- -------- --------
Total current liabilities 3,818 6,445 1,000 11,263
LONG-TERM LIABILITIES:
Capital lease - less current portion 103 48 151
Convertible Note Payable -- 2,000 2,000
-------- -------- -------- --------
Total Liabilities 3,921 8,493 1,000 13,414
STOCKHOLDERS' EQUITY:
Common stock 162 36 (6) 192
Preferred Stock -- 183 (183) --
Additional paid-in capital 25,290 3,974 189 29,453
Treasury stock (777) -- (777)
Cummulative translation adjustment -- (43) (43)
Accumulated deficit (11,941) (8,328) (1,000)(A) (21,269)
-------- -------- -------- --------
Total stockholders' equity 12,734 (4,178) (1,000) 7,556
-------- -------- -------- --------
$ 16,655 $ 4,315 $ - $ 20,970
======== ======== ======== ========
</TABLE>
(a) Represents estimated merger transaction costs. See footnote A.3
See notes to pro forma financial statements.
F-58
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED JUNE 30, 2000
(In thousands, except per share data)
<TABLE>
<CAPTION>
MUSE AVS Pro Forma
June 30 June 30 Pro Forma Statement of
2000 2000 Adjustment Operations
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue: $ 6,543 $ 9,640 -- $ 16,183
-------- -------- -------- --------
Expenses:
Cost of product sold 2,526 1,750 -- 4,276
Selling, general and administrative 4,247 5,660 -- 9,907
Research and development 1,585 2,199 -- 3,784
Officer severance costs 994 -- -- 994
Depreciation 559 324 -- 883
Amortization 293 -- -- 293
-------- -------- -------- --------
Total operating expenses 10,204 9,933 -- 20,137
-------- -------- -------- --------
Net Operating Income (Loss) (3,661) (293) -- (3,954)
-------- -------- -------- --------
Other income (expense):
Loss on Foreign Currency Transactions (147) (310) -- (457)
Interest income 705 65 -- 770
Interest expense (25) (153) -- (178)
Merger/acquisition costs (404) -- -- (404)
Other, net -- 62 -- 62
Taxes -- (69) -- (69)
-------- -------- -------- --------
Total other (expenses) income 129 (405) (276)
-------- -------- -------- --------
Net Loss $ (3,532) $ (698) -- $ (4,230)
======== ======== ======== ========
Net loss per share
Basic $ (0.33) $ (0.19) == $ (0.35)
======== ======== ======== ========
Diluted $ (0.33) $ (0.19) == $ (0.35)
======== ======== ======== ========
Weighted average common shares:
Basic 10,717 3,641 (2,244) 12,114
======== ======== ======== ========
Diluted 10,717 3,641 (2,244) 12,114
======== ======== ======== ========
</TABLE>
See notes to pro forma financial statements.
F-59
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED JUNE 30, 1999
(In thousands, except per share data)
<TABLE>
<CAPTION>
Pro Forma
MUSE AVS Statement
June 30 June 30 Pro Forma of
1999 1999 Adjustment Operations
---------- ----------- -------------- -------------
<S> <C> <C> <C> <C>
Revenues: $1,113 $9,810 - $10,923
---------- ----------- -------------- -------------
Expenses:
Cost of product sold - 2,206 - 2,296
Selling, general and administrative 3,168 5,214 - 8,382
Research and development 950 2,373 - 3,323
Depreciation 395 612 - 1,007
Amortization - - - -
---------- ----------- -------------- -------------
Total operating expenses 4,513 10,495 - 15,008
---------- ----------- -------------- -------------
Net Operating Loss (3,400) (685) - (4,085)
---------- ----------- -------------- -------------
Other income (expense):
Loss on Foreign Currency
Transactions - (58) - (58)
Transactions
Cost in excess of value of
repurchased stock (564) - - (564)
Repurchased stock
Interest income 553 19 - 572
Interest expense (29) - - (29)
Other, net - (282) - (282)
Restructuring Expenses - (620) - (620)
Taxes - (214) - (214)
---------- ----------- -------------- -------------
Total other (expenses) income (40) (1,155) - (1,195)
---------- ----------- -------------- -------------
Net Loss ($3,440) ($1,840) - ($5,280)
========== =========== ============== =============
Net loss per share
Basic ($0.35) ($0.50) - ($0.47)
========== =========== ============== =============
Diluted ($0.35) ($0.50) - ($0.47)
========== =========== ============== =============
Weighted average common shares:
Basic 9,892 3,692 (2,244) 11,340
========== =========== ============== =============
Diluted 9,892 3,692 (2,244) 11,340
========== =========== ============== =============
</TABLE>
See notes to pro forma financial statements.
F-60
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1999
(In thousands, except per share data)
<TABLE>
<CAPTION>
MUSE/VPL Combined
MUSE VPL Pro Forma AVS Pro Forma
September September MUSE/VPL Statement September MUSE/AVS Statement
30 30 Pro Forma of 30 Pro Forma of
1999 1999 Adjustments Operations 1999 Adjustments Operations
------------ ------------ ------------ ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Revenues: $1,724 $3,860 $5,584 $13,279 - $18,863
------------ ------------ ------------ ------------ ----------- ------------ -----------
Expenses:
Cost of product sold - 1,954 1,954 2,914 - 4,868
Selling, general and
administrative 4,181 1,948 6,129 7,100 - 13,229
Research and development 2,303 - 2,303 3,195 - 5,498
Depreciation 487 194 681 651 - 1,332
Amortization of
goodwill - - 110 (D) 110 - - 110
------------ ------------ ------------ ------------ ----------- ------------ -----------
Total operating
expenses 6,971 4,096 110 11,177 13,860 - 25,037
------------ ------------ ------------ ------------ ----------- ------------ -----------
Net Operating loss (5,247) (236) (110) (5,593) (581) - (6,174)
------------ ------------ ------------ ------------ ----------- ------------ -----------
Other income (expense):
Loss on Foreign
Currency Transactions - - - - (295) - (295)
Costs in excess of
value of repurchased
stock (564) - - (564) - - (564)
Interest income 729 - - 729 30 - 759
Interest expense (31) (115) - (146) (212) - (358)
Other, net - 4 - 4 53 - 57
Restructuring Expenses - - - - (620) - (620)
Taxes - - - - (237) - (237)
------------ ------------ ------------ ------------ ----------- ------------ -----------
Total other
(expenses) income 134 (111) - 23 (1,281) - (1,258)
------------ ------------ ------------ ------------ ----------- ------------ -----------
Net loss ($5,113) ($347) ($110) ($5,570) ($1,862) - ($7,432)
============ ============ ============ ============ =========== ============ ===========
Net loss per share
Basic ($0.51) - - ($0.53) ($0.51) - ($0.60)
============ ============ =========== ============ ===========
Diluted ($0.51) - - ($0.53) ($0.51) - ($0.60)
============ ============ =========== ============ ===========
Weighted average common
shares:
Basic 10,049 - 431 10,480 3,641 (1,745) 12,376
============ ============ ============ =========== ============ ===========
Diluted 10,049 - 431 10,480 3,641 (1,745) 12,376
============ ============ ============ =========== ============ ===========
</TABLE>
See notes to pro forma financial statements.
F-61
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR YEAR ENDED SEPTEMBER 30, 1998
(In thousands, except per share data)
<TABLE>
<CAPTION>
Pro Forma
MUSE AVS Statement
September September Pro Forma of
30 1998 30 1998 Adjustment Operations
------------ ------------- ------------ ------------
<S> <C> <C> <C>
Revenues: $6,206 $17,132 - $23,338
------------ ------------- ------------ ------------
Expenses:
Cost of product sold - 5,282 - 5,282
Selling, general and administrative 3,651 10,499 - 14,150
Research and development 957 4,443 - 5,400
Depreciation 476 531 - 1,007
------------ ------------- ------------ ------------
Total operating expenses 5,084 20,755 - 25,839
------------ ------------- ------------ ------------
Net Operating Income (Loss) 1,122 (3,623) - (2,501)
------------ ------------- ------------ ------------
Other income (expense):
Loss on Foreign Currency Transactions - (152) - (152)
Interest income - 232 - 232
Interest expense (799) - - (799)
Other, net - - -
Restructuring Expenses - (800) - (800)
Taxes - (191) - (191)
------------ ------------- ------------ ------------
Total other (expenses) income (799) (911) - (1,710)
------------ ------------- ------------ ------------
Net Income (Loss) $323 ($4,534) - ($4,211)
============ ============= ============ ============
Net Income (Loss) per share
Basic $0.04 ($1.17) - ($1.46)
============ ============= ============ ============
Diluted $0.04 ($1.17) - ($1.46)
============ ============= ============ ============
Weighted average common shares:
Basic 7,672 3,882 (2,412) 9,142
============ ============= ============ ============
Diluted 8,655 3,882 (2,412) 9,142*
============ ============= ============ ============
</TABLE>
* On a pro forma basis, there is no dilution.
See notes to pro forma financial statements.
F-62
<PAGE>
A. MUSE/AVS Notes to Pro Forma Condensed Combined Financial Statements:
1. PRO FORMA SHARE ISSUANCE
The unaudited pro forma condensed combined financial
statements reflect the issuance of one share of common stock of MUSE in
exchange for each 3.286 outstanding share of AVS common stock, Series B
Preferred Stock and Series C Preferred Stock; and one share of MUSE
common stock for each 0.649646 outstanding shares of AVS Series A
Preferred Stock. The actual number of shares of MUSE common stock to be
issued will be based on the number of outstanding shares of AVS common
and Preferred stock outstanding at the effective time of the merger.
The following table provides the pro forma share issuance's in
connection with the merger as of June 30, 2000.
<TABLE>
<CAPTION>
<S> <C>
AVS common and Series B and C preferred
shares outstanding as of June 30, 2000 5,523,798
Exchange Ratio 3.286 to 1
-----------------
Subtotal of shares of MUSE stock exchanged 1,681,010
AVS Series A preferred shares outstanding
as of June 30, 1999 187,266
Exchange Ratio .6497646 to 1
---------------
Subtotal of MUSE stock exchanged 288,206
TOTAL MUSE shares exchanged 1,969,216
Number of shares of MUSE common stock
outstanding as of June 30, 2000 10,808,882
----------------
Number of shares of MUSE common stock
outstanding as of June 30, 2000 assuming
completion of the merger on that date 12,778,098
===============
</TABLE>
In addition, at the effective time of the AVS merger, MUSE
will assume all of the outstanding AVS stock options with the number of
shares and the option price appropriately adjusted by the exchange
ratio. At June 30, 2000, AVS had options outstanding to purchase
4,807,730 shares of AVS common stock and Class C preferred stock, which
would become options to purchase 1,463,095 shares of MUSE common stock.
2. PRO FORMA COMBINED PER SHARE AMOUNTS
The pro forma combined basic net income or loss per share
amounts are based on MUSE's weighted average shares outstanding for the
respective periods plus AVS's weighted average common and preferred
shares outstanding for the respective periods multiplied by the
exchange ratio.
3. MERGER TRANSACTION COSTS
MUSE and AVS estimate they will incur costs in connection with
the merger in the range of $800 thousand to $1 million. Such costs
include direct transaction costs of approximately $800 thousand,
consisting primarily of business consulting fees paid to investment
bankers, legal and accounting fees and expenses, certain filing fees
and approximately $100 thousand for certain exit costs resulting from
the merger. MUSE is only in the preliminary stages of determining such
exit costs which could include, among other things, charges related to
severance for certain employees of AVS or MUSE who will not remain with
the combined company following the merger, lease payments for duplicate
facilities which will no longer be used, costs to be incurred to
terminate contracts with third parties who provide redundant or
conflicting services and write-off of duplicative equipment and other
fixed assets. Accordingly, such estimates of costs are preliminary and,
therefore, subject to change. MUSE anticipates having an exit plan in
place at the time the merger is consummated which is currently expected
to be in the fourth quarter of 2000, at which time the exit costs, as
well as the direct transaction costs, will be charged to operations.
F-63
<PAGE>
The Pro Forma Condensed Combined Balance Sheet as of June 30,
2000 gives effect such expenses using the maximum of $1.0 million of
the range above, less the related income tax effect, but such expenses
have not been reflected in the Pro Forma Condensed Combined
Consolidated Statements of Operations.
B. With respect to the acquisition of Virtual Presence Ltd. see notes to
Pro Forma financial statements on Page F-36.
F-64
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF MERGER
AMONG
ADVANCED VISUAL SYSTEMS INC.,
MUSE MERGER SUB, INC.
AND
MUSE TECHNOLOGIES, INC.
Dated as of July 18, 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
ARTICLE I
THE MERGER..............................................................................................2
Section 1.1 The Merger.............................................................................2
Section 1.2 Closing Date/Effective Time of the Merger..............................................2
Section 1.3 Certificate of Incorporation...........................................................2
Section 1.4 Bylaws.................................................................................3
Section 1.5 Directors of Surviving Corporation. ..................................................3
Section 1.6 Effect on Capital Stock................................................................3
Section 1.7 Exchange of AVS Stock..................................................................4
Section 1.8 No Fractional Securities...............................................................5
Section 1.9 Stock Options; Stock Purchase Plan.....................................................5
Section 1.10 Dissenting Shares......................................................................6
Section 1.11 Reorganization.........................................................................6
Section 1.12 Pooling of Interests...................................................................6
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF AVS...................................................................7
Section 2.1 Organization, Standing and Qualification; Subsidiaries.................................7
Section 2.2 Authority..............................................................................7
Section 2.3 Capitalization; Equity Interest........................................................8
Section 2.4 Consents and Approvals; No Violation...................................................9
Section 2.5 Books and Records......................................................................9
Section 2.6 Financial Statements; Certain Financial Information; EBIT.............................10
Section 2.7 Absence of Undisclosed Liabilities....................................................11
Section 2.8 Absence of Certain Changes or Events. ...............................................12
Section 2.9 Real Property.........................................................................13
Section 2.10 Leases................................................................................13
Section 2.11 Title to Assets.......................................................................14
Section 2.12 Intellectual Property Rights..........................................................14
Section 2.13 Contracts.............................................................................17
Section 2.14 Litigation............................................................................17
Section 2.15 Plants, Buildings, Structures, Facilities and Equipment...............................18
Section 2.16 Insurance.............................................................................18
Section 2.17 Employee Benefit Plans................................................................18
Section 2.18 Tax Matters...........................................................................20
Section 2.19 Environmental Matters.................................................................23
Section 2.20 Labor Relations; Employees............................................................24
Section 2.21 Compliance with Law...................................................................25
Section 2.22 Government Permits....................................................................26
i
<PAGE>
Section 2.23 Bank Accounts; Powers-of-Attorney.....................................................26
Section 2.24 Brokers or Finders....................................................................26
Section 2.25 Transactions with Affiliates..........................................................26
Section 2.26 Customers and Suppliers...............................................................27
Section 2.27 Accounts Receivable and Payables......................................................27
Section 2.28 Guarantees............................................................................28
Section 2.29 Common Activities.....................................................................28
Section 2.30 Disclosure............................................................................28
Section 2.31 Information Supplied..................................................................28
Section 2.32 Vote Required.........................................................................29
Section 2.33 No Stockholder Agreements.............................................................29
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF MUSE AND SUB.........................................................29
Section 3.1 Organization, Standing and Qualification..............................................29
Section 3.2 Authority.............................................................................29
Section 3.3 Capitalization........................................................................30
Section 3.4 Validity; Issuance of Shares..........................................................30
Section 3.5 Consents and Approvals; No Violation..................................................30
Section 3.6 Brokers or Finders....................................................................31
Section 3.7 Information Supplied..................................................................31
Section 3.8 Public Reports........................................................................32
Section 3.9 Operation of the Surviving Corporation................................................32
Section 3.10 Disclosure............................................................................32
ARTICLE IV
COVENANTS..............................................................................................33
Section 4.1 Conduct of Business...................................................................33
Section 4.2 Access to AVS Information.............................................................33
Section 4.3 Best Efforts..........................................................................34
Section 4.4 No Solicitation by AVS................................................................34
Section 4.5 Fees and Expenses.....................................................................35
Section 4.6 Public Announcements..................................................................35
Section 4.7 Books and Records.....................................................................35
Section 4.8 Compliance with Laws, Orders and Contracts...........................................35
Section 4.9 Certain Activities between Signing and Closing........................................35
Section 4.10 Tax Matters...........................................................................36
Section 4.11 AVS Employee and Affiliate Non-Disclosure.............................................37
Section 4.13 Closing Financial Statements..........................................................38
Section 4.14 Employee Benefits Matters.............................................................38
Section 4.15 Preparation of Proxy Statement; Stockholders Meeting..................................38
Section 4.16 Pooling...............................................................................41
Section 4.17 NASDAQ Listing........................................................................41
Section 4.18 AVS Affiliates........................................................................41
ii
<PAGE>
Section 4.19 Notification of Certain Matters.......................................................41
Section 4.20 Insurance.............................................................................42
ARTICLE V
CONDITIONS.............................................................................................42
Section 5.1 Conditions to Obligations of MUSE.....................................................42
Section 5.2 Conditions to Obligations of AVS......................................................44
ARTICLE VI
INDEMNIFICATION AND SURVIVAL...........................................................................45
Section 6.1 Indemnification.......................................................................45
Section 6.2 Survival Periods......................................................................48
Section 6.3 Escrow Agreement......................................................................48
Section 6.4 Limitation of Liability...............................................................49
ARTICLE VII
TERMINATION............................................................................................49
Section 7.1 Termination...........................................................................49
Section 7.2 Effect of Termination.................................................................50
ARTICLE VIII
MISCELLANEOUS..........................................................................................50
Section 8.1 Notices...............................................................................50
Section 8.2 Descriptive Headings; Definitions; Certain Interpretation.............................51
Section 8.3 Counterparts; Effectiveness...........................................................52
Section 8.4 Entire Agreement; Assignment..........................................................52
Section 8.5 Amendment.............................................................................52
Section 8.6 Extensions; Waiver....................................................................53
Section 8.7 Governing Law.........................................................................53
Section 8.8 Specific Performance..................................................................53
Section 8.9 Parties in Interest...................................................................53
Section 8.10 Severability..........................................................................53
Section 8.11 Consent to Service of Process.........................................................53
</TABLE>
iii
<PAGE>
LIST OF DEFINED TERMS
PAGE
Acquisition Proposal.......................................................35
Affiliate..................................................................51
Affiliate Agreement........................................................41
Agreement...................................................................1
Audited Financials.........................................................10
Authorization Termination Date..............................................5
Authorizations.............................................................42
AVS.........................................................................1
AVS Affiliate..............................................................41
AVS Capital Stock...........................................................3
AVS Common Stock............................................................3
AVS Disclosure Schedule.....................................................7
AVS Parties................................................................45
AVS Recommendation.........................................................40
AVS Stockholder Meeting....................................................39
AVS Stockholders............................................................1
Books and Records..........................................................10
Business....................................................................1
Business Combination.......................................................35
Certificate.................................................................3
Certificate of Merger.......................................................2
Change.....................................................................40
Change in the AVS Recommendation...........................................40
Claim Notice...............................................................46
Closing.....................................................................2
Closing Balance Sheet......................................................38
Closing Date................................................................2
Closing Financial Statements...............................................38
Code........................................................................6
Contaminant................................................................23
Contracts..................................................................17
Core Software Products.....................................................16
Determination Date.........................................................38
DGCL........................................................................2
Dispute Period.............................................................46
Dissenting Stock............................................................6
DOL........................................................................19
EBIT.......................................................................11
Effective Time..............................................................2
Environmental Laws.........................................................23
ERISA......................................................................19
iv
<PAGE>
ERISA Affiliate............................................................18
Escrow Agent................................................................4
Escrow Agreement............................................................1
Escrow Amount...............................................................4
Escrow Consent.............................................................40
Exchange Act...............................................................29
Exchange Agent..............................................................4
Exchange Ratio..............................................................3
Expiration Date............................................................48
Financial Statements.......................................................10
Form S-4...................................................................38
GAAP........................................................................1
Governmental Permits.......................................................26
income taxes...............................................................22
Indebtedness...............................................................11
Indemnified Party..........................................................46
Indemnifying Party.........................................................46
Indemnity Notice...........................................................47
Intellectual Property Rights...............................................15
Interim Balance Sheet......................................................10
IRS........................................................................19
Laws.......................................................................25
Leased Real Property.......................................................13
Lien.......................................................................52
Liquidation Preference Waiver..............................................43
Loss.......................................................................24
Material Adverse Effect....................................................12
Merger......................................................................1
Merger Consideration........................................................3
MUSE........................................................................1
MUSE Common Stock...........................................................1
MUSE Disclosure Schedule...................................................31
MUSE Material Adverse Effect...............................................40
MUSE Option.................................................................5
MUSE Parties...............................................................45
MUSE SEC Reports...........................................................32
Option Plan.................................................................5
Order.......................................................................9
Person.....................................................................52
Plan.......................................................................18
Proceeding.................................................................17
Proxy Statement/Prospectus.................................................38
Qualifying Amendment.......................................................39
Release....................................................................23
Representatives............................................................33
v
<PAGE>
Required AVS Vote..........................................................29
Resolution Period..........................................................47
return.....................................................................22
SEC........................................................................28
Securities Act.............................................................28
Series A Preferred Stock....................................................3
Series B Preferred Stock....................................................3
Series C Preferred Stock....................................................3
Share Issuance.............................................................38
Stock Option................................................................5
Stock Purchase Plan.........................................................6
Stockholder Representatives.................................................1
Sub.........................................................................1
Sub Common Stock............................................................4
Surviving Corporation.......................................................2
tax........................................................................22
Third Party Claim..........................................................46
Threshold Amount...........................................................11
WARN Act...................................................................25
vi
<PAGE>
ANNEXES
Annex A Closing Deliveries
Annex B Stockholders' Ownership
EXHIBITS
Exhibit A Form of Escrow Agreement
Exhibit B Form of Officer's Certificate of AVS
Exhibit C Form of Secretary's Certificate of AVS
Exhibit D Form of Opinion of Counsel to AVS
Exhibit E Form of Officer's Certificate of MUSE
Exhibit F Form of Secretary's Certificate of MUSE
Exhibit G Form of Opinion of Counsel to MUSE
Exhibit H Form of Officer's Certificate of Sub
Exhibit I Form of Secretary's Certificate of Sub
Exhibit J1 Form of MUSE's Standard Non-Compete/Confidentiality and Trade
Secrets/Invention Agreement
Exhibit J2 Form of Agreement Regarding Proprietary Information and Inventions,
Non-Competition, Arbitration, At-Will Employment and Other Matters
Exhibit K Form of Affiliate Agreement
SCHEDULES
Schedule A Intentionally Omitted
Schedule B AVS Employees to Execute Confidentiality Agreements
Schedule C Terms of Convertible Note Exchange
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AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER (this "Agreement") dated as of
July 18, 2000, among MUSE Technologies, Inc., a Delaware
corporation ("MUSE"), MUSE Merger Sub, Inc., a Delaware
corporation ("Sub") organized solely for the purpose of
consummating the transactions contemplated hereby and a
wholly-owned subsidiary of MUSE, and Advanced Visual Systems
Inc., a Delaware corporation ("AVS").
WHEREAS, AVS, together with its subsidiaries, is engaged in
the business of developing and delivering visual information solutions (the
"Business");
WHEREAS, the Boards of Directors of MUSE and AVS deem it
advisable and in the best interests of each corporation and its respective
stockholders that MUSE and AVS engage in a business combination in order to
advance the long-term strategic business interests of MUSE and AVS;
WHEREAS, the combination of MUSE and AVS shall be effected by
the terms of this Agreement through a merger as outlined below (the "Merger");
WHEREAS, in furtherance thereof, the respective Boards of
Directors of MUSE and AVS have approved the Merger, upon the terms and subject
to the conditions set forth in this Agreement, pursuant to which all shares of
capital stock of AVS issued and outstanding immediately prior to the Effective
Time (as defined in Section 1.2) will be converted into the right to receive
shares of common stock, par value $.015 per share, of MUSE (the "MUSE Common
Stock") as set forth in Section 1.6;
WHEREAS, for accounting purposes, it is intended that the
Merger shall be accounted for as a pooling-of-interests transaction under United
States generally accepted accounting principles ("GAAP");
WHEREAS, as a condition to the consummation of the Merger, the
stockholders of AVS who voted in favor of the Merger and who own no fewer than
500 shares of AVS Capital Stock or who are AVS Affiliates (as hereafter defined)
(the "AVS Stockholders") will consent to the escrow of a pro rata portion of the
MUSE Common Stock to be received in the Merger as set forth in Section 1.6 (d)
and shall appoint and authorize one or more stockholder representatives (the
"Stockholder Representatives"), to enter into an escrow agreement on behalf of
each of the AVS Stockholders in the form of Exhibit A hereto (the "Escrow
Agreement");
NOW, THEREFORE, in consideration of the mutual benefits to be
derived from this Agreement and of the representations, warranties, conditions,
agreements and promises contained
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herein and other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, and intending to be legally bound hereby, the
parties agree as follows:
ARTICLE I
THE MERGER
Section 1.1 The Merger. Subject to the terms and conditions of
this Agreement and the provisions of the Delaware General Corporations Law (the
"DGCL"), Sub shall be merged with and into AVS at the Effective Time. Following
the Merger, the separate corporate existence of Sub shall cease and AVS shall
continue as the surviving corporation (the "Surviving Corporation") under the
name "MUSE Advanced Visual Systems Inc." and shall continue to be governed by
the laws of the State of Delaware. At and after the Effective Time, the Merger
will have the effects set forth in the DGCL. Without limiting the generality of
the foregoing, and subject thereto, at the Effective Time all the property,
rights, privileges, immunities, powers and franchises of AVS and Sub, including
but not limited to the Distributor Agreement dated April 1, 1998 between AVS and
Kubota Graphics Technology, Incorporated, as subsequently amended by Amendment
Number 1 dated as of September 30, 1999, shall be vested in the Surviving
Corporation, and all debts, liabilities and duties of AVS and Sub shall become
the debts, liabilities and duties of the Surviving Corporation.
Section 1.2 Closing Date/Effective Time of the Merger.
(a) Subject to the terms and conditions set forth in Article V
and the termination rights set forth in Article VII, the closing of the
transactions contemplated by this Agreement (the "Closing") will take place at
10:00 a.m. at the offices of Proskauer Rose LLP, 1585 Broadway, New York, New
York 10036, on a date to be specified by the parties, which shall be no later
than the second business day after satisfaction or waiver of the conditions set
forth in Article V or on such other date and location as agreed to in writing by
the parties (the "Closing Date"). At the Closing, AVS, Sub and MUSE shall
deliver or cause to be delivered the items set forth in Annex A.
(b) At the Closing the parties shall (i) file a certificate of
merger (the "Certificate of Merger") in such form as is required by and executed
in accordance with the relevant provisions of the DGCL and (ii) make all other
filings or recordings required under the DGCL. The Merger shall become effective
at such time as the Certificate of Merger is duly filed with the Delaware
Secretary of State or such subsequent time as is agreed upon by MUSE and AVS and
specified in the Certificate of Merger (the date and time the Merger become
effective being the "Effective Time").
Section 1.3 Certificate of Incorporation. Pursuant to the
Merger, the certificate of incorporation of AVS, as in effect immediately prior
to the Effective Time, shall be the certificate of incorporation of the
Surviving Corporation until thereafter changed or amended as provided therein or
by applicable law; provided that Section 1 of the certificate of incorporation
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of the Surviving Corporation shall be amended to read in its entirety as
follows: "The name of the Corporation is MUSE Advanced Visual Systems Inc."
Section 1.4 Bylaws. Pursuant to the Merger, the bylaws of AVS,
as in effect immediately prior to the Effective Time, shall be the bylaws of the
Surviving Corporation until thereafter changed or amended as provided therein,
by the certificate of incorporation or by applicable law.
Section 1.5 Directors of Surviving Corporation. The directors
of Sub in office immediately prior to the Effective Time shall be the initial
directors of the Surviving Corporation, and shall hold office from the Effective
Time until their respective successors are duly elected or appointed and
qualified in the manner provided in the certificate of incorporation or bylaws
of the Surviving Corporation, or as otherwise provided by law or their earlier
death, resignation or removal.
Section 1.6 Effect on Capital Stock. Subject to the terms and
conditions of this Agreement, as of the Effective Time, by reason of the Merger
and without any action on the part of the holder of any shares of the capital
stock of AVS or the holder of any shares of capital stock of Sub:
(a) Capital Stock of AVS. Each 3.286 shares of (a) common
stock, $.01 par value, of AVS (the "AVS Common Stock"), (b) Series B Preferred
Stock, $.10 par value, of AVS ("Series B Preferred Stock"), and (c) Series C
Preferred Stock, $.10 par value, of AVS ("Series C Preferred Stock") issued and
outstanding immediately prior to the Effective Time (other than shares of
capital stock of AVS to be canceled in accordance with Section 1.6 (b) hereof
and any shares of Dissenting Stock (as defined in Section 1.10 hereof)) shall be
converted into the right to receive one validly issued, fully paid and
non-assessable share of MUSE Common Stock (the "Exchange Ratio"). Each 0.649646
shares of Series A Preferred Stock, $.10 par value, of AVS ("Series A Preferred
Stock") issued and outstanding immediately prior to the Effective Time (other
than any Shares of Dissenting Stock) shall be converted into the right to
receive one validly issued, fully paid and non-assessable shares of Muse Common
Stock. All shares of AVS Common Stock, Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock (collectively, the "AVS Capital
Stock") shall no longer be outstanding, shall automatically be canceled and
retired and shall cease to exist, and each holder of a certificate which
immediately prior to the Effective Time represented any such shares of AVS
Capital Stock (a "Certificate") shall thereafter cease to have any rights with
respect to such shares of AVS Capital Stock, except as provided herein or by
law. The maximum number of shares of MUSE Common Stock to be issued in exchange
for the outstanding shares of AVS Capital Stock (inclusive of shares underlying
director options and outstanding warrants) shall be an aggregate of 2,095,000
shares of MUSE Common Stock(1) (the "Merger Consideration").
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(1) May be adjusted as a result of the exercise of non-director options of
AVS.
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(b) Cancellation of Treasury Stock. All AVS Capital Stock, if
any, that are held by AVS as treasury shares shall be canceled and retired and
cease to exist, and no securities of MUSE or other consideration shall be
delivered or deliverable in exchange therefor.
(c) Common Stock of Sub. Each share of common stock, par value
$.01, of Sub ("Sub Common Stock") issued and outstanding immediately prior to
the Effective Time, shall be converted into and become one validly issued, fully
paid and nonassessable share of the common stock, no par value, of the Surviving
Corporation.
(d) Escrow Amount. Notwithstanding anything to the contrary
contained herein, MUSE shall withhold from the Merger Consideration according to
each AVS Stockholder's pro rata portion of the shares of MUSE Common Stock
otherwise deliverable at the Closing to the AVS Stockholders and place into
escrow an aggregate of 160,000 shares of MUSE Common Stock (such shares are
hereinafter collectively referred to as the "Escrow Amount") in connection with
the indemnification obligations of the AVS Stockholders under this Agreement and
related documents and the transactions contemplated hereby and thereby. The
terms and conditions of such escrow are more fully set forth in the Escrow
Agreement. MUSE shall deliver to the Bank of Albuquerque, N.A., as Escrow Agent
(the "Escrow Agent"), pursuant to the terms of the Escrow Agreement,
certificates of shares of MUSE Common Stock representing the Escrow Amount.
(e) Delivery of Merger Consideration. At the Effective Time,
delivery of the Merger Consideration (less the Escrow Amount) shall be made to
the Exchange Agent (as defined in Section 1.7), in trust for the benefit of each
holder of shares of AVS Capital Stock in proportion to its ownership of AVS
Capital Stock as set forth on Annex B hereto (less any MUSE Common Shares
included in the Escrow Amount).
Section 1.7 Exchange of AVS Stock.
(a) Prior to the Effective Time, MUSE shall appoint American
Stock Transfer & Trust Company to act as exchange agent hereunder for the
purpose of exchanging Certificates for the Merger Consideration (the "Exchange
Agent"). At or prior to the Effective Time, MUSE shall deposit with the Exchange
Agent, in trust for the benefit of holders of shares of AVS Capital Stock,
certificates representing MUSE Common Stock issuable pursuant to Section 1.6 in
exchange for outstanding shares of AVS Capital Stock.
(b) Promptly after the Effective Time, the Surviving
Corporation shall cause the Exchange Agent to mail to each holder of a
Certificate (i) a letter of transmittal which shall specify that delivery shall
be effected, and risk of loss and title to the Certificates shall pass, only
upon proper delivery of the Certificates to the Exchange Agent, and which letter
shall be in customary form and have such other provisions as MUSE may reasonably
specify and (ii) instructions for effecting the surrender of such Certificates
in exchange for the applicable Merger Consideration. Upon surrender of a
Certificate to the Exchange Agent together with such letter of transmittal, duly
executed and completed in accordance with the instructions thereto, and such
other documents as may reasonably be required by the Exchange Agent, the holder
of such
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Certificate shall be entitled to receive in exchange therefor one or more shares
of MUSE Common Stock representing, in the aggregate, the whole number of shares
that such holder has the right to receive pursuant to Section 1.6 (after taking
into account all shares of AVS Capital Stock then held by such holder) after
giving effect to the Escrow Amount. In the event of a transfer of ownership of
AVS Capital Stock which is not registered in the transfer records of AVS, one or
more shares of MUSE Common Stock evidencing, in the aggregate, the proper number
of shares of MUSE Common Stock may be issued with respect to such AVS Capital
Stock to such transferee if the Certificate representing such shares of AVS
Capital Stock is presented to the Exchange Agent, accompanied by all documents
required to evidence and effect such transfer and to evidence that any
applicable stock transfer taxes have been paid.
Section 1.8 No Fractional Securities. No certificates or scrip
representing fractional shares of MUSE Common Stock shall be issued upon the
surrender for exchange of Certificates and such fractional share interests shall
not entitle the owner thereof to vote or to have any rights of a stockholder of
MUSE or a holder of shares of MUSE Common Stock. Notwithstanding any other
provisions of this Agreement, each holder of shares of AVS Capital Stock
exchanged pursuant to the Merger who would otherwise have been entitled to a
fraction of a share of MUSE Common Stock (after taking into account all
Certificates delivered by such holder) shall receive, in lieu of thereof, one
whole share of MUSE Common Stock.
Section 1.9 Stock Options; Stock Purchase Plan. (a) (i) Each
option to purchase AVS Common Stock or Series C Preferred Stock (incentive stock
option or nonqualified stock option, as the case may be) (a "Stock Option")
granted under The AVS 1992 Stock Option Plan (the "Option Plan") prior to the
Effective Time and which remains outstanding immediately prior to the Effective
Time, whether vested or unvested, shall cease to represent a right to acquire
shares of AVS Common Stock or Series C Preferred Stock and shall be converted,
at the Effective Time, into a fully vested, immediately exercisable option to
acquire, on substantially the same terms and conditions as were applicable under
the Option Plan (but taking into account any changes thereto provided for in the
Option Plan or in such option by reason of this Agreement or the transactions
contemplated hereby), that number of shares of MUSE Common Stock determined by
dividing the number of shares of AVS Common Stock or Series C Preferred Stock
subject to such Stock Option by the Exchange Ratio, rounded, if necessary, to
the nearest whole share of MUSE Common Stock, at a price per share (rounded to
the nearest whole cent) equal to the per share exercise price specified in such
Stock Option multiplied by the Exchange Ratio (a "MUSE Option"); provided,
however, the MUSE Options will be governed by the MUSE 1996 Stock Incentive Plan
and the stock option agreements granted thereunder. Prior to the Effective Time,
the MUSE Board of Directors shall have taken all action necessary under the MUSE
1996 Stock Incentive Plan to permit the grant of the MUSE Options on the terms
set forth herein. The maximum number of shares of MUSE Common Stock to be issued
upon exercise of all outstanding Stock Options subsequent to the Merger shall be
1,313,000.(2) (ii) All Purchase Authorizations under the Advanced Visual Systems
Inc. 1992 Stock Purchase Plan (the "Stock Purchase Plan") not exercised at least
30 days prior to the
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(2) May be adjusted as a result of pre-closing exercise of non-director options.
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Closing Date (the "Authorization Termination Date") shall terminate as of the
Authorization Termination Date. (iii) The Board of Directors of AVS shall take
all necessary actions to effect the cancellation and substitution of Stock
Options and the termination of the Purchase Authorization as set forth above,
including but not limited to adopting resolutions terminating the Option Plan
and the Stock Purchase Plan effective no later than one day prior to the Closing
Date.
(b) As soon as reasonably practicable following the Closing
Date, MUSE shall use all reasonable efforts to file a registration statement on
Form S-8 covering the shares of MUSE Common Stock issuable under the MUSE 1996
Stock Incentive Plan.
Section 1.10 Dissenting Shares. Notwithstanding any provision
of this Agreement to the contrary, if and to the extent required by the DGCL,
shares of AVS Capital Stock which are issued and outstanding immediately prior
to the Effective Time and which are held by holders of such shares of AVS
Capital Stock who have properly exercised appraisal rights with respect thereto
(the "Dissenting Stock") in accordance with Section 262 of the DGCL, shall not
be exchangeable for the right to receive the Merger Consideration, and holders
of such shares of Dissenting Stock shall be entitled to receive payment of the
appraised value of such shares of Dissenting Stock in accordance with the
provisions of Section 262 of the DGCL unless and until such holders fail to
perfect or effectively withdraw or otherwise lose their rights to appraisal and
payment under the DGCL. If, after the Effective Time, any such holder fails to
perfect or effectively withdraws or loses such right, such shares of Dissenting
Stock shall thereupon be treated as if they had been converted into and to have
become exchangeable for, at the Effective Time, the right to receive the Merger
Consideration, without any interest thereon. Notwithstanding anything to the
contrary contained in this Section 1.10, if (i) the Merger is rescinded or
abandoned or (ii) the stockholders of AVS revoke the authority to effect the
Merger, then the right of any stockholder to be paid the fair value of such
stockholder's Dissenting Stock pursuant to Section 262 of the DGCL shall cease.
AVS shall give MUSE prompt notice of any demands received by AVS for appraisals
of shares of Dissenting Stock and MUSE shall have the right to participate in
all negotiations and proceedings with respect to such demands. AVS shall not,
except as required by applicable law or with the prior written consent of MUSE,
make any payment with respect to any demands for appraisals or offer to settle
or settle any such demands.
Section 1.11 Reorganization. The parties intend that the
Merger constitutes a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code"), and to report the Merger
for federal and state income tax purposes in a manner consistent with such
characterization. The parties agree to take no position at any time which is
inconsistent with such intention, except as otherwise required by law.
Section 1.12 Pooling of Interests. The parties acknowledge
that it is a condition of AVS's and MUSE's obligations hereunder that the Merger
qualify for pooling of interests accounting treatment (a "Pooling") under
Opinion No. 16 of the Accounting Principles Board ("APB 16"). Each of the AVS
Affiliates (as defined below) shall execute and deliver to MUSE Affiliate
Agreements (as defined below) as contemplated by Section 4.18 below, to ensure
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compliance by each AVS Affiliate with the restrictions required to allow such
accounting treatment to be utilized.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF AVS
Except as otherwise set forth in the AVS disclosure schedule
delivered to MUSE and Sub concurrently with the parties' execution of this
Agreement (the "AVS Disclosure Schedule"), which statements contained in the AVS
Disclosure Schedule shall also be deemed to be representations and warranties
made and given by AVS and each of its subsidiaries under this Article II of this
Agreement, AVS hereby represents and warrants to each of MUSE and Sub as
follows:
Section 2.1 Organization, Standing and Qualification;
Subsidiaries.
(a) AVS and each of its subsidiaries is a corporation or other
entity duly organized, validly existing and in good standing under the laws of
the jurisdiction of its incorporation or organization and has all requisite
corporate or other power and authority to own, lease and operate its properties
and to carry on its business as it is now being conducted. AVS and each of its
subsidiaries is duly qualified or licensed to do business and in good standing
in each jurisdiction in which its property is owned, leased or operated or the
nature of the Business conducted by it makes such qualification or licensing
necessary. Section 2.1 of the AVS Disclosure Schedule lists all lines of
business constituting the Business, the names (registered or otherwise) in which
AVS does business, the complete and correct list of all AVS's subsidiaries and
their respective jurisdictions of incorporation or organization (such list to
include the ownership structure of each subsidiary and the jurisdictions in
which each AVS subsidiary is doing business and whether each subsidiary is
qualified or licensed to do business in such jurisdictions) and the names and
titles of all officers and directors of AVS. AVS has not engaged in lines of
business other than the Business in the past. AVS has delivered to MUSE or its
counsel complete and correct copies of its certificate of incorporation and
bylaws, as currently in effect, and has heretofore made available to MUSE a
complete and correct copy of the charter and bylaws of each of its subsidiaries,
as currently in effect.
(b) All the outstanding shares of capital stock of, or other
equity interests in, each of AVS's subsidiaries have been validly issued and are
fully paid and non-assessable and are owned directly or indirectly by AVS, free
and clear of all pledges, claims, liens, charges, encumbrances and security
interests of any kind or nature whatsoever and free of any other restriction
(including any restriction on the right to vote, sell or otherwise dispose of
such capital stock or other ownership interests), except for restrictions
imposed by applicable securities laws, and no other person or entity has any
rights of any nature to acquire any securities of any of such subsidiaries.
Neither AVS nor any of its subsidiaries directly or indirectly owns any equity
or similar interest in, or any interest convertible into or exchangeable or
exercisable for, any
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corporation, partnership, joint venture or other business association or entity
(other than AVS' subsidiaries).
Section 2.2 Authority. AVS has all requisite corporate power
and authority to enter into this Agreement and to consummate the transactions
contemplated hereby, subject in the case of the Merger to the adoption of this
Agreement by the Required AVS Vote (as defined in Section 2.32). AVS has all
requisite corporate power and authority to enter into the Escrow Agreement, and
to consummate the transactions contemplated thereby. The execution and delivery
of this Agreement and the Escrow Agreement and the consummation of the
transactions contemplated hereby and thereby have been duly authorized by all
necessary corporate action on the part of AVS, subject in the case of the Merger
to the adoption of this Agreement by the Required AVS Vote. This Agreement has
been duly executed and delivered by AVS and the Escrow Agreement, when executed
and delivered by AVS, will constitute legal, valid and binding obligations of
AVS, enforceable against AVS in accordance with its respective terms, except to
the extent enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting the enforceability of
creditors' rights in general and subject to general principles of equity
(regardless of whether enforceability is considered in a proceeding in equity or
at law).
Section 2.3 Capitalization; Equity Interest.
(a) The authorized capital stock of AVS as of the date hereof
consists, and as of the Closing Date will consist, of (i) 12,000,000 shares of
AVS Common Stock, and (ii) 5,000,000 shares of Preferred Stock, $.10 par value.
As of the date hereof, 3,730,112 shares of AVS Common Stock are issued and
outstanding, 187,266 shares of Series A Preferred Stock are issued and
outstanding, 1,641,765 shares of Series B Preferred Stock are issued and
outstanding, no shares of Series C Preferred Stock are issued and outstanding,
3,236,530 shares of AVS Common Stock and 1,920,000 shares of Series C Preferred
Stock are reserved for issuance pursuant to options and warrants granted on or
prior to the date hereof, no shares of AVS Common Stock are held in AVS's
treasury and there are no other shares of capital stock of AVS authorized,
issued or outstanding. All outstanding shares of AVS Capital Stock are, and all
shares which may be issued pursuant to the exercise of outstanding options and
warrants when issued in accordance with the respective terms thereof shall be,
duly authorized, validly issued, fully paid and non-assessable and free of
preemptive rights. The Stock Options have been duly authorized, have been
validly executed, issued and delivered by AVS, constitute the legal, valid and
binding obligations of AVS, and are enforceable as to AVS in accordance with
their terms and the assumption of the Stock Options as provided for in this
Agreement is not prohibited by the terms of the Stock Options or the Option
Plan.
(b) Except as set forth in Section 2.3(a), there are no: (i)
shares of capital stock of AVS authorized, issued or outstanding, (ii)
securities convertible into or exchangeable or exercisable for, or any options,
warrants, calls, puts, subscriptions or other rights (preemptive or otherwise)
to acquire, directly or indirectly, any shares of capital stock of AVS or its
subsidiaries, (iii) agreements or contractual commitments, whether written or
oral, relating to the capital stock of AVS or any of its subsidiaries or
obligating AVS or any of its subsidiaries to
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issue, sell, repurchase, redeem or otherwise acquire any shares of capital stock
of AVS or any of its subsidiaries or any such securities, options, warrants,
calls, puts, subscriptions or other rights, (iv) liens relating to any of
capital stock of AVS or any of its subsidiaries, (v) rights or contractual
commitments of AVS or any of its subsidiaries (whether written or oral) that
give any Person (as defined in Section 8.2(b)) other than AVS any right to
reserve or exercise any benefits or rights similar to any rights enjoyed by or
accruing to the holder of shares of capital stock of AVS or (vi) rights or
contractual commitments of AVS or any of its subsidiaries (whether written or
oral) to provide funds to or make any investment in any other Person. AVS has
provided MUSE and Sub with a true and complete list, as of the date hereof, of
(i) all Stock Options to purchase AVS Common Stock and/or Series C Preferred
Stock that have been granted by AVS, (ii) the holder of each of the Stock
Options, (iii) the Option Plan under which each Stock Option was issued, (iv)
the number of Stock Options held by each such holder, (v) the exercise prices of
each such Stock Option, (vi) the date of grant of such Stock Option, (vii) the
expiration date of such Stock Option, (viii) whether such Stock Option has
vested as of the date hereof, and (ix) whether such Stock Option is a
non-qualified stock option or an incentive stock option within the meaning of
422(b) of the Code. Except as set forth in Section 2.3(a) of the AVS Disclosure
Schedule, no shares of restricted stock or other equity-based awards have been
granted under the Option Plan or otherwise.
Section 2.4 Consents and Approvals; No Violation. Neither the
execution and delivery of this Agreement or the Escrow Agreement, nor the
consummation of the transactions contemplated hereby or thereby nor compliance
by AVS with any of the provisions hereof or thereof will (i) conflict with or
result in a breach of the certificate of incorporation, bylaws or other
constitutive documents of AVS or any of its subsidiaries, (ii) conflict with or
result (with or without notice or lapse of time or both) in a default (or give
rise to any right of reimbursement, termination, cancellation, modification or
acceleration) under any of the provisions of any note, bond, lease, mortgage,
indenture, license, franchise, permit agreement or other instrument or
obligation to which AVS or any of its subsidiaries is a party, or by which AVS
or any of its subsidiaries or their respective properties or assets may be bound
or affected, except for such conflict, breach or default as to which requisite
waivers or consents are described in Section 2.4 of the AVS Disclosure Schedule
and are required to be obtained prior to Closing, (iii) violate any Law,
statute, rule or regulation or order, writ, injunction, judgment or decree
(each, an "Order") applicable to AVS or any of its subsidiaries or their
respective properties or assets or (iv) result in the creation or imposition of
any Lien upon any property or assets used or held in connection with the
Business. Except as set forth in Section 2.4 of the AVS Disclosure Schedule, no
consent or approval by, or any notification of or filing with, or other action
of any Person (governmental or private) is required in connection with the
execution, delivery and performance by AVS of this Agreement or any Transaction
Agreement. There is no Proceeding (as defined in Section 2.14) pending or, to
the knowledge of AVS, threatened against AVS or any of its assets or properties
that seeks to prevent the consummation of the transactions contemplated herein
or in any Transaction Agreement.
Section 2.5 Books and Records. The minute books and other
similar records of AVS and each of its subsidiaries made available to MUSE prior
to the execution of this Agreement contain a true, correct and complete record
of all actions taken at all meetings and by
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all written consents in lieu of meetings of the shareholders, the board of
directors and committees of the board of directors of AVS and each of its
subsidiaries. The stock transfer ledger and other similar records of AVS and
each of its subsidiaries made available to MUSE prior to the execution of this
Agreement accurately reflect all record transfers prior to the execution of this
Agreement in the capital stock of AVS and each of its subsidiaries. No Books and
Records (as defined below) of AVS and each of its subsidiaries have been
recorded, stored, maintained, operated or are otherwise wholly or partly
dependent upon or held by any means (including any electronic, mechanical or
photographic process, whether computerized or not) which (including all means or
access thereto and therefrom) are not under the exclusive ownership and direct
control of AVS and each of its subsidiaries. "Books and Records" means,
collectively, all files, documents, instruments, papers, books and records
relating to the business or the condition of a company, including financial
statements, tax returns and related work papers and letters from accountants,
budgets, pricing guidelines, ledgers, journals, deeds, title policies, minute
books, stock certificates and books, corporate seals, stock transfer ledgers,
contracts, licenses, customer lists, computer files and programs, retrieval
programs, operating data and plans and environmental studies and plans.
Section 2.6 Financial Statements; Certain Financial
Information; EBIT.
(a) AVS has previously delivered to MUSE true and complete
copies of the following financial statements: (i) the unaudited balance sheet of
AVS as of March 31, 2000 and the related unaudited statements of operations and
cash flows of AVS for the three months then ended (such balance sheet as of
March 31, 2000 is referred to herein as the "Interim Balance Sheet" and all of
the financial statement described in this clause (i) are referred to as the
"Interim Financial Statements"); and (ii) the audited balance sheets of AVS for
the fiscal years ended December 31, 1997, December 31, 1998 and December 31,
1999 and the related audited statements of operations and cash flows of AVS for
the fiscal years then ended, certified by AVS's independent certified public
accountants (the "Audited Financials") (such financial statements described in
clauses (i) and (ii) and any notes thereto are hereinafter collectively referred
to as the "Financial Statements"). Each of the balance sheets included in the
Financial Statements is, and the Closing Balance Sheet (as defined in Section
4.14) will be, true, complete and correct, and each of the balance sheets
included in the Financial Statements presents, and the Closing Balance Sheet
will present, fairly the financial position of AVS as of the respective date of
such balance sheet, in each case in accordance with GAAP, subject, in the case
of the Interim Balance Sheet and the Closing Balance Sheet, to year-end
adjustments and the absence of notes. Each of the statements of operations and
cash flows included in the Financial Statements is, and the statements of
operations and cash flows included in the Closing Financial Statements (as
defined in Section 4.14) will be, true, complete and correct, and each of the
statements of operations and cash flows included in the Financial Statements
presents, and the statements of operations and cash flows included in the
Closing Financial Statements will present, fairly the results of operations of
AVS for the periods set forth therein, in each case in accordance with GAAP,
subject, in the case of the Interim Balance Sheet and the Closing Balance Sheet,
to year-end adjustments and the absence of notes. The Financial Statements were,
and the Closing Financial Statements will be, compiled from the Books and
Records regularly maintained by management and used to prepare financial
statements of AVS in accordance with the principles
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stated therein. AVS has maintained the Books and Records in a manner sufficient
to permit the preparation of the Financial Statements and the Closing Financial
Statements in accordance with GAAP. The Books and Records fairly reflect the
income, expenses, assets and liabilities of AVS and provide a fair and accurate
basis for the preparation of the Financial Statements and the Closing Financial
Statements.
(b) All reserves established by AVS are reflected on the
Interim Balance Sheet and are adequate and are stated in accordance with GAAP,
including reserves for bad debt, vacation, sick leave and similar paid leave.
There are no loss contingencies that are required to be accrued by Statement of
Financial Accounting Standard No. 5 of the Financial Accounting Standards Board
which are not provided for on such Interim Balance Sheet.
(c) AVS generated at least $667,000 of EBIT (defined below)
for the twelve month period ended December 31, 1999. "EBIT" for any period for
any Person means such Person's net earnings before net interest expense and
provision for income taxes for such period, each as determined in accordance
with GAAP.
Section 2.7 Absence of Undisclosed Liabilities. Except as set
forth on Section 2.7 of the AVS Disclosure Schedule, AVS and each of its
subsidiaries do not have, and as a result of the transactions contemplated
herein will not have, any Indebtedness (as defined below), liabilities or
obligations of any nature (whether known or unknown, absolute, accrued, fixed,
contingent, liquidated, unliquidated or otherwise, and whether due or to become
due), except for the Indebtedness, liabilities and obligations (i) reflected on
the Interim Balance Sheet (including the notes thereto); (ii) incurred in the
ordinary course of business consistent with past practice since the date of the
Interim Balance Sheet and which do not exceed $25,000 individually or $100,000
in the aggregate (the "Threshold Amount"); provided that, upon reaching the
Threshold Amount, AVS will not be required to set forth on Section 2.7 of the
AVS Disclosure Schedule each additional item of Indebtedness, liability or
obligation which do not exceed $10,000 individually; or (iii) pursuant to any
Contract (as defined in Section 2.13) set forth in Section 2.13 of the AVS
Disclosure Schedule or not required to be set forth therein due to dollar
threshold or other parameter. Notwithstanding the foregoing, on the Closing
Date, (i) AVS and each of its subsidiaries will have no pension liabilities and
no contingent liabilities required to be reported in accordance with GAAP,
including as a result of the transactions contemplated herein; (ii) any related
party receivables of AVS and each of its subsidiaries will have been collected;
and (iii) AVS and each of its subsidiaries will have no related party payables
(accrued or unaccrued, contingent or fixed), except as set forth in Section 2.7
of the AVS Disclosure Schedule. "Indebtedness" means all obligations of AVS or
any of its subsidiaries as of any date, (i) for borrowed money, including such
indebtedness payable to any stockholder, (ii) evidenced by notes, bonds,
debentures or similar instruments, (iii) for which interest charges are
customarily paid, (iv) under conditional sale or other title retention
agreements relating to property or assets purchased by AVS or any of its
subsidiaries, (v) issued or assumed as the deferred purchase price of property
or services (other than trade accounts payable and accrued obligations incurred
in the ordinary course of business consistent with past practice), (vi) under
capital leases, (vii) in respect of interest rate protection agreements, foreign
currency exchange agreements or other interest or exchange rate hedging
arrangements, (viii) as an account party in
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respect of letters of credit and bankers' acceptances, (ix) with respect to the
issuance of preferred stock, (x) with respect to Indebtedness of others secured
by (or for which the holder of such Indebtedness has an existing right,
contingent or otherwise, to be secured by) any Lien on property owned or
acquired by AVS or any of its subsidiaries, (xi) in the nature of guarantees of
Indebtedness of others, (xii) with respect to any warrants and (xiii) with
respect to any negative cash balances, and other such similar amounts in each
case, as of such date, including accrued interest, premiums and penalties upon
prepayment as of such date provided, however, that Indebtedness does not include
accounts payable of AVS or any of its subsidiaries and other operating expenses
(such as payroll) incurred by AVS or any of its subsidiaries in the ordinary
course of business consistent with past practice.
Section 2.8 Absence of Certain Changes or Events. Except as
set forth in Section 2.8 of the AVS Disclosure Schedule, since December 31,
1999, neither AVS nor any of its subsidiaries has:
(a) made any material change in its business or operations or
in the manner of conducting its business;
(b) suffered any event, violation or other matter that would
have a material adverse effect on the Business, condition (financial or
otherwise), assets, liabilities, operations, properties or prospects of AVS (a
"Material Adverse Effect"), and no fact or condition exists that would
reasonably be expected to cause a Material Adverse Effect in the future;
(c) suffered any material casualty loss (whether or not
insured) or condemnation or other taking;
(d) other than in the ordinary course of business, entered
into any employment or consulting contract or commitment (whether oral or
written) or compensation arrangement or employee benefit plan, or changed or
committed to change (including any change pursuant to any bonus, pension,
profit-sharing or other plan, commitment, policy or arrangement) the
compensation payable or to become payable to any of its officers, directors,
employees, agents or consultants, or made any pension, retirement,
profit-sharing, bonus or other employee welfare or benefit payment or
contribution;
(e) declared, paid or made, or set aside for payment or
making, any dividend or other distribution in respect of its common stock or
other capital stock or securities, or directly or indirectly redeemed, purchased
or otherwise acquired any of its common stock or other capital stock or
securities, or combined or subdivided or in any way changed any of the terms or
provisions of its common stock or other capital stock or securities;
(f) paid (except for business payables incurred and paid in
the ordinary course of business consistent with past practice), loaned or
advanced any amount to or in respect of, or sold, transferred or leased any
property or assets (real, personal or mixed, tangible or intangible) to, or
entered into, amended or waived any rights under any transactions, agreements or
arrangements with or for the benefit of, any of its stockholders or any of their
respective
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Affiliates (as defined in Section 8.2(b)), associates or family members or any
of its officers or directors or any Affiliate or associate of its officers or
directors;
(g) made or proposed any change in any accounting or tax
principles, practices or methods, including its accounts payable or accounts
receivable practices and terms (including reserves), except for such changes
which are both (x) required by GAAP or by Law and (y) set forth in Section
2.8(g) of the AVS Disclosure Schedule;
(h) incurred any liability (whether known or unknown,
absolute, accrued, fixed, contingent, liquidated, unliquidated or otherwise, and
whether due or to become due), except for current liabilities reflected on the
Interim Balance Sheet or incurred after the date of the Interim Balance Sheet in
the ordinary course of business consistent with past practice and not exceeding
$25,000 individually or $100,000 in the aggregate;
(i) canceled or waived rights with respect to any debts or
other obligations owed to or claims held by AVS (including the settlement of any
claims or litigation or other Proceeding);
(j) accelerated or delayed collection of notes or accounts
receivable generated by the Business in advance of or beyond their regular due
dates or the dates when the same otherwise would have been collected;
(k) terminated or amended or suffered the termination or
amendment of any Contract (as defined in Section 2.13) pursuant to which AVS or
any of its subsidiaries would receive from any Person or pay to any Person more
than $50,000 in any calendar year or disposed of or permitted to lapse any item
of Intellectual Property Rights (as defined in Section 2.12);
(l) made any capital expenditures or commitments for additions
to property, plant or equipment constituting capital assets in excess of $50,000
(or $100,000 in the aggregate);
(m) incurred any Indebtedness; and
(n) agreed, whether in writing or otherwise, to take any
action described in this Section 2.8 or any action which, if taken after the
date of this Agreement without MUSE's consent, would constitute a breach under
Section 4.1.
Section 2.9 Real Property. Neither AVS nor any of its
subsidiaries have ever owned, nor will own as of the Closing Date, any real
property or any option to acquire any real property.
Section 2.10 Leases.
(a) All leases of real property as to which AVS or any of its
subsidiaries is the lessee or sublessee (the "Leased Real Property"), or
personal property as to which AVS or any of
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its subsidiaries is the lessee or sublessee, are listed in Section 2.10 of the
AVS Disclosure Schedule (true, correct and complete copies of which have been
delivered to MUSE). All such leases are in full force and effect, are
enforceable against AVS or its subsidiaries and the other parties thereto and
have not been modified or amended, except as set forth in Section 2.10 of the
AVS Disclosure Schedule. There exists no default by AVS or any of its
subsidiaries under any of such leases or, to the knowledge of AVS, by any other
party thereto, nor any event which, with the giving of notice or the passage of
time or both, would constitute an event of default by AVS or any of its
subsidiaries or any other party thereunder.
(b) There are no leases of real or personal property leased or
subleased for the use or benefit of any Person other than AVS or any of its
subsidiaries to which AVS or any of is subsidiaries is a party.
Section 2.11 Title to Assets. AVS and each of its subsidiaries
have good, valid and marketable title to all of the assets shown on the Interim
Balance Sheet or acquired since the date of the Interim Balance Sheet, except
for assets sold in the ordinary course of business consistent with past practice
since the date of the Interim Balance Sheet not exceeding $25,000 individually
or $100,000 in the aggregate. Except as set forth in Section 2.11 of the AVS
Disclosure Schedule, such assets are free and clear of any Lien. Such assets are
in good operating condition, subject to ordinary wear and tear, and constitute
all of the assets, interests and rights held for use or used in connection with
the Business and constitute all those necessary to operate the Business as it is
currently conducted and in accordance with recent historical practice. All items
of personal property with a book value in excess of $5,000 are listed in Section
2.11 of the AVS Disclosure Schedule.
Section 2.12 Intellectual Property Rights.
(a) AVS and each of its subsidiaries is the exclusive owner of
all right, title and interest in and to each of the following that are used or
licensed in the Business as currently conducted:
(i) except as set forth in Section 2.12(a)(i) of the
AVS Disclosure Schedule, and except for commercially available computer software
programs, all computer programs, databases and associated system and user
documentation (the "Software Products");
(ii) all copyrights and copyright registrations owned
by AVS or any of its subsidiaries, including, without limitation, all copyrights
and copyright registrations owned by AVS or any of its subsidiaries listed in
Section 2.12(a)(ii) of the AVS Disclosure Schedule and all copyrights and
copyright registrations in and to the Software Products;
(iii) all patentable inventions, patents and patent
applications owned by AVS or any of its subsidiaries, including, without
limitation, all inventions, patents and patent applications owned by AVS or any
of its subsidiaries listed in Section 2.12(a)(iii) of the AVS Disclosure
Schedule and all patentable inventions, patents and patent applications relating
to or embodied in the Software Products;
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(iv) all Internet domain names and registrations,
trademarks, service marks and trade names, and the applications to register any
of them in federal, state or foreign jurisdictions, including, without
limitation, all Internet domain names and registrations, trademarks, service
marks and trade names, and the applications to register any of them in federal,
state or foreign jurisdictions owned by AVS or any of its subsidiaries listed in
Section 2.12(a)(iv) of the AVS Disclosure Schedule and all Internet domain names
and registrations, trademarks, service marks and trade names, and the
applications to register any of them in federal, state or foreign jurisdictions
now used or contemplated to be used in connection with the Software Products;
and
(v) except for such trade secrets as may be contained
in the third-party software programs listed in Section 2.12(a)(i) of the AVS
Disclosure Schedule, all trade secrets and other proprietary rights, including
those applicable to any of the Software Products, necessary or useful for the
operation of the business of AVS and each of its subsidiaries as currently
conducted.
These items referred to in subparagraphs (i) through (v) of this Section 2.12(a)
are herein referred to collectively as the "Intellectual Property Rights."
(b) Section 2.12(b) of the AVS Disclosure Schedule sets forth
a list of all licenses and similar agreements between AVS or any of its
subsidiaries, on the one hand, and third parties, on the other hand, under which
AVS or any of its subsidiaries is granted rights to make, use, sell, reproduce,
distribute, manufacture, prepare derivative works based upon, perform or display
publicly, or license items embodying the patent, copyright, trade secret,
trademark or other proprietary rights of such third parties. AVS is not, nor as
a result of the execution and delivery of this Agreement or any Transaction
Agreement or the performance of its obligations hereunder or thereunder will be,
in violation of or lose any rights pursuant to any license or similar agreement
described in Section 2.12(b) of the AVS Disclosure Schedule. Except as set forth
in Section 2.12(b) of the AVS Disclosure Schedule, no Person is entitled to any
royalty, fee or other payment with respect to any such agreement or any
Intellectual Property Rights.
(c) Section 2.12(c) of the AVS Disclosure Schedule sets forth
a list of all agreements under which AVS or any of its subsidiaries has granted
rights to third parties under the Intellectual Property Rights other than in the
ordinary course of the business of AVS and its subsidiaries. Except as set forth
in Section 2.12(c) of the AVS Disclosure Schedule, all such rights granted have
been and are non-exclusive. True, correct and complete copies of all such
agreements have been delivered to MUSE.
(d) No claims with respect to any Intellectual Property Right
have been asserted or, to the knowledge of AVS, are threatened by any Person,
nor does AVS know of any valid grounds for any bona fide claims against the use
by AVS or any of its subsidiaries of any Intellectual Property Rights. All
Internet domain names granted and issued patents listed in Section 2.12(a)(iii)
of the AVS Disclosure Schedule, all trademarks, trade names and service marks
and all applications to register the same listed in Section 2.12(a)(iv) of the
AVS
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Disclosure Schedule, and all copyrights and copyrights registrations listed in
Section 2.12(a)(ii) of the AVS Disclosure Schedule are valid, enforceable and
subsisting. As of the date hereof, there has not been and there is not any
unauthorized use, infringement or misappropriation of any of the Intellectual
Property Rights by any third party, employee, consultant or former employee or
consultant of AVS or any of its subsidiaries.
(e) No Intellectual Property Rights are subject to any Order
restricting in any manner the use or licensing thereof by AVS or any of its
subsidiaries. Neither AVS nor any of its subsidiaries have entered into any
agreement to indemnify any other Person against any charge of infringement of
any third party intellectual property rights. Neither AVS nor any of its
subsidiaries have entered into any agreement granting any third party the right
to bring infringement actions or otherwise to enforce rights with respect to any
Intellectual Property Rights. Each of AVS and its subsidiaries has the exclusive
right to file, prosecute and maintain all applications and registrations with
respect to the Intellectual Property Rights.
(f) Each of the Software Products set forth in Section
2.12(a)(i) of the AVS Disclosure Schedule is the most recent version of such
Software Product. Except as set forth in Section 2.12(f) of the AVS Disclosure
Schedule, each of the Software Products set forth in Section 2.12(f) of the AVS
Disclosure Schedule (the "Core Software Products") conforms substantially to the
functional and operational specifications set forth in the respective user
manuals and other documentation for such Core Software Product. Each of AVS and
its subsidiaries owns and has possession of all such technical documentation and
software tools (including, by way of example and not limitation, all source
code, compilers, system documentation, statements of principles of operation and
schematics, as applicable) for each of such Core Software Products as are
necessary and sufficient for the continued effective use, further development
and maintenance of the latest version of each such Core Software Product. The
current status of such conformity is set forth in brackets immediately following
the name and version number of each such Core Software Product in Section
2.12(f) of the AVS Disclosure Schedule.
(g) Except as set forth in Section 2.12(g) of the AVS
Disclosure Schedule, there are no restrictions on the direct or indirect
transfer of any Contract, or any interest therein, held by AVS or any of its
subsidiaries in respect of the Intellectual Property Rights or the Software
Products. AVS has delivered to MUSE prior to the date hereof documentation with
respect to any invention, process, design, computer program or other know-how or
trade secret included in the Intellectual Property Rights, which documentation
is accurate in all material respects and reasonably sufficient in detail and
content to identify and explain such invention, process, design, computer
program or other know-how or trade secret and to facilitate its full and proper
use without reliance on the special knowledge of any Person. Each of AVS and its
subsidiaries has taken the necessary security and other measures to protect the
secrecy, confidentiality and value of its trade secrets and other Intellectual
Property Rights.
(h) No former or present employee, consultant, officer or
director of AVS or any of its subsidiaries holds any right, title or interest,
directly or indirectly, in whole or in part, in or to any Intellectual Property
Rights.
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(i) The Intellectual Property Rights are sufficient and
adequate for AVS and each of its subsidiaries to carry on the Business as
presently constituted.
Section 2.13 Contracts. Section 2.13 of the AVS Disclosure
Schedule contains a true and complete list of all written and oral (and a brief
description of such oral agreements) material contracts, agreements and other
instruments (collectively, "Contracts") to which AVS is a party (i) relating to
Indebtedness or guaranty of performance or warranty of products or services,
(ii) of duration of six months or more from the date hereof and not cancelable
by AVS without material penalty on 30 days' or less notice, (iii) relating to
commitments in excess of $10,000, (iv) relating to the employment or
compensation of any director, officer, employee, consultant or other agent of
AVS, (v) relating to the sale or other disposition of any assets, properties or
rights, (vi) relating to the lease or similar arrangement of any machinery,
equipment, motor vehicles, furniture, fixture or similar property, (vii) to
which any federal, state or local governmental agency or authority is a party,
(viii) between AVS and any AVS stockholder or Affiliate of any AVS stockholder,
(ix) that restricts the operation of AVS anywhere in the world, (x) pursuant to
which AVS is or may be obligated to make payments, contingent or otherwise, on
account of or arising out of prior acquisitions or sales of businesses, assets
or stock of other Persons, (xi) providing for the license to AVS by third
parties of rights to use software or other technology or providing for the
performance of development services by or for any third party; or (xii) that is
otherwise material to AVS or entered into other than in the ordinary course of
business consistent with past practice. AVS is not in default under any such
Contract, and there has been no event that with the giving of notice or the
passage of time, or both, would constitute such a default or, to the knowledge
of AVS, any default, or event that with the giving of notice or the passage of
time, or both, would constitute such a default, by any other party thereto,
existing with respect to any such Contract except for such defaults which, in
the aggregate, would result in loss or liability to AVS of no more than $15,000,
and AVS does not intend, and has not received notice that any party to any such
Contract intends, to terminate, amend, not renew or cancel any such Contract.
Each of the Contracts listed in Section 2.13 of the AVS Disclosure Schedule is
in full force and effect and constitutes a legal, valid and binding obligation
of AVS and, to AVS's knowledge, the other parties thereto, enforceable in
accordance with its terms. AVS has delivered to MUSE true and complete copies of
all written Contracts described in Section 2.13 of the AVS Disclosure Schedule.
AVS is not currently obligated to pay or liable for any amounts under any of the
Contracts, nor is AVS aware of any facts or circumstances that could result in
any claim under any Contract with respect to periods ending on or before the
date of this Agreement, in each instance, for which an accrual on the AVS
Financial Statements is or would have been required under GAAP and has not been
made.
Section 2.14 Litigation. Except as set forth in Section 2.14
of the AVS Disclosure Schedule, there are no, nor have there been for the five
years prior to the date of this Agreement any, (i) investigations pending or, to
the knowledge of AVS, threatened affecting or potentially affecting AVS or any
of its subsidiaries or the Business, (ii) actions, causes of action, claims,
suits, proceedings, arbitrations, mediations or other alternative dispute
resolution procedures, orders, writs, injunctions or decrees (each, a
"Proceeding") entered against, involving, pending or, to the knowledge of AVS,
threatened against AVS or any of its subsidiaries, in each case affecting or
potentially affecting the operations of AVS or any of its
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subsidiaries, the Business, assets, properties or prospects of AVS or any of its
subsidiaries, at law or in equity, or before or by any governmental entity, and
(iii) existing or prior facts, circumstances or conditions that could reasonably
form the basis for a Proceeding against AVS or any of its subsidiaries that
would affect or potentially affect the operations of AVS or any of its
subsidiaries, the Business, assets, properties or prospects of AVS or any of its
subsidiaries. Each of AVS and its subsidiaries is not in default with respect to
any Order of any governmental entity. AVS has delivered to MUSE accurate and
complete copies of all documentation relating to each Proceeding.
Section 2.15 Plants, Buildings, Structures, Facilities and
Equipment. No notice from any governmental entity has been received by AVS or
any of its subsidiaries requiring or calling attention to the need for any work,
repair, construction, alteration or installation on, or in connection with, any
real property or any of the plants, building, structures, facilities or
equipment located thereon. Neither AVS nor any of its subsidiaries has received
notification of any alleged violation of any applicable deed restrictions or
covenants or any building, zoning, subdivision, health, safety and other laws,
including the Americans with Disabilities Act and the Occupational Safety and
Health Act. No existing or prior facts or circumstances exist that could
reasonably form the basis of any such notification.
Section 2.16 Insurance. Set forth in Section 2.16 of the AVS
Disclosure Schedule is a complete and accurate list of all primary, excess and
umbrella policies, bonds and other forms of insurance currently owned or held by
or on behalf of or providing insurance coverage to AVS or the Business or
maintained by AVS for any officer, director or employee of AVS. All policies set
forth in Section 2.16 of the AVS Disclosure Schedule are in full force and
effect and shall remain in full force and effect through the Closing Date and
thereafter (until the scheduled expiration date or earlier termination caused by
MUSE), notwithstanding the Merger and without any consent of the insurer or
other action by AVS, MUSE or the insurer. With respect to all policies, all
premiums currently payable or previously due have been paid, and no notice of
cancellation or termination has been received by AVS with respect to any such
policy. All such policies are sufficient for compliance with all requirements of
law and of all Contracts to which AVS is a party or otherwise bound and are
valid, outstanding, enforceable and, to the knowledge of AVS, collectible
policies and provide insurance coverage that is adequate and customary for
businesses of similar size and type. Complete and accurate copies of all such
policies and related documentation have previously been delivered to MUSE.
Section 2.17 Employee Benefit Plans.
(a) Except as set forth in Section 2.17 of the AVS Disclosure
Schedule, neither AVS nor any ERISA Affiliate (as defined below) maintains or
contributes to, has ever maintained or contributed to, or has or has ever
incurred any liability (whether or not contingent) with respect to any employee
benefit plan or any collective bargaining agreement or any bonus, pension,
profit sharing, deferred compensation, incentive compensation, stock ownership,
stock purchase, stock option, phantom stock, stock appreciation right,
retirement, vacation, severance, disability, death benefit, hospitalization,
medical, worker's compensation, disability, supplementary unemployment benefits,
or other plan, arrangement or understanding (whether or
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not legally binding), or any employment, severance, termination or any similar
agreement (each, a "Plan"). "ERISA Affiliate" means (i) any corporation which at
any time on or before the Closing Date is or was a member of the same controlled
group of corporations (within the meaning of Section 414(b) of the Code) as AVS;
(ii) any partnership, trade or business (whether or not incorporated) which at
any time on or before the Closing Date is or was under common control (within
the meaning of Section 414(c) of the Code) with AVS; and (iii) any entity which
at any time on or before the Closing Date is or was a member of the same
affiliated service group (within the meaning of Section 414(m) of the Code) as
either AVS, any corporation described in clause (i) or any partnership, trade or
business described in clause (ii).
(b) Section 2.17 of the AVS Disclosure Schedule contains a
list and a brief, general description of each Plan. AVS has delivered to MUSE
true and complete copies of (A) each Plan, (B) the summary plan description, if
any, for each Plan, (C) the latest annual report, if any, which has been filed
with the Internal Revenue Service (the "IRS") for each Plan, (D) the most recent
IRS determination letter for each Plan that is a pension plan (as defined in
Section 3(2) of ERISA) intended to be qualified under Code Section 401(a) and
(E) copies of reports for the three most recent Plan years showing compliance
with discrimination rules under those of Code Sections 401(a), 401(k), 401(m),
419, 419A, 505, 501(c)(9), 105(h), 125 or 129 applicable to such Plan. Each Plan
intended to be tax qualified under Sections 401(a) and 501(a) of the Code has
been determined by the IRS to be tax qualified under Sections 401(a) and 501(a)
of the Code, and, no amendment to or failure to amend any such Plan and, no
other circumstance or event has occurred that adversely affects its tax
qualified status. There has been no prohibited transaction within the meaning of
Section 4975 of the Code and Section 406 of Title I of the Employee Retirement
Income Retirement Security Act of 1974, as amended ("ERISA"), with respect to
any Plan. AVS has no commitment, whether or not legally binding, to create any
additional employee benefit plan (as defined in Section 3(3) of ERISA) or to
change the terms of any existing Plan.
(c) Neither AVS nor any ERISA Affiliate has ever maintained an
employee benefit plan (as defined in Section 3(3) of ERISA) subject to the
provisions of Section 412 of the Code, Part 3 of Subtitle B of Title I of ERISA
or Title IV of ERISA.
(d) There are no Proceedings (as defined in Section 2.14) by
any Plan participant, Plan beneficiary or any representative thereof, (other
than routine claims for benefits) pending, or, to the knowledge of AVS,
threatened, and no facts or circumstances exist which could give rise to any
Proceeding. AVS has timely satisfied all funding, compliance and reporting
requirements for all Plans. No event or condition exists or is reasonably
expected to occur in connection with the administration of any Plan that would
either (i) subject MUSE or any of its Affiliates to any liability, contingent or
otherwise to the IRS, the Department of Labor ("DOL") or the Pension Benefit
Guarantee Corporation (other than any liability for premiums payments to the
Pension Benefit Guarantee Corporation) or (ii) cause the imposition of any lien
on the assets of MUSE or any of its Affiliates under the Code or ERISA. No Plan
is the subject of any pending application for administrative relief under any
voluntary compliance program or closing agreement program of the IRS or the DOL.
With respect to each Plan, AVS has timely paid all contributions (including
employee salary reduction contributions) and all insurance
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premiums that have become due, and any such expense accrued but not yet due has
been properly reflected in the Financial Statements. Each Plan has been operated
in accordance with its terms and complies in all material respects with all
applicable Laws.
(e) No Plan provides or is required to provide, now or in the
future, health, medical, dental, accident, disability, death or survivor
benefits to or in respect of any individual beyond termination of employment
except to the extent required under any state insurance Law or under Part 6 of
Subtitle B of Title I of ERISA and under Section 4980(B) of the Code (COBRA
benefits). Except to the extent of such COBRA benefits, no Plan covers any
individual other than an employee of AVS or dependents of employees under health
and child care Plans disclosed to MUSE.
(f) Except as set forth in Section 2.17 of the AVS Disclosure
Schedule, the consummation of the transactions contemplated by this Agreement
will not (A) entitle any Person providing or that has provided services at
anytime to AVS to severance pay or termination benefits for which MUSE or any of
its Affiliates may become liable, (B) except as provided in Section 1.9, solely
as a result of their consummation, increase or accelerate any amount due under
any Plan, require assets to be set aside or other forms of security to be
provided with respect to any liability under any Plan, or result in any
"parachute payment" (within the meaning of Code Section 280G) under any Plan or
(C) except as and to the extent accrued or reserved for on the Interim Balance
Sheet, obligate AVS or any of its Affiliates to pay or otherwise be liable for
any compensation (including options, warrants, rights and similar instruments),
vacation days, pension contribution or other benefits to any such Person for
periods before the Closing Date or for personnel whom AVS does not actually
employ.
Section 2.18 Tax Matters.
(a) All federal, state, local and foreign tax returns and tax
reports required to be filed by AVS and its subsidiaries on or prior to the
Closing Date (giving effect to any valid requests for extension that have been,
or will be, validly filed and granted) have been or will be filed on a timely
basis with the appropriate governmental agencies in all jurisdictions in which
such returns and reports are required to be filed. All such returns and reports
are and will be true, correct and complete in all material respects and disclose
all taxes required to be paid by AVS and its subsidiaries. All federal, state,
local and foreign income, profits, franchise, sales, use, occupation, property,
excise, employment and other taxes (including interest, penalties and
withholdings of tax) due from and payable by AVS and its subsidiaries with
respect to periods through the Closing Date have been or will be fully paid on a
timely basis or will be adequately reserved for on the Interim Balance Sheet.
Each of AVS and its subsidiaries is not currently the beneficiary of any
extension of time within which to file any tax return, except that the periods
for filing tax returns for the year ending December 31, 1999 are currently on
such extensions. There are no Liens for taxes upon the assets of AVS and its
subsidiaries except for statutory liens for current taxes not yet due.
(b) No claim has ever been made by an authority in a
jurisdiction where each of AVS and its subsidiaries does not file tax returns
that it is or may be subject to taxation by that
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jurisdiction, and each of AVS and its subsidiaries has not received any notice
or request for information from any such authority.
(c) No issues have been raised with AVS or any of its
subsidiaries by the IRS or any other taxing authority in connection with any tax
return or report filed by AVS or any of its subsidiaries relating to AVS or its
subsidiaries, and there are no issues which, either individually or in the
aggregate, could reasonably result in any liability for tax obligations of AVS
or any of its subsidiaries relating to periods ending on or before the Closing
Date in excess of the accrued liability for taxes shown on the Interim Balance
Sheet. No waivers or extensions of statutes of limitations have been given or
requested with respect to AVS or any of its subsidiaries. Except as set forth in
Section 2.18(c) of the AVS Disclosure Schedule, neither AVS nor any of its
subsidiaries have been, or have received notice that AVS or any of its
subsidiaries may be, subject to an audit by any federal, state, local or foreign
tax authority.
(d) No material differences exist between the amounts of the
book basis and tax basis of assets that are not accounted for by an accrual on
the books of AVS and its subsidiaries for income tax purposes. AVS and its
subsidiaries will not be required to recognize for income tax purposes in a
taxable year beginning on or after the Closing Date any amount of income or gain
which it would have been required to recognize under the accrual method of
accounting for tax purposes in a tax period ending on or before the Closing Date
as a result of the installment method of accounting, the completed contract
method of accounting, the cash method of accounting or a change in method of
accounting.
(e) All transactions or methods of accounting that could give
rise to an understatement of federal income tax (within the meaning of Section
6661 of the Code for tax returns filed on or before December 31, 1990, and
within the meaning of Section 6662 of the Code for tax returns filed after
December 31, 1990) have been adequately disclosed on the tax return in
accordance with Section 6661(b)(2)(B) of the Code for tax returns filed on or
prior to December 31, 1990, and in accordance with Section 6662(d)(2)(B) of the
Code for tax returns filed after December 31, 1990.
(f) Each of AVS and its subsidiaries is not and has not been a
United States real property holding company (as defined in Section 897(c)(2) of
the Code) during the applicable period specified in Section 897(c)(1)(11) of the
Code.
(g) AVS and its subsidiaries have complied (and until the
Closing will comply) with all applicable Laws relating to the payment and
withholding of taxes (including withholding and reporting requirements under
Section 1441 through 1464, 3401 through 3406, 6041 and 6049 of the Code and
similar provisions under any other Laws) and, within the time and in the manner
prescribed by Law, has withheld from wages, fees and other payments and paid
over to the proper governmental or regulatory authorities all amounts required.
(h) Each of AVS and its subsidiaries is not a party to any
tax-sharing or tax indemnity agreement or any other agreement of a similar
nature that remains in effect on the Closing Date.
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(i) Each of AVS and its subsidiaries is not subject to any
liability under Treasury Regulations 1.1502-6 or any comparable provision of
state, local or foreign tax law or regulation.
(j) There are no tax rulings, requests for rulings, closing
agreements or changes of accounting method relating to AVS and any of its
subsidiaries that could affect their liability for Taxes for any period after
the Closing. No power of attorney with respect to any matter relating to Taxes
of AVS and any of its subsidiaries is currently in force. No excess loss account
(as referred to in Treasury Regulations Section 1.1502-19) exists with respect
to any subsidiary of AVS. AVS and its subsidiaries do not have any deferred gain
or loss (i) arising from deferred intercompany transactions (as referred to in
Treasury Regulations Section 1.1502- 13), or (ii) with respect to the stock or
obligations of any other member of AVS's affiliated group (as described in
Treasury Regulations Section 1.1502-14). Neither AVS nor any of its subsidiaries
has filed a consent under Section 341(f) of the Code or any comparable provision
of state revenue statutes. No property of AVS or any of its subsidiaries is
"tax-exempt use property" within the meaning of Section 168(h) of the Code.
Neither AVS or any of its subsidiaries is a party to any lease made pursuant to
Section 168(f) of the Code. Any amount or other entitlement that could be
received (whether in cash or property or the vesting of property) as a result of
any of the transactions contemplated by this Agreement by any employee, officer
or director of AVS or any of its subsidiaries who is a "disqualified individual"
(as such term is defined in proposed Treasury Regulations Section 1.280G-1)
under any AVS Employee Plans or other compensation arrangement entered into or
in effect prior to the Closing would not be characterized as an "excess
parachute payment" or a "parachute payment" (as such terms are defined in
Section 280G(b)(1) of the Code).
(k) AVS does not file, and has never filed or been included
in, a consolidated Return for federal Income Tax purposes; provided that AVS was
included in a consolidated Return for federal Income Tax purposes with Stardent
Computer Inc. for the period November 15, 1991 (inception) through December 31,
1991.
(l) For purposes of this Agreement, except as otherwise
expressly provided, unless the context otherwise requires:
"income taxes" means any federal, state, local, or
foreign income, or franchise Tax and in each instance any interest, penalties,
or additions to tax attributable to such Tax;
"return" means any report, return, statement,
estimate, declaration, form, or other information required to be supplied to a
taxing authority in connection with Taxes; and
"tax" or "taxes" means taxes of any kind, levies or
other like assessments, customs, duties, imposts, charges or, including, without
limitation, income, gross receipts, ad valorem, value added, excise, real or
personal property, asset, sales, use, license, payroll, transaction, capital,
net worth and franchise taxes, estimated taxes, withholding, employment, social
security, workers compensation, utility, severance, production, unemployment
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compensation, occupation, premium, windfall profits, transfer and gains taxes or
other governmental taxes imposed or payable to the United States, or any state,
county, local, or foreign government or subdivision or agency thereof, and in
each instance such term shall include any interest, penalties, or additions to
tax attributable to any such Tax.
Section 2.19 Environmental Matters.
(a) The operations of AVS and its subsidiaries comply with all
applicable federal, state, local, and foreign laws, codes, regulations,
requirements, directives, Orders and common law, and all administrative or
judicial interpretations thereof that may be enforced by any governmental
entity, other Person or court, relating to pollution, the protection of human
health, the protection of the environment or the emission, discharge, disposal,
storage, transportation, Release (as defined below) or threatened Release of
materials in or into the environment, including the Occupational Safety and
Health Act (collectively, "Environmental Laws"). "Release" means release, spill,
emission, leaking, pumping, injection, deposit, disposal, discharge, dispersal,
leaching or migration into the environment or into or out of any property,
including the movement of Contaminants through or in the air, soil, surface
water, groundwater or Leased Real Property or other property. "Contaminant"
means any pollutant contaminant, chemical or industrial, hazardous or toxic
material or waste for which liability or standards of conduct are imposed under
Environmental Laws, and includes asbestos or asbestos-containing materials,
PCBs, and petroleum, oil or petroleum or oil products or derivatives.
(b) Each of AVS and its subsidiaries has obtained all
environmental, health and safety Governmental Permits (as defined in Section
2.22) necessary for the operation of the Business, and all such Governmental
Permits are in full force and effect and will not be revoked, suspended or
otherwise adversely affected by the consummation of the transactions
contemplated hereby. Each of AVS and its subsidiaries is in compliance with all
terms and conditions of such Governmental Permits.
(c) Neither AVS nor its subsidiaries is subject to any
judicial, administrative or other Proceeding, Order or settlement alleging or
addressing a violation of or liability or Indebtedness under any Environmental
Law.
(d) Neither AVS nor its subsidiaries has received any notice
or claim (whether written or oral) to the effect that it is or may be liable to
any governmental entity or any other Person as a result of the Release or
threatened Release of a Contaminant, and, to the knowledge of AVS, there are no
existing or prior facts, circumstances or conditions that could reasonably form
the basis for such a notice or claim against AVS or any of its subsidiaries.
Neither AVS nor its subsidiaries has sent or arranged for the disposal of any
Contaminant generated by AVS or any of its subsidiaries or their respective
operations to or at any disposal site that (i) is undergoing, or, to the
knowledge of AVS, could reasonably be expected to undergo, remedial action; (ii)
is listed or proposed for listing on the National Priorities List pursuant to
Comprehensive Environmental Response, Compensation and Liability Act 42 U.S.C.
ss.ss. 9601 et seq., any amendments thereto, any successor statutes, and any
regulations or guidance promulgated thereunder; or (iii) could give rise to any
claim of damages, fines, fees, penalties,
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deficiencies, losses or expenses (including without limitation interest, court
costs, fees of attorneys, accountants, consultants and other experts or other
expenses of litigation or other Proceedings) or of any claim, default or
assessment without regard to any reserves therefor (collectively, a "Loss") on
the part of AVS.
(e) Except as set forth in Section 2.19(e) of the AVS
Disclosure Schedule, there have been no environmental investigations, studies,
audits, tests, reviews or other analysis conducted by or on behalf of, or which
are in the possession of, AVS or any of its subsidiaries in relation to any site
or facility now or previously owned, operated or leased by AVS or any of its
subsidiaries which have not been delivered to MUSE prior to the execution of
this Agreement.
Section 2.20 Labor Relations; Employees.
(a) There is no labor strike, dispute, slowdown, stoppage or
lockout pending, affecting, or, to the knowledge of AVS, threatened against AVS
or any of its subsidiaries, and during the last five years there has not been
any such action, and there are no existing or prior facts, circumstances or
conditions that are reasonably likely to lead to such an action. There are no
union claims to represent the employees of AVS or any of its subsidiaries, nor
have there been any such claims within the last five years. There is no written
or oral contract, commitment, agreement, understanding or other arrangement with
any labor organization or multi-employer or union benefit or pension fund, or
work rules or practices agreed to with any labor organization or employee
association, applicable to employees of AVS or any of its subsidiaries, nor is
AVS or any of its subsidiaries a party to or bound by any collective bargaining
or similar agreement. There is, and within the last five years has been, no
representation of the employees of AVS or any of its subsidiaries by any labor
organization and, to the knowledge of AVS, there are no union organizing
activities among the employees of AVS or any of its subsidiaries, nor does any
question concerning representation exist concerning such employees.
(b) Section 2.20(b) of the AVS Disclosure Schedule sets forth
all personnel policies, rules or procedures (whether written or oral) applicable
to employees of AVS and its subsidiaries, and AVS has delivered to MUSE complete
and accurate copies of all such written policies, rules or procedures plus
summaries of all oral policies, rules or procedures. Neither AVS nor any of its
subsidiaries have engaged in any unfair labor practices as defined in the
National Labor Relations Act or other applicable Law, ordinance or regulation,
and each of AVS and it subsidiaries is and has for the past five years been in
compliance in all material respects with all applicable Laws respecting
employment and employment practices, terms and conditions of employment, wages,
hours of work and occupational safety and health. There is no unfair labor
practice charge or complaint against AVS pending or, to the knowledge of AVS,
threatened before the National Labor Relations Board or any similar state or
foreign agency, and there are no existing or prior facts, circumstances or
conditions that could reasonably be expected to form the basis therefor. There
is no grievance pending or, to the knowledge of AVS, threatened against AVS or
any of its subsidiaries arising out of any collective bargaining agreement or
other grievance procedure, and there are no existing or prior facts,
circumstances or conditions that could reasonably be expected to form the basis
therefor. There are no charges with respect to or relating to AVS or any of its
subsidiaries pending or, to the knowledge of AVS, threatened before
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the Equal Employment Opportunity Commission or any other governmental entity
responsible for the prevention of unlawful employment practices, and there are
no existing or prior facts, circumstances or conditions that could reasonably be
expected to form the basis therefor. There are no workers compensation claims
pending, and AVS has no knowledge of any such potential claim. AVS has not
received notice of the intent of any government entity responsible for the
enforcement of labor or employment Laws to conduct an investigation with respect
to or relating to AVS or any of its subsidiaries and, to the knowledge of AVS,
no such investigation is in progress. No complaints, lawsuits or other
Proceedings are pending or, to the knowledge of AVS, threatened in any forum by
or on behalf of any present or former employee of AVS or any of its
subsidiaries, any applicant for employment or classes of the foregoing alleging
breach of any express or implied Contract for employment, any Law governing
employment or the termination thereof or other discriminatory, wrongful or
tortious conduct in connection with any employment relationship.
(c) Since the enactment of the Worker Adjustment and
Retraining Notification Act of 1988 (the "WARN Act"), AVS and each of its
subsidiaries have not effectuated or experienced (i) a "plant closing" (as
defined in the WARN Act) affecting any site of employment or one or more
facilities or operating units within any site of employment or facility used by
AVS or any of its subsidiaries; or (ii) a "mass layoff" (as defined in the WARN
Act) affecting any site of employment or facility used by AVS or any of its
subsidiaries, nor has AVS or any of its subsidiaries been affected by any
transaction or engaged in layoffs or employment terminations sufficient in
number to trigger application of any similar state or local Law. None of AVS's
employees has suffered an "employment loss" (as defined in the WARN Act) at any
time prior to the Closing Date.
(d) Each of AVS and its subsidiaries has complied with all
employment verification procedures including proper completion of Forms I-9 as
it relates to all of its current and former employees. Each of AVS and its
subsidiaries has complied with all applicable immigration, visa and work-related
laws, codes and regulations of the United States in general.
Section 2.21 Compliance with Law. Each of AVS and its
subsidiaries has complied for the past five years and is presently complying
with all applicable laws (whether statutory or otherwise), rules, regulations,
orders, ordinances, judgments, decrees or other pronouncements having the effect
of any of the foregoing, of all governmental entities having jurisdiction
(collectively, "Laws"), including the Federal Occupational Safety and Health Act
and all Laws relating to the safe conduct of business and environmental
protection and conservation, the Civil Rights Act of 1964 and Executive Order
11246 concerning equal employment opportunity obligations of federal contractors
and any applicable health, sanitation, fire, safety, labor, zoning and building
laws. AVS has not received written notification of any asserted present or past
failure by AVS or any of its subsidiaries to so comply with the Laws and there
are no existing or prior facts, circumstances or conditions that could
reasonably be expected to form the basis for such notification or assertion. The
representations of this Section 2.21 are intended to be in addition to and not
as a qualification of Section 2.19 or any other Section in this Article II.
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Section 2.22 Government Permits. Each of AVS and its
subsidiaries owns, holds or possesses all licenses, franchises, permits,
privileges, immunities, approvals and other authorizations from all governmental
entities that are necessary to entitle it to own or lease, operate and use its
assets and to carry on and conduct the Business substantially as currently
conducted (herein collectively called "Governmental Permits"). Such Governmental
Permits are in full force and effect, no violations are or have been recorded in
respect thereof, no Proceeding is pending, or, to the knowledge of AVS,
threatened, to revoke or limit any thereof or to affect the rights of AVS or any
of its subsidiaries under any thereof. AVS does not know of any basis for any
such Proceeding, and none of such Governmental Permits will be revoked,
suspended or otherwise adversely affected by the consummation of the
transactions contemplated hereby. Section 2.22 of the AVS Disclosure Schedule
sets forth a list and brief description of each Governmental Permit. Complete
and correct copies of all Governmental Permits have been delivered to MUSE.
Section 2.23 Bank Accounts; Powers-of-Attorney. Section 2.23
of the AVS Disclosure Schedule contains a true and complete list of (i) all bank
accounts and safe deposit boxes of AVS and all Persons who are signatories
thereunder or who have access thereto and (ii) the names of all Persons holding
general or special powers-of-attorney from AVS and a summary of the terms
thereof, true copies of all such powers-of-attorney have been previously
delivered to MUSE.
Section 2.24 Brokers or Finders. Except as set forth in
Section 2.24 of the AVS Disclosure Schedule, neither MUSE nor any of its
Affiliates will have any obligation to pay any broker's, finder's, investment
banker's, intermediary's, financial advisor's or similar fee in connection with
this Agreement or the transactions contemplated herein by reason of any action
taken by or on behalf of AVS or any of their respective Affiliates.
Section 2.25 Transactions with Affiliates.
(a) Except as set forth in Section 2.25(a) of the AVS
Disclosure Schedule, each of AVS and its subsidiaries has no outstanding
Indebtedness, liabilities or obligations of any nature (accrued or unaccrued,
contingent or fixed) for amounts owing to, or notes or accounts receivable from,
or leases, Contracts or other commitments or arrangements with or for the
benefit of, any of the AVS stockholders, or any of their respective Affiliates,
associates or family members, or any of AVS's directors, officers or employees
or Affiliates of any of the foregoing.
(b) As of the Closing Date, (i) all Indebtedness, liabilities
and obligations set forth in Section 2.25(a) of the AVS Disclosure Schedule
shall have been repaid in cash and in full, (ii) all amounts owing on notes and
all accounts receivable set forth in Section 2.25(a) of the AVS Disclosure
Schedule shall have been collected by AVS in cash and in full and (iii) all
leases, Contracts and other commitments and arrangements set forth in Section
2.25(a) of the AVS Disclosure Schedule shall have been irrevocably terminated
without continuing liability on the part of MUSE or AVS.
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(c) Since December 31, 1999, AVS has not made any payments,
loans or advances of any kind or paid any dividends or distributions of any kind
to or for the benefit of the AVS stockholders or any of their respective
Affiliates, associates or family members, other than as set forth in Section 2.8
of the AVS Disclosure Schedule.
Section 2.26 Customers and Suppliers. Section 2.26 of the AVS
Disclosure Schedule sets forth a true and complete list of the names and
addresses of the ten largest suppliers (and for each such supplier the dollar
volume and percentage of total purchases of similar items from all suppliers of
such item) of products and services to AVS and the ten largest customers (and
for each such customer the dollar volume and percentage of total sales of AVS to
all customers) of products and services of AVS during the 12 months ended
December 31, 1998 and December 31, 1999, indicating any existing contractual
arrangements for continued supply from or to each such firm. Except as set forth
in Section 2.26 of the AVS Disclosure Schedule, there exists no actual or, to
the knowledge of AVS, threatened termination, cancellation or limitation of, or
any modification or change in, the business relationship of AVS with any
customer or group of customers which are listed in Section 2.26 of the AVS
Disclosure Schedule or which are otherwise material to the operations of the
Business, or with any supplier or group of suppliers which are listed in Section
2.26 of the AVS Disclosure Schedule or which are otherwise material to the
operations of the Business, and AVS has not received any report or other
information from any employee, sales representative or other Person who reports
to AVS on such matters in the ordinary course of business regarding the
existence of any present or future condition or state of facts or circumstances
involving customers, suppliers or sales representatives (including the
consummation of the transactions contemplated in this Agreement) that would
materially adversely affect the Business or the prospects of AVS or the Business
or prevent the conduct of the Business after the consummation of the
transactions contemplated in this Agreement on substantially the same terms as
the Business has been conducted. AVS has delivered to MUSE copies of all written
Contracts or other arrangements and written summaries of any oral arrangements
with the customers and suppliers listed in Section 2.26 of the AVS Disclosure
Schedule.
Section 2.27 Accounts Receivable and Payables. The accounts
and notes receivable and all other receivables shown on the Interim Balance
Sheet (subject to reserves for non-collectibility as reflected therein), and all
receivables acquired or generated by AVS since March 31, 2000, are bona fide
receivables and represent amounts due with respect to actual, arm's-length
transactions entered into in the ordinary course of business consistent with
past practice and AVS is not aware of any facts or circumstances that would
render such amounts uncollectable in excess of the reserves for such recorded on
the Interim Balance Sheet. Such reserves for non-collectibility have been
reflected on the Interim Balance Sheet in accordance with GAAP and are adequate.
No such account has been assigned or pledged to any other Person, and no defense
or set-off or similar right to any such account has been asserted by the account
obligor.
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Section 2.28 Guarantees.
(a) Except as set forth in Section 2.28(a) of the AVS
Disclosure Schedule, none of the Indebtedness, liabilities or obligations of AVS
is guaranteed by AVS stockholders or their respective Affiliates, associates or
family members or by any of AVS's officers, directors or employees or Affiliates
of any of the foregoing.
(b) Except as set forth on Section 2.28(b) of the AVS
Disclosure Schedule, AVS is not a guarantor or co-obligor of any Indebtedness,
liability or obligation of any AVS stockholder or any AVS stockholder's
Affiliates, associates or family members or of AVS's officers, directors or
employees or Affiliates of any of the foregoing.
Section 2.29 Common Activities. In the conduct of the
Business, the assets of AVS have not been commingled with those of any Affiliate
or associate of AVS, and AVS has not engaged in any joint activities with regard
to the purchase or sale of products or services, failed to maintain appropriate
distinction between the Business and assets and property of AVS and those of any
other Person or engaged in any other acts or omitted to take any other action
which could reasonably be expected to form the basis for any claim or assertion
that AVS or its property or assets were responsible for any Indebtedness,
liability or obligation of any other Person.
Section 2.30 Disclosure. The representations and warranties by
AVS in this Agreement and the Escrow Agreement and the statements contained in
the AVS Disclosure Schedule or any other schedules, certificates, documents,
exhibits and agreements referred to herein or otherwise furnished or to be
furnished by AVS to MUSE pursuant to this Agreement or in connection with the
transactions contemplated hereby do not and will not contain any untrue
statement of a material fact and do not and will not omit to state any material
fact necessary to make the statements herein or therein not misleading. AVS has
delivered to MUSE or its counsel true and complete copies of all material
certificates, exhibits, schedules, agreements or documents and has notified MUSE
or its counsel of all events, facts, circumstances, violations or other matters
that to the best of its knowledge after due inquiry may have a Material Adverse
Effect on the Business, transactions contemplated in this Agreement or the
Escrow Agreement, or the business or operations of MUSE subsequent to the
Merger.
Section 2.31 Information Supplied.
(a) None of the information supplied or to be supplied by AVS
for inclusion or incorporation by reference in (i) the Form S-4 (as defined in
Section 4.16) will, at the time the Form S-4 is filed with the Securities and
Exchange Commission (the "SEC"), at any time it is amended or supplemented or at
the time it becomes effective under the Securities Exchange Act of 1933, as
amended (the "Securities Act"), contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or necessary to
make the statements therein not misleading, and (ii) the Proxy
Statement/Prospectus (as defined in Section 4.16) will, on the date it is first
mailed to AVS stockholders or MUSE stockholders or at the time of the AVS and
MUSE stockholders' meetings, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading.
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The Form S-4 and the Proxy Statement/Prospectus will comply as to form in all
material respects with the requirements of the Securities Exchange Act of 1934,
as amended (the "Exchange Act") and the Securities Act and the rules and
regulations of the SEC thereunder.
(b) Notwithstanding the foregoing provision of this Section
2.31, no representation or warranty is made by AVS with respect to statements
made or incorporated by reference in the Form S-4 or the Proxy
Statement/Prospectus based on information supplied by MUSE or Sub for inclusion
or incorporation by reference therein.
Section 2.32 Vote Required. Other than the Liquidation
Preference Waiver (as defined in Section 5.1(l)), the affirmative vote of the
holders of a majority of the AVS Common Stock, the Series A Preferred Stock and
the Series B Preferred Stock, each voting separately as a class, in accordance
with applicable law to adopt this Agreement and approve the Merger (the
"Required AVS Vote") is the only vote of the holders of any class or series of
AVS capital stock necessary to adopt this Agreement and approve the Merger and
the other transactions contemplated thereby. In addition, upon obtaining the
Required AVS Vote, the AVS Stockholders also shall have approved the appointment
of the Stockholder Representatives as their attorneys-in-fact and agents in
connection with this Agreement, the Escrow Amount and the Escrow Agreement as
further described in Section 4.15 (b).
Section 2.33 No Stockholder Agreements. Neither AVS nor, to
its knowledge, any stockholder of AVS has entered into any agreements,
arrangements or understandings with respect to the capital stock or voting of
the capital stock of AVS, except for any voting agreements as contemplated in
the Letter of Intent, dated May 4, 2000, between MUSE and AVS.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF MUSE AND SUB
MUSE and Sub represent and warrant to AVS as follows:
Section 3.1 Organization, Standing and Qualification. MUSE is
a corporation duly organized, validly existing and in good standing under the
laws of Delaware and has all requisite corporate power and authority to own,
lease and operate its properties and to carry on its business as now being
conducted. MUSE is duly qualified or licensed to do business and in good
standing in each jurisdiction in which its property is owned, leased or operated
or the nature of its business makes such qualification or licensing necessary,
except where the failure to be so duly qualified or licensed and in good
standing would not in the aggregate have a material adverse effect on MUSE. Sub
is a corporation duly organized, validly existing and in good standing under the
laws of Delaware. Sub has not engaged in any business (other than in connection
with this Agreement and the transactions contemplated hereby) since the date of
its incorporation.
Section 3.2 Authority.
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(a) MUSE has all requisite corporate power and authority to
enter into this Agreement and to consummate the transactions contemplated
hereby. MUSE has all requisite corporate power and authority to enter into the
Escrow Agreement, and to consummate the transactions contemplated thereby. The
execution and delivery of this Agreement and the Escrow Agreement and the
consummation of the transactions contemplated hereby and thereby have been duly
authorized by all necessary corporate action on the part of MUSE. This Agreement
has been duly executed and delivered by MUSE. This Agreement does, and, when
executed and delivered by MUSE, the Escrow Agreement will, constitute legal,
valid and binding obligations of MUSE, enforceable against MUSE in accordance
with its respective terms, except to the extent enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting the enforceability of creditors' rights in general and subject to
general principles of equity (regardless of whether enforceability is considered
in a proceeding in equity or at law).
(b) Sub has all requisite corporate power and authority to
enter into this Agreement and to consummate the transactions contemplated
hereby. The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of Sub. This Agreement has been duly executed and
delivered by Sub and constitutes legal, valid and binding obligations of Sub,
enforceable against Sub in accordance with its terms, except to the extent
enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting the enforceability of creditors'
rights in general and subject to general principles of equity (regardless of
whether enforceability is considered in a proceeding in equity or at law).
Section 3.3 Capitalization. The authorized capital stock of
MUSE consists of 50,000,000 shares of MUSE Common Stock. As of the date hereof,
10,808,882 shares of MUSE Common Stock are issued and outstanding, 5,231,250
shares of MUSE Common Stock are reserved for issuance pursuant to options
granted or to be granted under the MUSE 1995 Stock Option Plan and the MUSE 1996
Stock Option Plan, 155,263 shares of MUSE Common Stock are held in MUSE's
treasury, and 2,810,033 shares are reserved for issuance pursuant to outstanding
warrants to purchase MUSE Common Stock, and there are no other shares of capital
stock of MUSE authorized, issued or outstanding, except as otherwise set forth
in this Agreement and the transactions contemplated hereby or as otherwise set
forth in the MUSE SEC Reports (as hereinafter defined).
Section 3.4 Validity; Issuance of Shares. The shares of MUSE
Common Stock being issued as Merger Consideration have been duly authorized and,
when issued in accordance with this Agreement, will be validly issued, fully
paid and non-assessable. The shares of MUSE Common Stock when issued upon the
exercise of the MUSE Options and in accordance with the MUSE Stock Incentive
Plan and Stock Option Agreements will be duly authorized, validly issued, fully
paid and non-assessable. The MUSE Options have been duly authorized, and when
executed and delivered in accordance with this Agreement, will constitute the
legal, valid and binding obligations of MUSE, enforceable against MUSE in
accordance with their terms.
Section 3.5 Consents and Approvals; No Violation.
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(a) Neither the execution and delivery of this Agreement or
the Escrow Agreement, nor the consummation of the transactions contemplated
hereby or thereby, nor compliance by MUSE with any of the provisions hereof or
thereof will (i) conflict with or result in a breach of the certificate of
incorporation or by-laws or other constitutive documents of MUSE, (ii) conflict
with or result (with or without notice or lapse of time or both) in a default
(or give rise to any right of reimbursement, termination, cancellation,
modification or acceleration) under any of the provisions of any note, bond,
lease, mortgage, indenture, license, franchise, permit agreement or other
instrument or obligation to which MUSE is a party, or by which MUSE or its
properties or assets may be bound or affected, except for such conflict, breach
or default as to which requisite waivers or consents are described in Section
3.5 of the disclosure schedule delivered to AVS prior to the date of this
Agreement (the "MUSE Disclosure Schedule") and are required to be obtained prior
to Closing, or (iii) violate any Law or Order applicable to MUSE or its
properties or assets; or (iv) result in the creation or imposition of any Lien
upon any property or assets used in MUSE's business. Except as set forth in
Section 3.5 of the MUSE Disclosure Schedule, no consent or approval by, or any
notification of or filing with, or other action of any Person (governmental or
private) that has not been obtained is required in connection with the
execution, delivery and performance by MUSE of this Agreement or the Escrow
Agreement. There is no Proceeding pending or, to the knowledge of MUSE,
threatened against MUSE or Sub that seeks to prevent the consummation of the
transactions contemplated herein or in any Transaction Agreement to which MUSE
is a party.
(b) Neither the execution and delivery of this Agreement, nor
the consummation of the transactions contemplated hereby or thereby nor
compliance by Sub with any of the provisions hereof will (i) conflict with or
result in a breach of the certificate of incorporation or by-laws or other
constitutive documents of Sub or (ii) violate any Law or Order applicable to Sub
or the properties or assets of Sub that would prevent or materially impair the
consummation of the transactions contemplated hereby.
Section 3.6 Brokers or Finders. Neither MUSE nor Sub will have
any obligation to pay any broker's, finder's, investment banker's,
intermediary's, financial advisor's or similar fee in connection with this
Agreement or the transactions contemplated herein by reason of any action taken
by or on behalf of MUSE or Sub.
Section 3.7 Information Supplied.
(a) None of the information supplied or to be supplied by MUSE
for inclusion or incorporation by reference in (i) the Form S-4 will, at the
time the Form S-4 is filed with the SEC, at any time it is amended or
supplemented or at the time it becomes effective under the Securities Act,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein
not misleading, and (ii) the Proxy Statement/Prospectus will, on the date it is
first mailed to AVS stockholders or at the time of the AVS stockholders'
meetings, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading. The Form S-4 and the Proxy Statement/Prospectus will comply as
to form in all material respects
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with the requirements of the Exchange Act and the Securities Act and the rules
and regulations of the SEC thereunder.
(b) Notwithstanding the foregoing provision of this Section
3.7, no representation or warranty is made by MUSE with respect to statements
made or incorporated by reference in the Form S-4 or the Proxy
Statement/Prospectus based on information supplied by AVS for inclusion or
incorporation by reference therein.
Section 3.8 Public Reports. MUSE has and, at the Effective
Time will have, filed all required forms, reports and documents with the SEC
since November 16, 1998, (collectively, the "MUSE SEC Reports") all of which
have and shall have complied in all material respects with all applicable
requirements of the Securities Act and the Exchange Act, and MUSE is current in
all of its required filings under the Exchange Act. As of their respective dates
of filing in final or definitive form (or, if amended or superseded by a
subsequent filing, then on the date of such subsequent filing), none of the MUSE
SEC Reports, including, without limitation, any financial statements or
schedules included therein, contained or shall have contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances in which they were made, not misleading. Each of the balance
sheets (including the related notes) included in the MUSE SEC Reports fairly
presents the consolidated financial position of MUSE and its subsidiaries as of
the respective dates thereof, and the other related financial statements
(including the related notes) included therein fairly presented the consolidated
results of operations and changes in financial position of MUSE and its
subsidiaries for the respective periods indicated, except, in the case of
interim financial statements, for year-end audit adjustments, consisting only of
normal recurring accruals. Each of the financial statements (including the
related notes) included in the MUSE SEC Reports has been prepared in accordance
with GAAP consistently applied during the periods involved, except as otherwise
noted therein.
Section 3.9 Operation of the Surviving Corporation.
Immediately following the Effective Time, the Surviving Corporation will
continue to operate the prior AVS business as a separate subsidiary of MUSE.
MUSE represents that it has no current plans or intentions following the
Effective Time to (i) materially change the operations or location of operations
of AVS as conducted immediately prior to the Effective Time, (ii) cause the
Surviving Corporation to sell, transfer or otherwise dispose of any of its
assets, except for dispositions made in the ordinary course of business or for
the payment of expenses incurred by the Surviving Corporation in the Merger,
(iii) liquidate the Surviving Corporation, (iv) merge the Surviving Corporation
with or into another corporation, including MUSE or its Affiliates, (v) sell,
distribute or otherwise dispose of the common stock of the Surviving
Corporation, (vi) issue additional shares of stock (or rights to acquire shares
of stock) of the Surviving Corporation that would result in MUSE losing control
of the Surviving Corporation within the meaning of Section 368(c) of the Code,
or (vii) reacquire any of the MUSE Common Stock issued in the Merger.
Section 3.10 Disclosure. The representations and warranties by
MUSE in this Agreement and the Escrow Agreement and the statements contained in
the MUSE Disclosure
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Schedule or any other schedules, certificates, documents, exhibits and
agreements referred to herein or otherwise furnished or to be furnished by MUSE
to AVS pursuant to this Agreement or in connection with the transactions
contemplated hereby do not and will not contain any untrue statement of a
material fact and do not and will not omit to state any material fact necessary
to make the statements herein or therein not misleading.
ARTICLE IV
COVENANTS
Section 4.1 Conduct of Business.
(a) From the date hereof until the Closing Date, except as
otherwise consented to by MUSE in writing, AVS shall operate the Business only
in the ordinary course of business consistent with past practice.
(b) Without limiting the generality of the foregoing, (i) AVS
shall use all reasonable efforts to preserve intact in all material respects
AVS's present business organization and reputation and to preserve its
relationships with employees, creditors, customers and suppliers and others
having significant business relationships with AVS, (ii) AVS shall not, without
the prior written consent of MUSE, directly or indirectly, cause or permit any
state of affairs, action or omission described in clauses (a) through (n) of
Section 2.8, and (iii) AVS shall not take, or agree to commit to take, any
action that would make any representation or warranty of AVS contained herein
inaccurate in any material respect at, or as of any time prior to, the Closing
Date.
Section 4.2 Access to AVS Information.
(a) AVS shall (i) give MUSE and its officers, directors,
employees, agents, counsel, accountants, financial advisors, existing lenders,
consultants and other representatives (collectively, "Representatives")
reasonable access, upon reasonable prior notice, to all officers and accountants
of AVS and to all Books and Records, offices and other facilities and properties
utilized by AVS in connection with the Business and all information relating to
AVS, the Business and the properties, assets, Contracts, financial condition,
results of operations and prospects of AVS as MUSE or its Representatives may
reasonably request, (ii) permit MUSE and its Representatives to make such
inspections thereof and, with the prior consent of AVS (which shall not be
unreasonably withheld), interview such personnel, customers and vendors of AVS
during normal business hours as MUSE or its Representatives may reasonably
request, (iii) cause AVS's officers and auditors to furnish MUSE and its
Representatives with such financial and operating data and other information
with respect to the items set forth in clause (i) as MUSE or its Representatives
may from time to time reasonably request, and cause the auditors to deliver
their work papers related to such information if MUSE or its Representatives
shall so request, and (iv) at MUSE's or its Representatives' reasonable request,
cause AVS's officers to compile information that has not been compiled for
another purpose.
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(b) MUSE shall hold any such information which is nonpublic in
confidence in accordance with the provisions of the confidentiality agreements,
dated April 7, 2000 and April 17, 2000 between AVS and MUSE.
Section 4.3 Best Efforts.
(a) Upon the terms and subject to the conditions of this
Agreement, each of the parties hereto agrees to use its best efforts to take, or
cause to be taken, all actions, and to do, or cause to be done, all things
necessary, proper or advisable under applicable Laws and regulations to
consummate and make effective the transactions contemplated in this Agreement as
promptly as practicable, including (i) the preparation and filing of any forms,
registrations and notices required to be filed to consummate the transactions
contemplated in this Agreement and the taking of such actions as are necessary
to obtain any requisite approvals, consents, Orders, exemptions or waivers by
any third party or governmental entity and (ii) the satisfaction of all
conditions to Closing. Each party shall promptly consult with the other with
respect to, provide any necessary information not subject to legal privilege
with respect to and, except as otherwise not permitted by Law, provide the other
(or its Representatives) copies of, all filings made by such party with any
governmental entity or any other information supplied by such party to a
governmental entity in connection with this Agreement and the transactions
contemplated by this Agreement or as otherwise reasonably requested.
(b) Each party hereto shall promptly inform the other of any
communication from any governmental entity regarding any of the transactions
contemplated by this Agreement. If any party or Affiliate thereof receives a
request for additional information or documentary material from any such
governmental entity with respect to the transactions contemplated by this
Agreement, then such party will endeavor in good faith to make, or cause to be
made, as soon as reasonably practicable and after consultation with the other
party(ies), an appropriate response in compliance with such request.
(c) Notwithstanding the foregoing, nothing in this Agreement
shall be deemed to require MUSE or any of its Affiliates to enter into any
agreement with any governmental entity or to consent to any Order requiring any
of them to hold, separate or divest, or to restrict the dominion or control of
any of them over, any of their respective assets, properties or businesses or to
submit to the laws and regulations of such governmental entity or qualify to do
business or submit to process in any other jurisdiction.
Section 4.4 No Solicitation by AVS. AVS shall immediately
cease any existing discussions or negotiations with any third parties conducted
prior to the date hereof with respect to any Business Combination (as defined
below). For a period from the date hereof to the Closing Date, AVS shall not,
and AVS shall cause its respective Affiliates and Representatives not to,
directly or indirectly, take any action to (i) initiate, assist, solicit,
receive, negotiate, encourage or accept any offer or inquiry from any Person
with respect to a Business Combination or engage in any Business Combination,
(ii) reach any agreement or understanding (whether or not such agreement or
understanding is absolute, revocable, contingent or conditional) for, or
otherwise attempt to consummate, any Business Combination or (iii) furnish or
cause to be
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furnished any information with respect to AVS to any Person (other than as
expressly provided in Section 4.2 of this Agreement) who AVS or any of its
respective Affiliates or Representatives knows or has reason to believe is in
the process of considering any Business Combination. If AVS or any of its
respective Affiliates or Representatives receives from any Person any offer,
inquiry or informational request referred to above (an "Acquisition Proposal"),
AVS will, or will cause such Affiliate or Representative to, promptly advise
such Person, by written notice, of the terms of this Section 4.4 and promptly,
orally and in writing, advise MUSE of such offer, inquiry or informational
request. "Business Combination" means any merger, consolidation or combination
to which AVS is a party, any sale, dividend, split or other disposition of the
capital stock of or other equity interest in AVS or any sale, dividend or other
disposition of any of the assets and properties of AVS, other than in the
ordinary course of business and the transactions contemplated herein.
Section 4.5 Fees and Expenses. MUSE and Sub, on the one hand,
and AVS, on the other hand, shall pay their own fees, costs and expenses
incurred in connection with the preparation and negotiation of this Agreement
and the transactions contemplated herein, including the performance of such
party's obligations hereunder (including, but not limited to, the fees and
disbursements of counsel and advisors).
Section 4.6 Public Announcements. None of MUSE, Sub or AVS
will, and each will cause its respective Affiliates and Representatives not to,
issue or cause the publication of any press release or otherwise make any public
statement with respect to the transactions contemplated herein without the prior
written consent of the parties hereto, provided that any party hereto may make a
public announcement to the extent required by any applicable Law or Order
(including the rules, regulations or interpretations of the Securities and
Exchange Commission or any national securities exchange), which required public
disclosure shall be submitted to the non-disclosing party sufficiently in
advance to afford such non-disclosing party an opportunity to comment on such
disclosure.
Section 4.7 Books and Records. AVS shall maintain all Books
and Records in the regular and customary manner as such Books and Records have
been maintained consistent with past practices.
Section 4.8 Compliance with Laws, Orders and Contracts. AVS
shall comply in all material respects with all Laws, Orders and Contracts
applicable to the Business or to AVS and, promptly following receipt thereof,
give MUSE copies of any notice received from any governmental entity or other
Person alleging any violation of any such Law, Order or Contract.
Section 4.9 Certain Activities between Signing and Closing.
(a) From the date hereof until the Closing, except as required
by Law, without the prior written consent of MUSE, AVS shall not make or change
any tax election, change any annual tax accounting period, adopt or change any
method of tax accounting, file any amended tax return, enter into any closing
agreement, settle any material tax claim or assessment, surrender any right to
claim a tax refund, consent to any extension or waiver of the limitations
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period applicable to any tax claim or assessment or take or omit to take any
other action, if any such other action or omission would have the effect of
increasing the tax liability or decreasing any tax benefit or tax refund or
similar matter of AVS or MUSE as a result of the transactions contemplated
herein.
(b) All tax returns with respect to AVS (i) shall, to the
extent required to be filed on or before the Closing Date (taking into account
any valid extensions), be filed by AVS when due in accordance with all
applicable Laws and (ii) shall, as of the time of filing, correctly reflect in
all material respects the facts regarding the income, business, assets,
operations, activities and status of AVS and any other information required to
be shown therein.
(c) From the date hereof until the Closing, without the prior
written consent of MUSE, AVS shall not amend or adopt any Plan, except as
required by Law.
Section 4.10 Tax Matters.
(a) MUSE shall file with the appropriate tax authorities all
federal, state, local and foreign tax returns and tax reports required to be
filed on behalf of AVS or Sub for any taxable period (or portion thereof) ending
after the Closing Date. With respect to any return or report that may affect the
liability of the AVS Stockholders under Article VI, MUSE will allow the
Stockholder Representatives on behalf of the AVS Stockholders an opportunity to
review and comment upon any such report or return at least thirty (30) days
prior to its filing. MUSE will take no position on any such returns or reports
that is inconsistent with AVS's past custom and practice and that would
adversely affect the AVS Stockholders, except to the extent that such position
is either required by law or a taxing authority. MUSE also shall not make any
amendment to any report or return that may affect the liability of the AVS
Stockholders under Article VI, without the Stockholder Representatives' (on
behalf of the AVS Stockholders) prior written consent. In the event that the
parties cannot agree as to any disputed item on any return or report within ten
(10) business days after the Stockholder Representatives' notice of objections,
the parties shall jointly select a firm of nationally recognized independent
accountants (or, if they cannot agree on the selection of such a firm within 5
business days, then MUSE and the Stockholder Representatives shall, within an
additional 3 business days, each select its own nationally recognized
independent accounting firm, which two firms shall select a third nationally
recognized accounting firm) to resolve the dispute within an additional 5
business days. Such firm's determination shall be final and binding on the
parties, and any expenses relating to the engagement of such firm shall be split
by the parties.
(b) The Stockholder Representatives shall have the right to
control any audits of or administrative or court proceedings to the extent they
relate to taxable periods of AVS that affect the liability of the AVS
Stockholders under Article VI. In such matters, the Stockholder Representatives
shall have the right to employ counsel of their own choice, but reasonably
satisfactory to MUSE, and at its own expense, MUSE (and its counsel) shall have
the right to participate in any audits or other proceedings, and the Stockholder
Representatives shall have the right to settle the issues as to which they are
obligated to make full indemnification. Notwithstanding the foregoing, neither
the Stockholder Representatives nor the AVS
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Stockholders shall be entitled to settle, either administratively or after the
commencement of litigation, any claim for taxes of AVS, or otherwise bind AVS,
if such settlement would adversely affect MUSE (including, without limitation,
the imposition of income tax deficiencies, a change of accounting method, the
reduction of asset basis or cost adjustments, the lengthening of any
amortization or depreciation periods, the denial of amortization or depreciation
deductions or the reduction of loss or credit carry forwards), without the prior
written consent of MUSE, which consent shall not be unreasonably withheld.
(c) After the Closing Date, MUSE and the former officers and
directors of AVS shall:
(i) assist in all reasonable respects (and cause
their respective Affiliates to assist) the other party in preparing any tax
returns or reports which such other party is responsible for preparing and
filing in accordance with this Section 4.10;
(ii) cooperate in all reasonable respects with each
other in preparing for any audits of, or disputes with taxing authorities
regarding, the tax returns of AVS including providing powers of attorney to
authorized representatives of the AVS Stockholders;
(iii) make available to the other and to any taxing
authority, as reasonably requested, all information, records and documents
relating to taxes of AVS and in connection therewith, AVS shall retain all such
records until the expiration of the applicable period for the assessment of tax
including extensions thereof;
(iv) provide timely notice to the other in writing of
any pending or threatened tax audit or assessments of AVS for taxable periods
for which the other may have a liability under this Section 4.10; and
(v) furnish the other with copies of all
correspondence received from any taxing authority in connection with any tax
audit or information request with respect to any such taxable period.
(d) All taxes that are not due and payable on or prior to the
Closing Date but which relate to a tax period ending on or prior to the Closing
Date shall be paid from the Escrow Amount when due but only to the extent such
taxes exceed the amount accrued (to the extent such accruals are consistent with
past practice) on the Interim Balance Sheet and amounts arising in the ordinary
course of business between the Interim Balance Sheet date and the Closing.
Section 4.11 AVS Employee and Affiliate Non-Disclosure. AVS
shall require each of the AVS employees listed on Schedule B to enter into
MUSE's standard confidentiality and trade secrets/invention agreements, each in
the form of Exhibit J1; provided, however, that such employees shall not be
required to enter into MUSE's standard confidentiality and trade
secrets/invention agreement if a substantially similar agreement is currently in
effect between such employees and AVS; and provided, further, that (i) the form
of agreement regarding proprietary information and inventions, non-competition,
arbitration, at-will employment and
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other matters attached as Exhibit J2 shall be deemed so to be substantially
similar and (ii) there shall be appropriate modifications in such forms of
agreements with respect to employees listed on Schedule B who are not based in
the United States to reflect customary business practices in the software
industry in the country in which the employee is based.
Section 4.12 Expenditures. AVS agrees that it will not make
any capital expenditure in excess of $50,000 (or $100,000 in the aggregate) or
engage in any extraordinary corporate or business transactions, including, but
not limited to, stock splits, dividends, repurchases or recapitalizations,
without the express written approval of MUSE.
Section 4.13 Closing Financial Statements. On the business day
prior to the Closing Date, AVS shall deliver to MUSE an unaudited balance sheet
(the "Closing Balance Sheet") as of the end of the month immediately preceding
the Closing Date (the "Determination Date") and the related unaudited statements
of operations and cash flows for the period from January 1, 2000 through the
Determination Date, each prepared in accordance with GAAP subject to year-end
adjustments and the absence of notes (together with the Closing Balance Sheet,
the "Closing Financial Statements").
Section 4.14 Employee Benefits Matters. All AVS employees
shall continue on their existing benefit plans until such time after the
Closing, in MUSE's sole and absolute discretion, as MUSE decides to convert to
employee benefit plans and programs maintained by MUSE at that time.
Section 4.15 Preparation of Proxy Statement; Stockholders
Meeting.
(a) As promptly as reasonably practicable following the date
hereof, MUSE and AVS shall prepare and file with the SEC mutually acceptable
proxy materials which shall constitute the Proxy Statement/ Prospectus (such
proxy statement/prospectus, and any amendments or supplements thereto, the
"Proxy Statement/Prospectus") and MUSE shall prepare and file a registration
statement on Form S-4 (the "Form S-4") with respect to the issuance of MUSE
Common Stock in the Merger (the "Share Issuance"). The Proxy
Statement/Prospectus will be included in and will constitute a part of the Form
S-4 as MUSE's prospectus. The Form S-4 and the Proxy Statement/Prospectus shall
comply as to form in all material respects with the applicable provisions of the
Securities Act and the Exchange Act and the rules and regulations thereunder.
Each of MUSE and AVS shall use reasonable best efforts to have the Form S-4
declared effective by the SEC and to keep the Form S-4 effective as long as is
necessary to consummate the Merger and the transactions contemplated thereby.
MUSE and AVS shall, as promptly as practicable after receipt thereof, provide
the other party copies of any written comments and advise the other party of any
oral comments, with respect to the Proxy Statement/Prospectus received from the
SEC. MUSE will provide AVS with a reasonable opportunity to review and comment
on any amendment or supplement to the Form S-4 prior to filing such with the
SEC, and will provide AVS with a copy of all such filings made with the SEC.
Notwithstanding any other provision herein to the contrary, no amendment or
supplement (including by incorporation by reference) to the Proxy
Statement/Prospectus or the Form S-4 shall be made without the approval of both
parties, which approval shall not be unreasonably
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withheld or delayed; provided, that with respect to documents filed by a party
which are incorporated by reference in the Form S-4 or Proxy Statement/
Prospectus, this right of approval shall apply only with respect to information
relating to the other party or its business, financial condition or results of
operations; and provided, further, that AVS, in connection with a Change in the
AVS Recommendation (as defined below), may amend or supplement the Proxy
Statement/Prospectus or Form S-4 (including by incorporation by reference)
pursuant to a Qualifying Amendment (as defined below) to effect such a Change,
and in such event, this right of approval shall apply only with respect to
information relating to the other party or its business, financial condition or
results of operations, and shall be subject to the right of each party to have
its Board of Directors' deliberations and conclusions to be accurately
described. A "Qualifying Amendment" means an amendment or supplement to the
Proxy Statement/Prospectus or Form S-4 (including by incorporation by reference)
to the extent it contains (i) a Change in the AVS Recommendation, (ii) a
statement of the reasons of the Board of Directors of AVS for making such Change
in the AVS Recommendation and (iii) additional information reasonably related to
the foregoing. AVS will use reasonable best efforts to cause the Proxy
Statement/Prospectus to be mailed to AVS's stockholders, in each case after the
Form S-4 is declared effective under the Securities Act. MUSE shall also take
any action (other than qualifying to do business in any jurisdiction in which it
is not now so qualified or to file a general consent to service of process)
required to be taken under any applicable state securities laws in connection
with the Share Issuance and AVS shall furnish all information concerning AVS and
the holders of AVS Capital Stock as may be reasonably requested in connection
with any such action. Each party will advise the other party, promptly after it
receives notice thereof, of the time when the Form S-4 has become effective, the
issuance of any stop order, the suspension of the qualification of the MUSE
Common Stock issuable in connection with the Merger for offering or sale in any
jurisdiction, or any request by the SEC for amendment of the Proxy
Statement/Prospectus or the Form S-4. If at any time prior to the Effective Time
any information relating to MUSE or AVS, or any of their respective affiliates,
officers or directors, should be discovered by MUSE or AVS which should be set
forth in an amendment or supplement to any of the Form S-4 or the Proxy
Statement/Prospectus so that any of such documents would not include any
misstatement of a material fact or omit to state any material fact necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading, the party which discovers such information shall promptly
notify the other party hereto and, to the extent required by law, rules or
regulations, an appropriate amendment or supplement describing such information
shall be promptly filed with the SEC and disseminated to the stockholders of
AVS.
(b) AVS shall duly take (subject to compliance with the
provisions of Section 2.31 (provided that AVS shall have used reasonable best
efforts to ensure that such representations are true and correct)) all lawful
action to call, give notice of, convene and hold a meeting of its stockholders
on a date as soon as reasonably practicable in accordance with the DGCL (the
"AVS Stockholder Meeting") or solicit its stockholders by written consent for
the purpose of obtaining the Required AVS Vote with respect to the transactions
contemplated by this Agreement, which vote shall constitute the consent of the
AVS Stockholders to the provisions of this Agreement applicable to the AVS
Stockholders and the irrevocable appointment of the Stockholder Representatives,
and each of them, as their true and lawful attorneys-in-fact and agents, with
full power of substitution, to act solely and exclusively on
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behalf of, and in the name of, the AVS Stockholders with
respect to any matters relating to this Agreement, the Escrow Amount, the Escrow
Agreement or any agreement, instrument, document or certificate to be executed
and delivered by or on behalf of the AVS Stockholders pursuant hereto and
thereto, with the full power, without the further consent of the AVS
Stockholders, to exercise as the Stockholder Representatives in their sole
discretion deem appropriate, all of the powers which the AVS Stockholders could
exercise under the provisions of this Agreement and the Escrow Agreement or any
document or certificate to be executed and delivered by or on behalf of the AVS
Stockholders pursuant thereto, including, without limitation, to (i) accept and
give notices on behalf of any or all of the AVS Stockholders, (ii) consent to
any modifications or amendments, (iii) give any waiver or consents, (iv) execute
stock powers pursuant to the Escrow Agreement, and (v) take any and all other
actions required or permitted to be taken by the AVS Stockholders or any one or
more of them, in connection with this Agreement, the Escrow Agreement and all
other agreements, instruments, certificates or other documents delivered in
connection therewith, provided that the Stockholder Representatives shall not be
obligated to take any action under this Agreement or the Escrow Agreement
without the receipt by them of agreements, reasonably satisfactory to the
Stockholder Representatives, of one or more of the AVS Stockholders to indemnify
the Stockholder Representatives for all losses, liability, cost or expense
associated with service as a Stockholder Representative pursuant to this
Agreement or the Escrow Agreement, provided further that the Stockholder
Representatives shall have no liability to any AVS Stockholder for their actions
taken in good faith in connection with their services as Stockholder
Representatives (collectively, the "Escrow Consent"); and shall take all lawful
action to solicit the adoption of this Agreement by the Required AVS Vote; and
the Board of Directors of AVS shall recommend adoption of this Agreement by the
stockholders of AVS (the "AVS Recommendation"), and shall not withdraw, modify
or qualify (or propose to withdraw, modify or qualify) (a "Change") in any
manner adverse to MUSE such recommendation or take any action or make any
statement in connection with the AVS Stockholders Meeting inconsistent with such
recommendation (collectively, a "Change in the AVS Recommendation"); provided
the foregoing shall not prohibit accurate disclosure (and such disclosure shall
not be deemed to be a Change in the AVS Recommendation) of factual information
regarding the business, financial condition or results of operations of MUSE or
AVS or the fact that an Acquisition Proposal has been made, the identity of the
party making such proposal or the material terms of such proposal (provided,
that the Board of Directors of AVS does not withdraw, modify or qualify (or
propose to withdraw, modify or qualify) in any manner adverse to MUSE its
recommendation) in the Form S-4 or the Proxy Statement/Prospectus or otherwise,
to the extent such information, facts, identity or terms is required to be
disclosed under applicable law; and provided further, that the Board of
Directors of AVS may make a Change in the AVS Recommendation prior to the AVS
Stockholders Meeting or the conclusion of the consent solicitation if (i) the
Board of Directors of AVS determines in good faith that an event, violation or
other matter that would have a material adverse effect on the business,
condition (financial or otherwise), assets, liabilities or operations has
occurred with respect to MUSE (a "MUSE Material Adverse Effect") and (ii) the
Board of Directors of AVS determines in good faith that, by reason of its
determination in clause (i) the failure to effect such Change in the AVS
Recommendation would create a substantial probability of violating the fiduciary
duties of the AVS Board of Directors under applicable law. Notwithstanding any
Change in the AVS Recommendation, this Agreement shall be submitted to the
stockholders of AVS at the AVS
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Stockholders Meeting for the purpose of adopting the Agreement and approving the
Merger; provided that this Agreement shall not be required to be submitted to
the stockholders of AVS at the AVS Stockholders Meeting if this Agreement has
been terminated pursuant to Article VII hereof.
Section 4.16 Pooling. Each of AVS and MUSE agree not to take
any action that would adversely affect the ability of MUSE to treat the Merger
as a pooling of interests and each of AVS and MUSE agree to take such action as
may be reasonably required to negate the impact of any past or future actions
that would adversely impact the ability of MUSE to treat the Merger as a pooling
of interests. MUSE shall obtain a letter from Feldman Sherb Horowitz & Co.,
P.C., MUSE's independent public accountants, with respect to MUSE, and from
Arthur Andersen, LLP, AVS's independent public accountants, with respect to AVS,
dated the date of the Proxy Statement/Prospectus, and confirmed in writing at
the Effective Date, to the effect that each of AVS and MUSE, as applicable, may
participate in a transaction such as the Merger in a manner so as to permit the
Merger to qualify as a pooling of interest.
Section 4.17 NASDAQ Listing. As soon as practicable after the
Effective Time, MUSE will use its best efforts (i) to cause the MUSE Common
Stock to be issued in the Merger to be quoted on the Nasdaq Stock Market or
listed on such securities exchange as MUSE Common Stock is then listed and (ii)
to cause shares of MUSE Common Stock issued upon exercise of MUSE Options on the
Nasdaq Stock Market or listed on such securities exchange as MUSE Common Stock
is then listed.
Section 4.18 AVS Affiliates. Not less than 45 days prior to
the Effective Time, AVS shall deliver to MUSE a letter identifying all persons
who, in the judgment of AVS, may be deemed at the time this Agreement is
submitted for adoption by the stockholders of AVS, "affiliates" of AVS for
purposes of Rule 145 under the Securities Act or for purposes of qualifying the
Merger for Pooling accounting treatment under APB 16 and applicable SEC rules
and regulations (each an "AVS Affiliate"), and such list shall be updated as
necessary to reflect changes from the date thereof. AVS shall use its best
efforts to cause each AVS Affiliate identified on such list to deliver to MUSE
not less than 30 days prior to the Effective Time, a written agreement
substantially in the form attached as Exhibit K hereto (an "Affiliate
Agreement"). MUSE shall impose restrictions substantially similar to those
contained in the Affiliate Agreement on all persons who, in the judgment of
MUSE, may be deemed at the time this Agreement is submitted for adoption by the
stockholders of AVS, "affiliates" of MUSE for purposes of qualifying the Merger
for Pooling accounting treatment under APB 16 and applicable SEC rules and
regulations.
Section 4.19 Notification of Certain Matters. AVS agrees that
it will not take any action which would cause or constitute a material breach,
or would, if it had been taken prior to the date hereof, have caused or
constituted a material breach, of any of the representations and warranties set
forth in Article II hereof. From the date hereof until the Closing Date, AVS
shall have a continuing obligation to give detailed notice thereof to MUSE and
to update or supplement any information provided herein in the event of, or
promptly after the occurrence of, or promptly after obtaining knowledge of the
occurrence of or the impending or threatened
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occurrence of, any fact, circumstance or event which would cause or constitute
or be reasonably likely to cause or constitute a Material Adverse Effect with
regard to AVS or a breach of any of the representations and warranties set forth
in Article II hereof. AVS shall use its best efforts to prevent or promptly
remedy such breach. AVS' compliance with this Section 4.19 shall not limit or
otherwise affect the remedies available hereunder to MUSE, including, but not
limited to MUSE's right to terminate this Agreement pursuant to Section 7.1
notwithstanding any remedy of any breach hereunder and MUSE's rights under
Article VI hereunder.
Section 4.20 Insurance. Notwithstanding anything to the
contrary contained herein, MUSE, in its sole discretion, shall determine the
necessity and the timing of obtaining an insurance policy for such duration and
in such amounts as it reasonably determines covering breaches of AVS'
representations and warranties contained herein and for excess liability
coverage for such breaches and other matters, including, but not limited to,
environmental related liabilities, and AVS will fully cooperate with MUSE and
any insurance agent or carrier in obtaining such insurance policy and AVS will
pay all fees, premiums and costs incurred in connection with obtaining such
insurance policy provided that no such fees, premiums or costs shall be payable
prior to the Closing.
ARTICLE V
CONDITIONS
Section 5.1 Conditions to Obligations of MUSE. The obligations
of MUSE and Sub to effect the transactions contemplated by this Agreement are
subject to the satisfaction or waiver by MUSE and Sub at or prior to the Closing
of the following conditions:
(a) the representations and warranties of AVS shall be true
and correct in all material respects as of the date hereof and as of the Closing
with the same effect as though such representations and warranties had been made
at and as of such time, other than representations and warranties that speak as
of a specific date or time (which need only be true and correct in all material
respects as of such date or time);
(b) AVS shall have performed and complied with each agreement,
covenant and obligation required to be performed or complied with by AVS under
this Agreement at or prior to the Closing;
(c) since December 31, 1999, AVS shall not have suffered a
Material Adverse Effect;
(d) all authorizations, permits, consents, Orders or approvals
of, or declarations or filings with, any governmental entity or other Person
(collectively, the "Authorizations") necessary to effect the transactions
contemplated by this Agreement shall have occurred, been filed or been obtained,
as the case may be;
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(e) AVS shall have obtained all Governmental Permits (whether
by transfer, reissuance, modification or otherwise) required to be obtained by
it in connection with or for the operation of the Business as presently
conducted and contemplated in this Agreement;
(f) there shall not be in effect on the Closing Date any Order
or Law restraining, enjoining or otherwise prohibiting or making illegal, or
diminishing the economic benefits derived from, the consummation of any of the
transactions contemplated in this Agreement, and there shall not be pending or
threatened on the Closing Date any Proceeding or any other action in, before or
by any governmental entity which could reasonably be expected to result in the
issuance of any such Order or the enactment, promulgation or deemed
applicability to MUSE, Sub, AVS or any transaction contemplated in this
Agreement of any such Law or that otherwise relates to this Agreement or the
transactions contemplated hereby;
(g) the Required AVS Vote and the Escrow Consent shall have
been obtained and the Dissenting Stock and/or shares of AVS Capital Stock
capable of becoming Dissenting Stock after the Closing shall not constitute in
excess of 10% of the shares eligible to vote for such approval and adoption;
(h) AVS shall have delivered or caused to be delivered to MUSE
each of the items required to be delivered by AVS as specified in Annex A
hereto;
(i) AVS shall have terminated its Executive Bonus Program with
no Material Adverse Effect to AVS;
(j) AVS shall have obtained Kubota Corporation's agreement
with AVS to the effect that the Merger shall not trigger the conversion feature
of the convertible promissory note and that such convertible promissory note
shall be exchanged for convertible debt of MUSE following the Merger on terms
set forth in Schedule C;
(k) AVS shall have obtained the requisite vote of the holders
of the Series A Preferred Stock and Series B Preferred Stock that the Merger
shall not be deemed to be a liquidation, dissolution or winding up of AVS for
purposes of the liquidation preference provisions of such stocks (the
"Liquidation Preference Waiver");
(l) the Form S-4 shall have become effective under the
Securities Act and shall not be the subject of any stop order or proceeding
seeking a stop order;
(m) each of the AVS employees listed on Schedule B shall have
entered into MUSE's standard confidentiality and trade secrets/invention
agreements in the form of Exhibit J;
(n) MUSE shall have received a letter from Feldman Sherb
Horowitz & Co., P.C., MUSE's independent public accountants, with respect to
MUSE, and from Arthur Andersen LLP, AVS's independent public accountants, with
respect to AVS, dated the date of the Proxy Statement/Prospectus, and confirmed
in writing at the Effective Date, to the effect that
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each of AVS and MUSE, as applicable, may participate in a transaction such as
the Merger in a manner so as to permit the Merger to qualify as a Pooling; and
(o) Each AVS Affiliate shall have entered into an Affiliate
Agreement, which Affiliate Agreements, as of the Closing Date, (i) shall be in
full force and effect, (ii) shall be the legal, valid and binding obligation of
the signatory thereto, enforceable in accordance with its terms and not conflict
with any other agreement to which such person is a party and (iii) the
provisions of which shall not have been challenged or modified by any legal
proceeding or otherwise changed or amended without the prior written consent of
MUSE.
Section 5.2 Conditions to Obligations of AVS. The obligations
of AVS to effect the transactions contemplated by this Agreement are subject to
the satisfaction or waiver by AVS at or prior to the Closing of the following
conditions:
(a) the respective representations and warranties of MUSE and
Sub in this Agreement shall be true and correct in all material respects as of
the date hereof and at and as of the Closing with the same effect as though such
representations and warranties had been made at and as of such time, other than
representations and warranties that speak as of a specific date or time (which
need only be true and correct in all material respects as of such date or time);
(b) Each of MUSE and Sub shall have performed and complied
with each agreement, covenant and obligation required to be performed or
complied with by them under this Agreement at or prior to the Closing;
(c) since March 31, 2000, MUSE shall not have suffered a MUSE
Material Adverse Effect;
(d) all Authorizations necessary for MUSE or Sub to effect the
transactions contemplated in this Agreement shall have occurred, been filed or
been obtained, as the case may be;
(e) there shall not be in effect on the Closing Date any Order
or Law restraining, enjoining or otherwise prohibiting or making illegal, or
diminishing the economic benefits derived from, the consummation of any of the
transactions contemplated in this Agreement, and there shall not be pending or
threatened on the Closing Date any Proceeding or any other action in, before or
by any governmental entity which could reasonably be expected to result in the
issuance of any such Order or the enactment, promulgation or deemed
applicability to MUSE, Sub, AVS or any transaction contemplated in this
Agreement of any such Law;
(f) Each of MUSE and Sub shall have delivered or caused to be
delivered to AVS each of the items required to be delivered by them as specified
in Annex A hereto; and
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(g) the Form S-4 shall have become effective under the
Securities Act and shall not be the subject of any stop order or proceeding
seeking a stop order.
ARTICLE VI
INDEMNIFICATION AND SURVIVAL
Section 6.1 Indemnification.
(a) The AVS Stockholders shall jointly and severally indemnify
MUSE, Sub and their respective officers, directors, stockholders, employees,
agents and Affiliates (the "MUSE Parties") and hold each of them harmless from
and against any Loss suffered, incurred or sustained by any of them or to which
any of them becomes subject, resulting from, arising out of or relating to (i)
any inaccuracy in or breach of, or any alleged inaccuracy in or alleged breach
of, any representation or warranty or failure to perform any covenant or
agreement to be performed on or before the Closing Date on the part of AVS
contained in this Agreement or the Escrow Agreement; (ii) any intentional tort,
including without limitation, fraud (including fraud in the inducement), willful
misconduct or bad faith by AVS or any executive officer, director, stockholder
or employee of AVS in connection with this Agreement, the Escrow Agreement or
the transactions contemplated hereby or thereby; and (iii) any and all actions,
suits, Proceedings, demands, judgments, costs and legal and reasonable other
expenses incident to any of the matters referred to in clauses (i), and (ii) of
this Section 6.l (a). Once it is determined there is such an indemnifiable
event, the amount of the Loss shall be determined without giving effect to any
"Material Adverse Effect" qualification or any other materiality, dollar limit
or similar qualification contained in the representation, warranty, covenant or
agreement.
(b) MUSE hereby indemnifies and holds harmless AVS and its
officers, directors, stockholders, agents and Affiliates (the "AVS Parties")
from and against any Loss suffered, incurred or sustained by any of them or to
which any of them becomes subject, resulting from, arising out of or relating to
(i) any inaccuracy in or breach of, or any alleged inaccuracy or alleged breach
of any representation or warranty or failure to perform any covenant or
agreement to be performed on or before the Closing Date on the part of MUSE or
Sub contained in this Agreement or the Escrow Agreement to which MUSE or Sub is
a party; (ii) any intentional tort, including without limitation, fraud
(including fraud in the inducement), willful misconduct or bad faith by any of
the MUSE Parties or any executive officer, director, stockholder or employee of
MUSE in connection with this Agreement, the Escrow Agreement or the transactions
contemplated hereby or thereby; and (iii) any and all actions, suits,
Proceedings, demands, judgments, costs and legal and reasonable other expenses
incident to any of the matters referred to in clauses (i) and (ii) of this
Section 6.1(b). Once it is determined there is such an indemnifiable event, the
amount of the Loss shall be determined without giving effect to any "Material
Adverse Effect" qualification or any other materiality, dollar limit or similar
qualification contained in the representation, warranty, covenant or agreement.
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(c) All claims for indemnification by any party seeking
indemnity under this Agreement (an "Indemnified Party") will be asserted and
resolved as follows:
(i) In the event any claim or demand, in respect of
which an Indemnified Party might seek indemnity under this Agreement, is
asserted against or sought to be collected from such Indemnified Party by a
Person other than an MUSE Party or AVS Party or any of their respective
Affiliates (a "Third Party Claim"), the Indemnified Party shall deliver a notice
(a "Claim Notice") with reasonable promptness to the party from whom the
Indemnified Party is seeking indemnification (the "Indemnifying Party"), which
Claim Notice shall provide reasonable detail relating to such Third Party Claim,
including the amount of Loss claimed, to the extent known. If the Indemnified
Party fails to provide the Claim Notice with reasonable promptness after the
Indemnified Party receives notice of such Third Party Claim, the Indemnifying
Party shall not be obligated to indemnify the Indemnified Party with respect to
such Third Party Claim only to the extent that the Indemnifying Party
demonstrates that its ability to defend such Third Party Claim has been
irreparably prejudiced by such failure of the Indemnified Party. The
Indemnifying Party shall notify the Indemnified Party as soon as practicable
within the Dispute Period (defined below) whether the Indemnifying Party
disputes its liability to the Indemnified Party, and whether the Indemnifying
Party desires, at its sole cost and expense, to defend the Indemnified Party
against such Third Party Claim. "Dispute Period" means the period ending 30 days
following receipt by an Indemnifying Party of either a Claim Notice or an
Indemnity Notice (as hereinafter defined).
(ii) If the Indemnifying Party notifies the
Indemnified Party within the Dispute Period that the Indemnifying Party desires
to defend the Indemnified Party with respect to the Third Party Claim pursuant
to this Section 6.1, then the Indemnifying Party shall have the right to defend,
with counsel reasonably satisfactory to the Indemnified Party, at the sole cost
and expense of the Indemnifying Party, such Third Party Claim by all appropriate
proceedings, which proceedings must be vigorously and diligently prosecuted by
the Indemnifying Party to a final conclusion or may be settled at the discretion
of the Indemnifying Party; provided, however, that the Indemnifying Party shall
not be permitted to effect any settlement without the written consent (which
shall not be unreasonably withheld) of the Indemnified Party unless (A) the sole
relief provided in connection with such settlement is monetary damages that are
paid in full by the Indemnifying Party, (B) such settlement involves no finding
or admission of any wrongdoing, violation or breach by any Indemnified Party of
any right of any other Person or any Laws, Contracts or Governmental Permits,
and (C) such settlement has no effect on any other claims that may be made
against or liabilities of any Indemnified Party. The Indemnifying Party shall
have full control of such defense and proceedings, including any compromise or
settlement thereof (except as provided in the preceding sentence); provided,
however, that the Indemnified Party may, at its sole cost and expense, at any
time prior to the Indemnifying Party's delivery of the notice referred to in the
first sentence of this clause (ii), file any motion, answer or other pleadings
or take any other action that the Indemnified Party reasonably believes to be
necessary or appropriate to protect its interests; and provided further, that if
requested by the Indemnifying Party, the Indemnified Party shall, at the sole
cost and expense of the Indemnifying Party, provide reasonable cooperation to
the Indemnifying Party in contesting any Third Party Claim that the Indemnifying
Party elects to contest. The Indemnified Party may participate in, but not
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control, any defense or settlement of any Third Party Claim controlled by the
Indemnifying Party pursuant to this clause (ii) and, except as provided in the
first sentence of this clause (ii) and the preceding sentence, the Indemnified
Party will bear its own costs and expenses with respect to such participation.
Notwithstanding the foregoing, the Indemnified Party may take over the control
of the defense or settlement of a Third Party Claim at any time if it
irrevocably waives its right to indemnity with respect to such Third Party
Claim.
(iii) If the Indemnifying Party fails to notify the
Indemnified Party within the Dispute Period that the Indemnifying Party desires
to defend the Third Party Claim pursuant to Section 6.1(d)(ii) or if the
Indemnifying Party gives such notice but fails to prosecute vigorously and
diligently or settle the Third Party Claim (in each case in accordance with
Section 6.1(d)(ii) above), or if the Indemnifying Party fails to give any notice
whatsoever within the Dispute Period, then the Indemnified Party will have the
right to defend, at the sole cost and expense of the Indemnifying Party, the
Third Party Claim by all appropriate proceedings, which proceedings will be
prosecuted by the Indemnified Party in a reasonable manner and in good faith or
will be settled at the discretion of the Indemnified Party (with the consent of
the Indemnifying Party, which consent will not be unreasonably withheld).
Subject to the immediately preceding sentence, the Indemnified Party will have
full control of such defense and proceedings, including any compromise or
settlement thereof; provided, however, that if requested by the Indemnified
Party, the Indemnifying Party will, at the sole cost and expense of the
Indemnifying Party, provide reasonable cooperation to the Indemnified Party and
its counsel in contesting any Third Party Claim which the Indemnified Party is
contesting. The Indemnifying Party may participate in, but not control, any
defense or settlement controlled by the Indemnified Party pursuant to this
clause (iii), and the Indemnifying Party will bear its own costs and expenses
with respect to such participation.
(iv) If the Indemnifying Party notifies the
Indemnified Party that it does not dispute its liability to the Indemnified
Party with respect to a Third Party Claim or fails to notify the Indemnified
Party within the Dispute Period whether the Indemnifying Party disputes its
liability to the Indemnified Party with respect to such Third Party Claim, the
Loss in the amount specified in the Claim Notice will be conclusively deemed a
liability of the Indemnifying Party, and the Indemnifying Party shall pay the
amount of such Loss to the Indemnified Party on demand, subject to the
limitation on liability set forth in Section 6.4. If the Indemnifying Party has
timely disputed its liability with respect to such claim, the Indemnifying Party
and Indemnified Party will proceed in good faith to negotiate a resolution of
such dispute, and if not resolved through negotiations within the Resolution
Period, such dispute shall be resolved by litigation in a court of competent
jurisdiction. "Resolution Period" means the period ending 30 days following
expiration of the Dispute Period.
(v) In the event any Indemnified Party should have a
claim under this Agreement against any Indemnifying Party that does not involve
a Third Party Claim, the Indemnified Party shall deliver a notice (an "Indemnity
Notice") with reasonable promptness to the Indemnifying Party, which Indemnity
Notice shall provide reasonable detail relating to such claim, including the
amount of Loss claimed, to the extent known. If the Indemnified Party fails to
provide the Indemnity Notice with reasonable promptness, the Indemnifying Party
shall not be
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obligated to indemnify the Indemnified Party with respect to such claim only to
the extent that an Indemnifying Party demonstrates that it has been irreparably
prejudiced by such failure of the Indemnified Party. If the Indemnifying Party
notifies the Indemnified Party that it does not dispute the claim described in
such Indemnity Notice or fails to notify the Indemnified Party within the
Dispute Period whether the Indemnifying Party disputes the claim described in
such Indemnity Notice, the Loss in the amount specified in the Indemnity Notice
will be conclusively deemed a liability of the Indemnifying Party, and the
Indemnifying Party shall pay the amount of such Loss to the Indemnified Party on
demand. If the Indemnifying Party has timely disputed its liability with respect
to such claim, the Indemnifying Party and the Indemnified Party will proceed in
good faith to negotiate a resolution of such dispute, and if not resolved
through negotiations within the Resolution Period, such dispute shall be
resolved by litigation in a court of competent jurisdiction.
(d) Any indemnity payment, including any payments made out of
the Escrow Amount, under this Agreement will be treated for tax purposes as an
adjustment to the Merger Consideration.
Section 6.2 Survival Periods. (a) All representations and
warranties of AVS contained in this Agreement, the AVS Disclosure Schedule, the
Escrow Agreement or any certificate or document delivered in connection herewith
or therewith shall survive the Closing and shall remain in full force and effect
for 12 months after the Closing Date (such 12-month anniversary to the Closing
Date being referred to as the "Expiration Date") and shall apply beyond such 12
month period with respect to claims asserted in writing within such 12 month
period, provided, however, that those representations and warranties which are
specifically confirmed by the first audit of the consolidated financial
statements of MUSE and AVS following the Merger shall survive only until the
earlier of the end of such twelve month period or completion of such audit;
provided further, however, that in the event of an adjustment, modification or
restatement of such audited consolidated financial statements, such
representations and warranties shall survive for the period through and
including such adjustment, modification or restatement and any claims with
respect to prior periods may be made within 30 days thereafter. Except as
otherwise provided, the covenants and agreements of the parties hereto shall
survive the Closing. Rights of an Indemnified Party to indemnification shall not
be limited or affected in any way by any pre-Closing investigation by such
Indemnified Party or by such Indemnified Party's actual knowledge of any
inaccuracy of the representations and warranties.
(b) All representations and warranties of MUSE contained in
this Agreement, the MUSE Disclosure Schedule, the Escrow Agreement or any
certificate or document delivered in connection herewith or therewith shall
survive the Closing and shall remain in full force and effect for a period of
twelve months after the Closing Date and any claims in respect thereof, whether
made by AVS or any current or former holder of AVS Capital Stock, shall be
limited to an amount in the aggregate not in excess of $250,000.
Section 6.3 Escrow Agreement. The parties hereto acknowledge
that shares of MUSE Common Stock representing the Escrow Amount, together with
stock powers with
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respect thereto, are being deposited on the Closing Date into an escrow account
established pursuant to the Escrow Agreement. Subject to Section 6.4, all claims
by any MUSE Party with respect to the indemnification obligations of the AVS
Stockholders shall be made in accordance herewith and with said Escrow Agreement
and shall be satisfied solely from said Escrow Amount. The AVS Stockholders may
pay any claims required to be paid by them in cash or the shares representing
the Escrow Amount based on the value of such shares as of the date of
consummation of the Merger.
Section 6.4 Limitation of Liability. (a) Notwithstanding
anything to the contrary contained herein, the AVS Stockholders shall not be
subject to payment, with respect to Losses, in excess of the Escrow Amount. MUSE
and AVS agree and acknowledge that the indemnification provisions of this
Article VI shall be the exclusive remedy of MUSE and AVS with respect to the
indemnification obligations set forth in Sections 6.1(a) and (b) of this Article
VI, provided, however, nothing contained herein shall in any way limit the
ability of AVS or MUSE, as the case may be, from seeking or recovering damages
(including no limitation on the amount of such damages) or any other legal
remedy in connection with any intentional torts, including but not limited to
fraud, willful misconduct or bad faith (collectively, "fraud claims") by AVS or
MUSE or any of their officers, directors or employees, it being agreed that (i)
the damages associated with any such fraud claim by MUSE may be satisfied from
the Escrow Amount to the extent that the Escrow Amount (giving effect to claims
thereunder which are not fraud claims) is adequate; and (ii) any such fraud
claim by MUSE or AVS may be brought only against the entity or entities or
person or persons which or who have actually committed, or may otherwise be
deemed liable or responsible for such fraud claim because they knew or should
have known of such act or omission which is the basis for the fraud claim and
that the other persons or entities referred to in this Section 6.4(a) shall have
no liability, joint or otherwise, therefor, it being understood that a person's
position as an officer, director or stockholder will not solely by virtue of
such position result in such liability.
(b) Notwithstanding anything to the contrary in this Article
VI, no party shall make any Claim unless and until the aggregate indemnified
Losses under this Agreement exceed $50,000, in which event recovery for such
Losses shall be available as if this limitation were not applicable.
ARTICLE VII
TERMINATION
Section 7.1 Termination. This Agreement may be terminated, and
the transactions contemplated herein may be abandoned:
(a) any time before the Closing, by mutual written agreement
of AVS, on the one hand, and MUSE and Sub, on the other hand;
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(b) any time before the Closing, by AVS, on the one hand, or
MUSE and Sub, on the other hand, (i) in the event of a material breach hereof by
any non-terminating party or (ii) upon notification to the non-terminating party
by the terminating party that the non-terminating party has failed to satisfy a
condition set forth herein or in any Transaction Agreement required to be
satisfied by such non-terminating party prior to or at the Closing.
(c) any time after October 31, 2000, by AVS, on the one hand,
or MUSE and Sub, on the other hand, upon notification to the non-terminating
party by the terminating party if the Closing shall not have occurred on or
before such date and such failure to consummate is not caused by a breach of
this Agreement by any terminating party.
Section 7.2 Effect of Termination. If this Agreement is
validly terminated pursuant to Section 7.1, this Agreement will forthwith become
null and void, and there will be no liability or obligation on the part of any
party (or any of their respective officers, directors, employees, partners,
agents or other representatives or Affiliates), except as provided in the next
succeeding sentence and except that the provisions with respect to public
announcements in Section 4.6 will continue to apply following any such
termination. Notwithstanding any other provision in this Agreement to the
contrary, upon termination of this Agreement pursuant to Section 7.1(b), AVS
will remain liable to the MUSE Parties for any misrepresentation or breach of
this Agreement by AVS existing at the time of such termination, and MUSE will
remain liable to the AVS Parties for any misrepresentation or breach of this
Agreement by MUSE existing at the time of such termination, and AVS, on the one
hand, or MUSE, on the other hand, may seek such remedies, including damages and
fees of attorneys, against the other with respect to any such misrepresentation
or breach as are provided in this Agreement or as are otherwise available at law
or in equity.
ARTICLE VIII
MISCELLANEOUS
Section 8.1 Notices. All notices and other communications
hereunder to any party shall be deemed to be sufficient if contained in a
written instrument delivered in person or by a nationally recognized courier
service or duly sent by facsimile or first class, registered or certified mail,
postage prepaid, addressed to:
(a) if to MUSE or Sub, to:
MUSE Technologies, Inc.
1601 Randolph, S.E.
Albuquerque, NM 87106
Telephone: (505) 843-6873
Telecopy: (505) 766-9123
Attention: Brian R. Clark, President
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with a copy to:
Proskauer Rose LLP
1585 Broadway
New York, NY 10036
Telephone: (212) 969-3000
Telecopy: (212) 969-2900
Attention: Neil S. Belloff, Esq.
(b) if to AVS, to:
Advanced Visual Systems Inc.
300 Fifth Avenue
Waltham, MA 02451
Telephone: (781) 890-4300
Telecopy: (781) 890-8290
Attention: Marc R. Spigel
Vice President, Finance and Administration
with a copy to:
Hill & Barlow
One International Place
Boston, MA 02110
Telephone: (617) 428-3000
Telecopy: (617) 428-3500
Attention: Thomas C. Chase, Esq.
All such notices and communications shall be deemed to have been received (i) in
the case of personal or courier delivery, on the date of such delivery, (ii) in
the case of facsimile transmission, on the date on which the sender receives
confirmation that such was received by the addressee and (iii) in the case of
mailing, on the fifth business day following the date of such mailing.
Section 8.2 Descriptive Headings; Definitions; Certain
Interpretation.
(a) The descriptive headings are for convenience only and
shall not control or affect the meaning or construction of any provision of this
Agreement.
(b) The following terms shall have the following meanings:
"Affiliate" means any Person that directly, or indirectly
through one or more intermediaries, controls or is controlled by or is under
common control with the Person specified. For purposes of this definition,
control of a Person means the power, direct or indirect, to direct or cause the
direction of management and policies of such Person whether by contract or
otherwise and, in any event and without limitation of the previous sentence, any
Person owning
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10 percent or more of the voting securities of another Person shall be deemed to
control that Person.
"Lien" means any mortgage, pledge, security interest,
encumbrance, lien or charge of any kind, including any agreement to give any of
the following: any conditional sale or other title retention agreement, any
lease in the nature thereof, and the filing of or any agreement to file any
financing statement under the Uniform Commercial Code of any jurisdiction, or
the recordation of any such interest with the U.S. Copyright Office or the U.S.
Patent and Trademark Office.
"Person" means any person, corporation, limited liability
company, limited liability partnership, partnership, joint venture or other
entity.
(c) Except as otherwise expressly provided in this Agreement,
the following rules of interpretation apply to this Agreement: (i) the singular
includes the plural and the plural includes the singular; (ii) "or" and "either"
are not exclusive and "include" and "including" are not limiting; (iii) a
reference to any agreement or other contract includes permitted supplements and
amendments; (iv) a reference to a law includes any amendment or modification to
such law and any rules or regulations issued thereunder; (v) a reference in this
Agreement to an Article, Section, Annex, Exhibit or Schedule is to the Article,
Section, Annex, Exhibit or Schedule of this Agreement; and (vi) capitalized
terms used and not defined in the Annexes, Exhibits or Schedules attached to
this Agreement shall have the meanings set forth in this Agreement.
(d) Whenever any party makes any representation, warranty or
other statement to such party's knowledge, such party will be deemed to have
made due inquiry, including due inquiry by any officer or director of such party
or any other Person who has responsibility with respect to the relevant subject
matter, into the subject matter of such representation, warranty or other
statement.
Section 8.3 Counterparts; Effectiveness. This Agreement may be
executed in two or more counterparts, all of which shall be considered one and
the same agreement. This Agreement shall not be effective against any party
until signed by all parties hereto.
Section 8.4 Entire Agreement; Assignment. This Agreement,
including the appendices, annexes and exhibits hereto and the documents,
schedules (including the AVS Disclosure Schedule and the MUSE Disclosure
Schedule), certificates and instruments referred to herein, constitute the
entire agreement and supersede all prior agreements and understandings, both
written and oral, with respect to the subject matter hereof. This Agreement
shall not be assigned by operation of law or otherwise, provided that MUSE and
Sub may assign all of their respective rights and obligations under this
Agreement to any subsidiary or Affiliate of MUSE.
Section 8.5 Amendment. This Agreement may be amended at any
time by the parties hereto, but only by an instrument in writing signed by each
of the parties hereto.
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Section 8.6 Extensions; Waiver. At any time prior to the
Closing, the parties hereto may (i) extend the time for the performance of any
of the obligations or other acts of the parties hereto, (ii) waive any
inaccuracies in the representations and warranties contained herein or in any
document delivered pursuant hereto and (iii) waive compliance with any of the
covenants, agreements or conditions contained herein. Any agreement on the part
of a party hereto to any such extension or waiver shall be valid only if set
forth in a written instrument signed by such party.
SECTION 8.7 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, WITHOUT
REGARD TO ANY APPLICABLE PRINCIPLES OF CONFLICTS OF LAW.
Section 8.8 Specific Performance. The parties hereto agree
that if any of the provisions of this Agreement were not performed in accordance
with their specific terms or were otherwise breached, irreparable damage would
occur, no adequate remedy at law would exist and damages would be difficult to
determine, and that the parties shall be entitled to specific performance of the
terms hereof, in addition to any other remedy at law or equity.
Section 8.9 Parties in Interest. This Agreement shall be
binding upon and inure solely to the benefit of each party hereto and its
permitted assigns, and nothing in this Agreement express or implied, is intended
to or shall confer upon any other Person or Persons any rights, benefits or
remedies of any nature whatsoever under or by reason of this Agreement, except
as otherwise specified herein.
Section 8.10 Severability. This Agreement shall be deemed
severable, and the invalidity or unenforceability of any term or provision of
this Agreement shall not affect the validity or enforceability of this Agreement
or of any other term hereof, which shall remain in full force and effect.
SECTION 8.11 CONSENT TO SERVICE OF PROCESS. EACH OF AVS, MUSE
AND SUB HEREBY IRREVOCABLY SUBMITS, ON A NON-EXCLUSIVE BASIS, TO THE
JURISDICTION OF ANY DELAWARE STATE OR FEDERAL COURT SITTING IN THE CITY AND
COUNTY OF WILMINGTON IN RESPECT OF ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF
OR RELATING TO THIS AGREEMENT, AND IRREVOCABLY ACCEPT FOR ITSELF AND IN RESPECT
OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, JURISDICTION OF THE AFORESAID
COURTS. AVS AND MUSE HEREBY IRREVOCABLY WAIVE, TO THE FULLEST EXTENT SUCH PARTY
MAY EFFECTIVELY DO SO UNDER APPLICABLE LAW, TRIAL BY JURY AND ANY OBJECTION THAT
SUCH PARTY MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUCH SUIT,
ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT AND ANY CLAIM THAT ANY SUCH SUIT,
ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN
INCONVENIENT FORUM. NOTHING HEREIN SHALL AFFECT THE RIGHT OF ANY PARTY HERETO TO
SERVE
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PROCESS IN ANY MANNER PERMITTED BY LAW OR TO COMMENCE LEGAL PROCEEDINGS OR
OTHERWISE PROCEED AGAINST THE OTHER PARTY IN ANY OTHER JURISDICTION.
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The parties have signed or caused this Agreement to be signed
by their respective duty authorized officers, all as of the date first written
above.
MUSE TECHNOLOGIES, INC.
By: /s/ Brian R. Clark
-----------------------------
Name: Brian R. Clark
Title: President
MUSE MERGER SUB, INC.
By: /s/ Brian R. Clark
-----------------------------
Name: Brian R. Clark
Title: President
ADVANCED VISUAL SYSTEMS INC.
By: /s/ Russell G. Barbour
-----------------------------
Name: Russell G. Barbour
Title: President
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APPENDIX B
DELAWARE GENERAL CORPORATION LAW
SECTION 262 APPRAISAL RIGHTS.- (a) Any stockholder of a corporation of
this State who holds shares of stock on the date of the making of a demand
pursuant to subsection (d) of this section with respect to such shares, who
continuously holds such shares through the effective date of the merger or
consolidation, who has otherwise complied with subsection (d) of this section
and who has neither voted in favor of the merger or consolidation nor consented
thereto in writing pursuant to Section 228 of this title shall be entitled to an
appraisal by the Court of Chancery of the fair value of the stockholder's shares
of stock under the circumstances described in subsections (b) and (c) of this
section. As used in this section, the word "stockholder" means a holder of
record of stock in a stock corporation and also a member of record of a nonstock
corporation; the words "stock "and "share" mean and include what is ordinarily
meant by those words and also membership or membership interest of a member of a
nonstock corporation; and the words "depository receipt" mean a receipt or other
instrument issued by a depository representing an interest in one or more
shares, or fractions thereof, solely of stock of a corporation, which stock is
deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to ss.251 (other than a merger effected pursuant to Section
251(g) of this title), Section 252, Section 254, Section 257, Section 258,
Section 263 or Section 264 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which stock,
or depository receipts in respect thereof, at the record date fixed to determine
the stockholders entitled to receive notice of and to vote at the meeting of
stockholders to act upon the agreement of merger or consolidation, were either
(i) listed on a national securities exchange or designated as a national market
system security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or (ii) held of record by more than 2,000 holders;
and further provided that no appraisal rights shall be available for any shares
of stock of the constituent corporation surviving merger if the merger did not
require for its approval the vote of the stockholders of the surviving
corporation as provided in subsection (f) of Section 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series of
stock of a constituent corporation if the holders thereof are required by the
terms of an agreement of merger or consolidation pursuant to Sections 251, 252,
254, 257, 258, 263 and 264 of this title to accept for such stock anything
except:
a. Shares of stock of the corporation surviving or resulting from such
merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts in
respect thereof, which shares of stock (or depository receipts in respect
thereof) or depository receipts at the effective date of the merger or
consolidation will be either listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or held of record
by more than 2,000 holders;
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c. Cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a. and b. of this paragraph; or
d. Any combination of the shares of stock, depository receipts and cash
in lieu of fractional shares or fractional depository receipts described in the
foregoing subparagraphs a., b. and c. of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under Section 253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall be
available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation
that appraisal rights under this section shall be available for the shares of
any class or series of its stock as a result of an amendment to its certificate
of incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting, shall
notify each of its stockholders who was such on the record date for such meeting
with respect to shares for which appraisal rights are available pursuant to
subsections (b) or (c) hereof that appraisal rights are available for any or all
of the shares of the constituent corporations, and shall include in such notice
a copy of this section. Each stockholder electing to demand the appraisal of
such stockholder's shares shall deliver to the corporation, before the taking of
the vote on the merger or consolidation, a written demand for appraisal of such
stockholder's shares. Such demand will be sufficient if it reasonably informs
the corporation of the identity of the stockholder and that the stockholder
intends thereby to demand the appraisal of such stockholder's shares. A proxy or
vote against the merger or consolidation shall not constitute such a demand. A
stockholder electing to take such action must do so by a separate written demand
as herein provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become effective;
or
(2) If the merger or consolidation was approved pursuant to Section 228
or Section 253 of this title, each constituent corporation, either before the
effective date of the merger or consolidation or within ten days thereafter,
shall notify each of the holders of any class or series of stock of such
constituent corporation who are entitled to appraisal rights of the approval of
the merger or consolidation and that appraisal rights are available for any or
all shares of such class or series of stock of such constituent corporation, and
shall include in such notice a copy of this section; provided that, if the
notice is given on or after the effective date of the merger or consolidation,
such notice shall be given by the surviving or resulting corporation to all such
holders of any class or series of stock of a constituent corporation that are
entitled to appraisal rights. Such notice may, and if given on or after the
effective date of the merger or consolidation, shall, also notify such
stockholders of the effective date of the merger or consolidation. Any
stockholder entitled to appraisal rights may, within 20 days after the date of
mailing of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
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stockholder and that the stockholder intends thereby to demand the appraisal of
such holder's shares. If such notice did not notify stockholders of the
effective date of the merger or consolidation, either (i) each such constituent
corporation shall send a second notice before the effective date of the merger
or consolidation notifying each of the holders of any class or series of stock
of such constituent corporation that are entitled to appraisal rights of the
effective date of the merger or consolidation or (ii) the surviving or resulting
corporation shall send such a second notice to all such holders on or within 10
days after such effective date; provided, however, that if such second notice is
sent more than 20 days following the sending of the first notice, such second
notice need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with this
subsection. An affidavit of the secretary or assistant secretary or of the
transfer agent of the corporation that is required to give either notice that
such notice has been given shall, in the absence of fraud, be prima facie
evidence of the facts stated therein. For purposes of determining the
stockholders entitled to receive either notice, each constituent corporation may
fix, in advance, a record date that shall be not more than 10 days prior to the
date the notice is given, provided, that if the notice is given on or after the
effective date of the merger or consolidation, the record date shall be such
effective date. If no record date is fixed and the notice is given prior to the
effective date, the record date shall be the close of business on the day next
preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw such stockholder's demand for appraisal and to accept the terms offered
upon the merger or consolidation. Within 120 days after the effective date of
the merger or consolidation, any stockholder who has complied with the
requirements of subsections (a) and (d) hereof, upon written request, shall be
entitled to receive from the corporation surviving the merger or resulting from
the consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which demands
for appraisal have been received and the aggregate number of holders of such
shares. Such written statement shall be mailed to the stockholder within 10 days
after such stockholder's written request for such a statement is received by the
surviving or resulting corporation or within 10 days after expiration of the
period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
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(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the
Court shall appraise the shares, determining their fair value exclusive of any
element of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted
such stockholder's certificates of stock to the Register in Chancery, if such is
required, may participate fully in all proceedings until it is finally
determined that such stockholder is not entitled to appraisal right sunder this
section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and
taxed upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation,
no stockholder who has demanded appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of such
stockholder's demand for an appraisal and an acceptance of the merger or
consolidation, either within 60 days after the effective date of the merger or
consolidation as provided in subsection (e) of this section or thereafter with
the written approval of the corporation, then the right of such stockholder to
an appraisal shall cease. Notwithstanding the foregoing, no appraisal proceeding
in the Court of Chancery shall be dismissed as to any stockholder without the
approval of the Court, and such approval may be conditioned upon such terms as
the Court deems just.
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(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law authorizes a court
to award, or a corporation's board of directors to grant, indemnity to directors
and officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act of 1933. MUSE's certificate of
incorporation and bylaws provide for indemnification of its directors, officers,
employees and other agents to the maximum extent permitted by the Delaware
General Corporation Law. MUSE has also purchased and maintains insurance for its
officers, directors, employees or agents against liabilities which an officer, a
director, an employee or an agent may incur in his or her capacity as such.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
The following exhibits are filed herewith or incorporated herein by
reference.
EXHIBIT
NUMBER DESCRIPTION
------- -----------
2.1 Agreement and Plan of Merger, dated as of July 18, 2000, among Advanced
Visual Systems Inc., MUSE Merger Sub, Inc. and MUSE Technologies, Inc.
(incorporated by reference to Appendix A to the proxy
statement/prospectus filed as part of this registration statement).
2.2* Form of Escrow Agreement among MUSE Technologies, Inc., Russell G.
Barbour and John William Poduska, Sr., as representatives of the AVS
stockholders, Advanced Visual Systems Inc. and the escrow agent.
2.3* Form of Affiliate Agreement of affiliates of Advanced Visual Systems
Inc.
3.1 Certificate of Incorporation of MUSE Technologies, Inc., as amended
(incorporated by reference to Exhibit 3.1 to the registration statement
on Form SB-2 (Commission File No. 333-62495)).
3.2 Bylaws of MUSE Technologies, Inc., as amended (incorporated by
reference to Exhibits 3.2 and 3.3 to the registration statement on Form
SB-2 (Commission File No. 333-62495)).
5.1 Opinion of Proskauer Rose LLP, counsel to MUSE Technologies, Inc., as
to the legality of the MUSE common stock being registered hereby.
8.1 Opinion of Hill & Barlow, a Professional Corporation, counsel to AVS,
regarding tax matters.
23.1 Consent of Proskauer Rose LLP with respect to the legality of MUSE
common stock being registered hereby (contained in Exhibit 5.1).
23.2 Consent of Feldman Sherb & Co., P.C., independent auditors, with
respect to financial statements of MUSE Technologies, Inc.
23.3 Consent of Arthur Andersen LLP, independent auditors, with respect to
financial statements of Advanced Visual Systems Inc.
23.4 Consent of Hill & Barlow, a Professional Corporation, regarding tax
matters (contained in Exhibit 8.1).
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23.5 Consent of Pridie Brewster, Chartered Accountants and Registered
Auditors, with respect to certain financial statements of Virtual
Presence Limited.
24.1* Power of Attorney (included in signature page).
99.1 Form of Proxy to be used in connection with special meeting of
stockholders of Advanced Visual Systems Inc.
-----------
* Previously filed.
(b) FINANCIAL STATEMENT SCHEDULES
All schedules have been omitted as not applicable or not required under
the rules of Regulation S-X.
ITEM 22. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(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 of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar
value of securities offered would not exceed that which was
registered) and any deviation from the low or high and of the
estimated maximum offering range may be reflected in the form
of prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and price
represent no more than 20 percent change in the maximum
aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective Registration
Statement; and
(iii) To include any material information with
respect to the plan of distribution not previously disclosed
in the registration statement or any material change to such
information in the registration statement.
provided, however, that paragraphs (i) and (ii) do not apply if the
registration statement is on Form S-3, Form S-8 or Form F-3, and the
information required to be included in a post-effective amendment by
those paragraphs is contained in periodic reports filed with or
furnished to the Commission by the registrant pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934 that are incorporated by
reference in the registration statement.
(2) That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement
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relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(c) The undersigned registrant hereby undertakes as follows: that prior
to any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of the registration statement, by any person or party
who is deemed to be an underwriter within the meaning of Rule 145(c), the issuer
undertakes that such reoffering prospectus will contain the information called
for by the applicable registration form with respect to reofferings by persons
who may be deemed underwriters, in addition to the information called for by the
other items of the applicable form.
(d) The registrant undertakes that every prospectus: (i) that is filed
pursuant to paragraph (c) immediately preceding or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(e) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that such 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 registrants will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
(f) The undersigned registrant hereby undertakes to respond to requests
for information that is incorporated by reference into the prospectus pursuant
to Items 4, 10(b), 11 or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
II-3
<PAGE>
(g) The undersigned registrant hereby undertakes to supply by means of
a post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the undersigned
registrant certifies that it has duly caused Amendment No. 1 to this
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of London, Country of the United Kingdom on
September 13, 2000.
MUSE TECHNOLOGIES, INC.
By: /s/ Brian R. Clark
---------------------------------
Name: Brian R. Clark
Title: President
Pursuant to the requirements of the Securities Act of 1933, Amendment
No. 1 to this registration statement has been signed on September 13, 2000 by
the following persons in the capacities indicated.
SIGNATURE TITLE
President, Chief Financial Officer (principal
/s/ Brian R. Clark financial and accounting officer) and Director
--------------------------- (principal executive officer)
Brian R. Clark
/s/ Brian R. Clark* Managing Director of Virtual Presence and Director
---------------------------
John Hough
/s/ Brian R. Clark* Director
---------------------------
Edward A. Masi
/s/ Brian R. Clark* Director
---------------------------
Jack C. Berenzweig
/s/ Brian R. Clark*
---------------------------------------------
Brian R. Clark, Attorney-in-Fact
-----------------
* Original powers of attorney authorizing Brian R. Clark and John Hough, or
either of them, to sign the registration statement and any amendments thereto on
behalf of the above-named directors and officers have been previously filed.
II-5
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
2.1 Agreement and Plan of Merger, dated as of July 18, 2000, among Advanced
Visual Systems Inc., MUSE Merger Sub, Inc. and MUSE Technologies, Inc.
(incorporated by reference to Appendix A to the proxy
statement/prospectus filed as part of this registration statement).
2.2* Form of Escrow Agreement among MUSE Technologies, Inc., Russell G.
Barbour and John William Poduska, Sr., as representatives of the AVS
stockholders, Advanced Visual Systems Inc. and the escrow agent.
2.3* Form of Affiliate Agreement of affiliates of Advanced Visual Systems
Inc.
3.1 Certificate of Incorporation of MUSE Technologies, Inc., as amended
(incorporated by reference to Exhibit 3.1 to the registration statement
on Form SB-2 (Commission File No. 333-62495)).
3.2 Bylaws of MUSE Technologies, Inc., as amended (incorporated by
reference to Exhibits 3.2 and 3.3 to the registration statement on Form
SB-2 (Commission File No. 333-62495)).
5.1 Opinion of Proskauer Rose LLP, counsel to MUSE Technologies, Inc., as
to the legality of the MUSE common stock being registered hereby.
8.1 Opinion of Hill & Barlow, a Professional Corporation, counsel to AVS,
regarding tax matters.
23.1 Consent of Proskauer Rose LLP with respect to the legality of MUSE
common stock being registered hereby (contained in Exhibit 5.1).
23.2 Consent of Feldman Sherb & Co., P.C., independent auditors, with
respect to financial statements of MUSE Technologies, Inc.
23.3 Consent of Arthur Andersen LLP, independent auditors, with respect to
financial statements of Advanced Visual Systems Inc.
23.4 Consent of Hill & Barlow, a Professional Corporation, regarding tax
matters (contained in Exhibit 8.1).
23.5 Consent of Pridie Brewster, Chartered Accountants and Registered
Auditors, with respect to certain financial statements of Virtual
Presence Limited.
24.1* Power of Attorney (included in signature page).
99.1 Form of Proxy to be used in connection with special meeting of
stockholders of Advanced Visual Systems Inc.
-----------
* Previously filed.
