<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 19, 2000
REGISTRATION NO. 333 -
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------------------------
FORM SB-2
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
---------------------------------------------
MUSE TECHNOLOGIES, INC.
(Exact names of registrant as specified in its charter)
<TABLE>
<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.
PROSKAUER ROSE LLP
1585 BROADWAY
NEW YORK, NEW YORK 10036-8299
(212) 969-3000
Approximate date of commencement of proposed sale to the public: From time
to time after the registration statement becomes effective.
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be pursuant to Rule 434 check
the following box. [ ]
---------------------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
==================================================================================================================================
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TO BE REGISTERED REGISTERED (1) OFFERING PRICE PER UNIT AGGREGATE OFFERING PRICE REGISTRATION FEE
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value 8,082,500 (2)(3) $2.44 (1) $19,721,300 $5,206
$.015 per share
==================================================================================================================================
</TABLE>
------------------
(1) In the event of a stock split, stock dividend, or other transaction
involving our common stock, in order to prevent dilution, the number of
shares registered shall automatically be increased to cover the additional
shares in accordance with Rule 416(a) under the Securities Act, which
applies to stock splits, stock dividends, or similar transactions.
(2) Estimated, pursuant to Rule 457(c) of the Securities Act of 1933, as
amended, solely for the purpose of calculating the registration fee.
(3) Amount includes the common stock issuable to Kingsbridge Capital Limited
under an equity line agreement, 1,000,000 shares of common stock issued to
Continuum Resources International ASA and common stock issuable upon the
exercise of warrants issued to Kingsbridge and Josephthal & Co. Inc.
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>
PROSPECTUS Subject to Completion, Dated ____ __, 2000
8,082,500 Shares
MUSE TECHNOLOGIES, INC.
Common Stock
This Prospectus will be used in connection with the resale:
(i) by Kingsbridge Capital Limited of up to 7,000,000 shares of our common
stock as follows:
o 6,800,000 shares of common stock which may be issued by us to
Kingsbridge pursuant to an equity line agreement; and
o 200,000 shares of common stock issuable upon exercise of a
warrant granted to Kingsbridge in connection with the equity line
agreement;
(ii) by Continuum Resources International ASA of up to 1,000,000 shares
of our common stock;
(iii) by certain other selling stockholders of up to 82,500 shares of our
common stock to be issued upon the exercise of warrants that were
originally issued to Josephthal & Co., Inc.
The shares offered may be sold from time to time for the account of the
selling stockholders. We will not receive any of the proceeds from the sale of
the shares by the selling stockholders. We may receive funds upon the exercise
of warrants, which funds, if any, will be used for working capital. We have
agreed to pay certain costs of registering the shares.
The price at which the common stock will be issued by us to Kingsbridge
will be 88-90% of the five day average of the lowest intra-day trading price of
our common stock prior to the date we issue the shares. The lowest intra-day
trading price does not include trades of less than 1,000 shares. The exercise
price of the warrants issued to Kingsbridge in connection with the equity line
agreement is $3.76 per share. The exercise price of the Josephthal warrants is
$3.90 per share.
The selling stockholders may offer shares of common stock in transactions
on the Nasdaq Stock Market, in negotiated transactions, or otherwise, or by a
combination of these methods, at fixed prices that may be changed, at market
prices prevailing at the time of sale, at prices related to market prices or at
negotiated prices. Sales of the shares by the selling stockholders may be
effected through broker-dealers, who may receive compensation in the form of
discounts or commissions. Kingsbridge is an "underwriter" within the meaning of
the Securities Act in connection with sales of the shares offered hereby.
Our common stock is listed on the Nasdaq Stock Market under the symbol
"MUZE" and on the Boston Stock Exchange under the symbol "MZE". The average of
the high and low bid prices for our common stock on _________ ___, 2000 on the
Nasdaq Stock Market was $_____ per share.
INVESTING IN OUR COMMON STOCK INVOLVES CERTAIN RISKS WHICH ARE DESCRIBED IN
"RISK FACTORS" BEGINNING ON PAGE 5.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIME.
1
<PAGE>
TABLE OF CONTENTS
Page
----
PROSPECTUS SUMMARY...........................................................1
RISK FACTORS.................................................................6
THE EQUITY LINE AGREEMENT...................................................14
USE OF PROCEEDS.............................................................16
DETERMINATION OF THE OFFERING PRICE.........................................16
PRICE RANGE OF OUR COMMON STOCK.............................................16
CAPITALIZATION..............................................................17
DIVIDEND POLICY.............................................................18
BUSINESS OF THE COMPANY.....................................................18
ACQUISITION STRATEGY........................................................30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.................................................36
MANAGEMENT..................................................................43
PRINCIPAL STOCKHOLDERS......................................................44
EXECUTIVE COMPENSATION......................................................46
OPTION GRANTS IN LAST FISCAL YEAR ..........................................46
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL
YEAR-END OPTION VALUES ...................................................47
SELLING SECURITY HOLDERS....................................................50
PLAN OF DISTRIBUTION........................................................54
LEGAL MATTERS...............................................................57
EXPERTS.....................................................................58
ADDITIONAL INFORMATION......................................................58
WHERE YOU CAN FIND MORE INFORMATION.........................................59
FORWARD-LOOKING STATEMENTS..................................................59
INDEX TO FINANCIAL STATEMENTS..............................................F-1
i
<PAGE>
PROSPECTUS SUMMARY
This summary highlights selected information from this prospectus and may
not contain all of the information that is important to you. To better
understand and for a more complete description of this offering, you should read
carefully this entire document and the documents to which you are referred. See
"Where You Can Find More Information" on page 57. We have included page
references parenthetically to direct you to a more complete description of the
topics presented in this Summary.
THE COMPANY (PAGE 17)
MUSE TECHNOLOGIES, INC.
1601 Randolph SE, Suite 210
Albuquerque, New Mexico 87106
(505) 843-6873
www.musetech.com(o)
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. We also provide our customers with
comprehensive software and hardware solutions, systems integration, and training
and support services.
RECENT DEVELOPMENTS (PAGE 18)
On November 16, 1999, we purchased all of the outstanding stock of Virtual
Presence, Ltd., a U.K. company that creates sophisticated three-dimensional
graphics solutions using proprietary and third-party software and hardware.
On March 17, 2000, we purchased all of the outstanding stock of Simulation
Solutions, Ltd., also a U.K. company involved in providing advanced solutions to
the manufacturing industry using proprietary and third-party software and
hardware.
On March 28, 2000, we completed an asset purchase of TheVrsource.com, an
e-commerce Web site that is a reseller of third-party hardware and software
used in virtual reality, data visualization and perceptual computing.
On June 1, 2000, we entered into the equity line agreement with
Kingsbridge, which entitles us to sell and obligates Kingsbridge to purchase up
to $18,000,000 of our common stock. Pursuant to the terms of the equity line
agreement we issued warrants to Kingsbridge to purchase 200,000 shares of our
common stock which is exercisable at $3.76 per share. On August 7, 2000, we sold
to Kingsbridge a 10% convertible note in the principal amount of $1,000,000.
Pursuant to the terms of the convertible note we issued warrants to Kingsbridge
to purchase 75,000 shares of our common stock which is exercisable at $2.6125
per share.
On July 18, 2000, we signed a merger agreement with Advanced Visual
Systems Inc. ("AVS") whereby a subsidiary of ours will merge with and into AVS.
AVS will continue as the surviving corporation and become our wholly-owned
subsidiary. AVS is a developer of several different proprietary software
products that, like MuSE, enable programmers and end-users to present, interact
with and understand computer based information using data visualization
technology. AVS also provides custom software solutions to its customers. The
completion of the merger remains subject to a number of conditions. If
completed, the stockholders of AVS will own approximately 19% of our company
(not including shares issuable to the selling stockholders) in addition to
assumption of existing AVS stock options.
--------
o Inclusion of any worldwide web address is not intended to, and does not
constitute incorporation by reference into this prospectus of any
information contained on any such website.
<PAGE>
THE OFFERING
We entered into a private equity line agreement with Kingsbridge Capital
Limited on June 1, 2000. This agreement entitles us to sell and obligates
Kingsbridge to purchase, from time to time, up to $18,000,000 (after deducting
Kingsbridge's discount) of our common stock. Our ability to require Kingsbridge
to purchase our stock is subject to certain limitations based on the market
price and trading volume of our stock. Pursuant to the agreement, we have:
filed a registration statement for 6,800,000 shares of common stock which
we may sell to Kingsbridge pursuant to the equity line agreement, which
Kingsbridge may offer to the public through this prospectus; and issued a
warrant to Kingsbridge to purchase 200,000 shares of our common stock at an
exercise price of $3.76 per share. Shares issuable on exercise of the
Kingsbridge warrant may also be offered to the public through this
prospectus. The warrant may be exercised from November 28, 2000 until
November 27, 2004.
On July 15, 1998, we sold to Continuum Resources International ASA
1,000,000 shares of our common stock. Pursuant to registration rights granted to
Continuum Resources in connection with their purchase of common stock, we are
registering such shares for resale pursuant to this prospectus.
On December 1, 1999, in connection with a financial advisory agreement, we
issued a warrant to Josephthal & Co. Inc. to purchase up to 82,500 shares of our
common stock. In April 2000, Josephthal distributed the warrant to certain of
its employees and affiliates. The warrants may be exercised at any time through
November 30, 2002 at an exercise price of $3.90 per share. The shares issuable
upon exercise of the warrants are being registered for resale pursuant to
registration rights granted in connection with the warrants.
Through this prospectus, the selling stockholders may offer to the public
the common stock acquired under the equity line agreement, the warrants or as
otherwise registered hereby.
Shares offered by the
selling stockholders 8,082,500 shares
Offering price Determined at the time of sale by the selling
stockholders.
Common stock outstanding 10,808,882 shares
Use of proceeds We will not receive any of the proceeds of
the shares offered by the selling
stockholders.
Any proceeds we receive from the sale of
common stock pursuant to the equity line
agreement and the exercise of warrants will
be used for working capital and general
corporate purposes. See "Use of Proceeds."
Dividend policy We currently intend to retain any future
earnings to fund the development and growth
of our business. Therefore, we do not
currently anticipate paying cash dividends.
See "Dividend Policy."
2
<PAGE>
Trading Symbols
Nasdaq Stock Market:
Common Stock "MUZE"
Warrants "MUZEW"
Boston Stock Exchange:
Common Stock "MZE"
Warrants "MZEW"
Risk Factors Investment in our common stock involves a high degree
of risk. See "Risk Factors."
SUMMARY OF SELECTED HISTORICAL FINANCIAL INFORMATION
We are providing the following financial information to assist you in your
analysis of the financial aspects of our company. We derived our information
from our audited financial statements 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 us and AVS are derived from unaudited condensed financial
statements, which in the opinion of management of each of us and AVS, include
all adjustments, consisting of normal recurring adjustments, necessary to
present fairly the information for such periods. Our selected financial
information is only a summary and should be read in conjunction with our
historical financial statements and related notes contained in the annual and
quarterly reports and other information that we have filed with the Securities
and Exchange Commission. See "Where You Can Find More Information" on page 57
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>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30, 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
<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>
3
<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
DECEMBER 31, JUNE 30,
-------------------------------------------------------- ---------------------
1995 1996 1997 1998 1999 1999 2000
---------- ----------- --------- --------- --------- --------- ----------
In thousands (UNAUDITED)
BALANCE SHEET DATA
<S> <C> <C> <C> <C> <C> <C> <C>
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 $ 2,303 $ 2,048
Shareholders equity (deficit)........ $5,222 $4,456 $2,704 $(3,342) $(3,268) $(3,540) $(4,178)
</TABLE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
We intend that the merger with AVS 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.
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 us 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 our acquisition 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.
4
<PAGE>
MUSE TECHNOLOGIES, INC AND ADVANCED VISUAL SYSTEMS INC.
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
(in thousands, except 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
<CAPTION>
JUNE 30, 2000
-------------
<S> <C>
Balance Sheet Data
Total Assets $20,970
Long-term debt 2,151
Shareholders equity $7,556
</TABLE>
5
<PAGE>
RISK FACTORS
You should carefully consider the following risk factors, in addition to
the other information contained in this prospectus, before making an investment
decision. This prospectus contains forward-looking statements which involve
risks and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of factors,
including those set forth in the following risk factors and elsewhere in this
prospectus. If any of the following risk factors or other risks actually occur,
our business, financial condition, or results of operations could be materially
and adversely affected.
RISKS RELATING TO OUR 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 pursuant to the equity
line agreement and a convertible note recently entered into or the exercise of
warrants by Kingsbridge and the selling securityholders pursuant to this
prospectus or otherwise 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 could 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.
6
<PAGE>
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 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 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 OUR 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
7
<PAGE>
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:
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
8
<PAGE>
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:
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.
9
<PAGE>
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 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
10
<PAGE>
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 cancelable 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 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
11
<PAGE>
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, and
o general economic conditions and acceptance and use of our software
products.
Revenues and operating results are difficult to forecast because of those
fluctuations.
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.
12
<PAGE>
THE FAILURE TO ATTRACT OR THE LOSS OF SENIOR MANAGEMENT PERSONNEL COULD
DETRIMENTALLY IMPACT OUR BUSINESS.
The success of our 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.
MANAGEMENT WILL HAVE BROAD DISCRETION AS TO THE USE OF THE PROCEEDS FROM THE
EQUITY LINE AGREEMENT.
The net proceeds from the sale of shares to Kingsbridge under the equity
line agreement and the exercise of the warrants will be used for working capital
purposes, including marketing, research and development and other general
corporate purposes. However, unforeseen circumstances, including general
economic and business conditions or material shifts in our strategy or business
plan may result in a reallocation of the intended use of the proceeds.
Accordingly, management will have broad discretion with respect to the
expenditure of the net proceeds.
RISKS RELATING TO THE AVS MERGER
IF WE CANNOT SUCCESSFULLY INTEGRATE AVS WITH OUR COMPANY, OUR BUSINESS COULD BE
ADVERSELY AFFECTED.
The AVS merger involves the integration of two companies that have
previously operated independently. To combine AVS with our company, 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 operations, our business and
the results of operations of the combined businesses could be adversely
affected.
Combining AVS with our company 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 ability to retain
key management, sales and research and development personnel. In addition, our
management will be occupied with integrating AVS operations with our operations
following the merger and this may temporarily distract management from our
day-to-day business. We cannot assure you that AVS will be successfully
integrated with our company.
13
<PAGE>
THE EQUITY LINE AGREEMENT
On June 1, 2000, we entered into the equity line agreement with
Kingsbridge, pursuant to which, subject to the satisfaction of certain
conditions, we may issue and sell and Kingsbridge will be obligated to purchase,
from time to time, up to an aggregate of $18,000,000 of our common stock.
Beginning on the date hereof, and continuing for a maximum period of 24
months thereafter, we may from time to time in our sole discretion sell, or put,
shares of our common stock to Kingsbridge at a price equal to 90% of the
five-day average of the lowest intra-day trading price of our common stock, if
the average trading price is greater than or equal to $8.00 per share, or 88% of
the five-day average of the lowest intra-day trading price if the average
trading price is less than $8.00 per share. The lowest trading prices exclude
trades of less than 1,000 shares of our common stock and is calculated during
the five-day period beginning two days before and ending two days after we send
a put notice to Kingsbridge.
The following are conditions to our ability to put our common stock to
Kingsbridge and to Kingsbridge's obligation to acquire and pay for such shares
of our common stock:
(a) The registration statement, of which this prospectus forms a part,
shall have been declared effective by the SEC prior to the first date
we put our common stock to Kingsbridge and in no event later than one
hundred twenty (120) days after June 1, 2000, unless such date is
extended by mutual agreement.
(b) The registration statement shall have previously become effective and
shall remain effective on each put date and (i) neither we nor
Kingsbridge shall have received notice that the SEC has issued or
intends to issue a stop order with respect to the registration
statement or that the SEC otherwise has suspended or withdrawn the
effectiveness of the registration statement, either temporarily or
permanently, or intends or has threatened to do so (unless the SEC's
concerns have been addressed and Kingsbridge is reasonably satisfied
that the SEC no longer is considering or intends to take such action)
as a result of corporate developments, and (ii) no other suspension of
the use or withdrawal of the effectiveness of the registration
statement or related prospectus shall exist.
(c) Our representations and warranties to Kingsbridge as set forth in the
equity line agreement shall be true and correct in all material
respects as of the date of each put (except for representations and
warranties specifically made as of a particular date).
(d) We shall have performed, satisfied and complied in all material
respects with all covenants, agreements and conditions required by the
equity line agreement, the registration rights agreement and the
warrant to be performed, satisfied or complied with by us at or prior
the date of each put.
(e) No statute, rule, regulation, executive order, decree, ruling or
injunction shall have been enacted, entered, promulgated or adopted by
any court or governmental authority of competent jurisdiction that
prohibits the transactions contemplated by the equity line agreement or
otherwise has a material adverse effect, and no actions, suits or
proceedings shall be in progress, pending or threatened by any person,
that seek to enjoin or prohibit the transactions contemplated by the
equity line agreement or otherwise could reasonably be expected to have
a material adverse effect.
14
<PAGE>
(f) The trading of our common stock shall not have been suspended by the
SEC, the Nasdaq Stock Market or the NASD and our common stock shall
have been approved for listing or quotation on and shall not have been
delisted from the Nasdaq Stock Market.
(g) We shall have caused to be delivered to Kingsbridge, within five (5)
trading days of the effective date of the registration statement, an
opinion of our independent counsel in form and substance reasonably
acceptable to Kingsbridge relating to the issuance of our common stock.
(h) The number of shares of common stock already beneficially held by
Kingsbridge, together with those shares we are proposing to put, shall
not exceed 9.9% of the total amount of our common stock that would be
outstanding upon completion of the put.
(i) The average daily trading volume for our common stock equals or exceeds
30,000 shares per trading day for the five day period during which the
amount of shares subject to the put is calculated.
(j) At least fifteen trading days shall have elapsed since the immediately
preceding put date.
(k) The issuance of shares of our common stock shall not violate the
shareholder approval requirements of the NASD or the Nasdaq Stock
Market.
(l) The parties hereto shall have entered into an escrow agreement as
contemplated in the equity line agreement.
(m) On each put date, Kingsbridge shall have received and been reasonably
satisfied with such other certificates and documents as shall have been
reasonably requested by Kingsbridge in order to confirm the
satisfaction of the conditions set forth above.
We may not be able to satisfy all conditions required to put shares to
Kingsbridge at any given time. Further, the amount of shares that we can put to
Kingsbridge depends on our trading price and trading volume. Also, we cannot put
shares to Kingsbridge at a time when we have not publicly disclosed material
information about our company.
We have filed a registration statement, of which this prospectus forms a
part, in order to permit Kingsbridge to resell to the public any common stock it
buys pursuant to the equity line agreement. Kingsbridge may be entitled to
indemnification by us for lawsuits based on statements in this prospectus. We
will prepare and file such amendments and supplements to the registration
statement as may be necessary in accordance with the Securities Act and the
rules and regulations promulgated under it. The registration rights shall
terminate at the earlier of (i) two years following the termination of the
equity line agreement or (ii) the time all securities have been issued pursuant
to the equity line agreement and have ceased to be registerable securities (as
defined in the registration rights agreement). We have agreed to bear certain
expenses (other than broker discounts and commissions, if any) in connection
with the registration statement.
Pursuant to the terms of the equity line agreement, in the event that,
during the 24 month period following the date hereof, we do not put the minimum
commitment of $7,500,000 worth of our common stock to Kingsbridge, we will incur
as liquidated damages an expense equal to the product of (X) $7,500,000 minus
the aggregate amount invested by Kingsbridge to purchase put shares and (Y)
twelve percent. Further, in the event that, within five (5) trading days
following any put closing date, we give notice to the Kingsbridge that they
should cease selling efforts with respect to put shares (a "Blackout
15
<PAGE>
Period") in accordance with the registration rights agreement, and the trading
price of our common stock after the Blackout Period (the "New Price") is less
than the trading price before such Blackout Period (the "Old Price"), then we
shall issue to Kingsbridge the number of additional shares of our common stock
equal to the difference between (X) the product of the number of our common
stock held by Kingsbridge immediately prior to the Blackout Period multiplied by
the Old Price, divided by the New Price, and (Y) the number of our common stock
held by Kingsbridge immediately prior to the Blackout Period.
In conjunction with the equity line agreement, on June 1, 2000, we issued
to Kingsbridge a warrant to purchase 200,000 shares of our common stock at an
exercise price of $3.76 per share. The warrant is exercisable from November 28,
2000 through November 27, 2004. The warrant contains provisions that protect
Kingsbridge against dilution by adjustment of the exercise price and the number
of shares issuable thereunder upon the occurrence of certain events, including a
stock split or reverse stock split, stock dividend or recapitalization. The
exercise price of the warrant is payable either in cash or by cashless exercise.
In a cashless exercise, the number of shares of common stock issuable pursuant
to the warrant having a fair market value at the time of exercise equal to the
aggregate exercise price are cancelled as payment of the exercise price.
USE OF PROCEEDS
The proceeds from the sale of the common stock will be received directly by
the selling stockholders. We will receive no proceeds from the sale of the
common stock offered by this prospectus. However, we will receive the put price
pursuant to the equity line agreement to the extent that our common stock is
sold under the equity line agreement. The put price equals 88-90% of the then
lowest intra-day market price of our common stock, as determined by the equity
line agreement. We may also receive proceeds relating to the exercise, if any,
of the Kingsbridge warrants and the other warrants held by the selling
stockholders. We intend to use the proceeds from puts to Kingsbridge and the
exercise of the warrants for working capital and other general corporate
purposes.
DETERMINATION OF THE OFFERING PRICE
Our common stock offered by this prospectus may be offered for sale, by the
selling stockholders, from time to time in transactions on the Nasdaq Stock
Market or the Boston Stock Exchange, in negotiated transactions, or otherwise,
or by a combination of these methods, at fixed prices which may be changed, at
market prices at the time of sale, at prices related to market prices or at
negotiated prices. As such, the offering price is indeterminate as of the date
of this prospectus. See "Plan of Distribution."
PRICE RANGE OF OUR COMMON STOCK
Our common stock and Class A warrants are traded on the Nasdaq Stock Market
under the symbols "MUZE" and "MUZEW," respectively, and on the Boston Stock
Exchange under the symbols "MZE" and "MZEW," respectively. The following table
sets forth, for the periods indicated, the range of high and low bid prices of
the common stock and the warrants as reported by the Nasdaq Stock Market. These
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission, and may not necessarily represent actual transactions.
16
<PAGE>
<TABLE>
<CAPTION>
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
WARRANTS
--------
From November 17, 1998 (first trade date) through December 31, 1998............... $4.18 $1.25
Quarter ended March 31, 1999...................................................... $3.50 $1.25
Quarter ended June 30, 1999....................................................... $1.75 $1.13
Quarter ended September 30, 1999.................................................. $1.63 $0.75
Quarter ended December 31, 1999................................................... $1.3125 $0.375
Quarter ended March 31, 2000...................................................... $1.50 $0.125
Quarter ended June 30, 2000....................................................... $1.50 $0.625
Quarter beginning July 1, 2000 through August 31, 2000............................ $0.7188 $0.1875
</TABLE>
The approximate number of record holders of the common stock on August 31,
2000 was 285, not including beneficial owners whose shares are held by banks,
brokers and other nominees.
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 2000. You
should read this table in conjunction with Management's Discussion and Analysis
of Financial Condition and Results of Operations included elsewhere in this
prospectus and our financial statements and the related notes thereto.
LIABILITIES AND STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
JUNE 30, 2000
-------------
<S> <C>
Long term liabilities
Lease payable less current portion................................... $102,852
STOCKHOLDERS' EQUITY:
common stock, par value $.015 per share, 50,000,000 shares
authorized; issued and outstanding 10,808,882 (1).................... 162,133
Additional paid-in-capital................................................ 25,289,941
Accumulated deficit....................................................... (11,941,373)
Less treasury stock at cost (155,263 shares).............................. (776,315)
-----------
TOTAL STOCKHOLDERS' EQUITY................................................ 12,734,386
-----------
TOTAL CAPITALIZATION...................................................... $12,837,238
===========
</TABLE>
17
<PAGE>
-------------------
(1) Does not include an aggregate of 7,829,638 shares of common stock reserved
as follows: (a) 2,598,388 shares of common stock issuable upon the exercise of
warrants (including common stock issuable upon exercise of outstanding warrants
to purchase 543,388 shares of common stock held by certain warrant holders not
included in this prospectus, warrants to purchase 1,000,000 shares of common
stock held by Continuum Resources, 600,000 shares of common stock issuable upon
exercise of Class A Warrants, 180,000 shares of common stock issuable upon
exercise of the underwriter's unit purchase option and upon exercise of warrants
issuable upon exercise of the underwriter's unit purchase option, and 275,000
shares of common stock issuable upon exercise of warrants held by Kingsbridge);
and (b) 5,231,250 shares of common stock issuable upon exercise of options
granted or to be granted pursuant to the company's 1995 and 1996 stock option
plans (of which, options to purchase 2,760,847 shares of common stock are
outstanding).
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock. We
currently intend to retain our earnings to finance the growth and development of
our business and therefore do not anticipate paying any cash dividends in the
foreseeable future.
BUSINESS OF THE COMPANY
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.
18
<PAGE>
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 theVRsource.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 the 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. Pursuant to the
terms of the equity line agreement we also issued to Kingsbridge warrants to
purchase 200,000 shares of MUSE common which is exercisable at $3.76 per share
over the four-year period commencing on November 28, 2000. 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.
Pursuant to the terms of the convertible note we also issued warrants to
purchase 75,000 shares of our common stock which is 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. The merger agreement provides for the merger of a
subsidiary of MUSE with and into AVS with the result that AVS will become our
wholly-owned subsidiary. The merger agreement provides that AVS stockholders
will receive in the merger one share of our common stock 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 our common stock
for each 0.649646 outstanding shares of AVS Series A Preferred Stock that they
own. The merger is subject to a number of conditions, including AVS stockholder
approvals and receipt of pooling-of-interests accounting treatment. The merger
is expected to be consummated in the Fall of 2000; however, we cannot provide
assurance that it will be completed then or at all.
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
19
<PAGE>
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
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.
20
<PAGE>
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 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.
21
<PAGE>
PRODUCTS AND SERVICES
We have developed and are currently marketing the following products and
services:
o MUSE(R) (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 FRAMESET(TM)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 MIST(TM)(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 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
22
<PAGE>
(scheduled for Summer 2000) includes six additional tasks
relating to gynecological surgical skills.
o ICTS(TM)(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
23
<PAGE>
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 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.
24
<PAGE>
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, Procter & Gamble, Guidant
Corporation.
MUSE SIMTEAM: Electricite de France, Renault, Institut de France Petroleum,
French Army, Schneider, Ecole des Mines, Lectra.
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.
<TABLE>
<CAPTION>
MUSE
PERCEPTUAL MUSE FEDERAL MUSE VIRTUAL MUSE SIMULATION
COMPUTING SYSTEMS GROUP PRESENCE SOLUTIONS MUSE VRSOURCE
INDUSTRY FOCUS (US) (US) (U.S. & EUROPE) (U.S. & EUROPE) (INTERNATIONAL)
-------------- ------------- ------------------ --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Automotive X X X X
Manufacturing X X X X
Engineering X X X X
25
<PAGE>
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
o MUSE VRsource employs 1 dedicated salesperson.
26
<PAGE>
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 PARTNERS 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;
27
<PAGE>
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.
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.
28
<PAGE>
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.
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
29
<PAGE>
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
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 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.
30
<PAGE>
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. See "Recent Developments".
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.
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:
31
<PAGE>
o MUSE: Dvise(TM)by Division, a unit of Parametric Technologies;
WorldToolKit(TM)by Sense8, A unit of Engineering Animation, Inc.;
AVS/Express(TM)by Advanced Visual Systems; and Vega(TM) 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.
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:
32
<PAGE>
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.
33
<PAGE>
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 had 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,
34
<PAGE>
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.
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.
35
<PAGE>
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
36
<PAGE>
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 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
37
<PAGE>
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 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
38
<PAGE>
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 TheVRSource,
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, 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.
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.
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
39
<PAGE>
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
Revenues for the nine-month period ended June 30, 2000 was $6,542,545, as
compared to revenues 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 expenses for the nine-month period ended June 30, 2000 was
$10,204,413 as compared to total operating expenses 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 form severance and other costs in connection with the
resignation of an executive officer in May 2000.
Total other income for the nine-month period ended June 30, 2000 was
$129,561 as compared to a $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.
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.
40
<PAGE>
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. A
balance of $750,000 plus accrued interest remains outstanding on the loan as of
the date hereof. We are currently in discussions with Continuum Resources to
formalize a further 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.
41
<PAGE>
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 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 $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.
42
<PAGE>
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 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:
NAME AGE POSITION
---- --- --------
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
Jack C. Berenzweig 57 Director
Edward A. Masi 52 Director
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
43
<PAGE>
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.
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.
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. The table presents
information on the percentage ownership of our common stock in the event the AVS
merger is consummated. 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.
44
<PAGE>
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 BENEFICIALLY OWNED
NUMBER OF ------------------------------------------
NAME OF BENEFICIAL OWNER SHARES (1) BEFORE THE MERGER AFTER THE MERGER
------------------------ ---------- ----------------- ----------------
<S> <C> <C> <C>
Continuum Resources 2,000,000 18.5% 15.5%
International, ASA (2)
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% 3.3%
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.
45
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth the compensation of each of our executive
officers that had earned in excess of $100,000 for the fiscal years ended
September 30, 1999, 1998 and 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION SECURITIES
------------------- UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OTHER OPTIONS
--------------------------- ---- ------ ----- ----- -------
<S> <C> <C> <C> <C> <C>
Curtiz J. Gangi, (1) 1999 $215,000 $134,375 -- --
President and Director 1998 $178,846 -- $172,467 (2) 466,447
1997 $112,500 -- -- 361,842
Brian Clark, 1999 $150,000 $65,625 -- --
Chief Financial Officer, Secretary and 1998 $130,000 -- $172,467 (2) 150,395
Treasurer 1997 $120,000 -- -- 197,368
Douglas Harless, (3) 1999 $280,399 (4) $123,642 (5) -- --
Vice President - Sales and Marketing 1998 $134,785 $478,155 (2) -- 124,079
1997 $ 10,000 (6) -- -- 378,289
Steve Sukman, Senior Vice President 1999 $103,462 $4,000 -- 90,000
1998 -- -- -- --
1997 -- -- -- --
</TABLE>
---------------------
(1) Mr. Gangi resigned his employment position effective May 4, 2000.
(2) Includes amounts received in connection with (i) the Company's distribution
agreement with Continuum Resources and (ii) Continuum Resource's purchase
of 1,000,000 shares of common stock and warrants to purchase an additional
1,000,000 shares of Common Stock in July 1998.
(3) Mr. Harless resigned his employment position effective May 8, 2000.
(4) Includes salary of $150,000 and commissions of $130,399.
(5) During fiscal 1999, Mr. Harless received a bonus of $123,642.
(6) Reflects that portion of Mr. Harless' salary earned in fiscal 1997.
OPTION GRANTS IN LAST FISCAL YEAR
The table below sets forth information with respect to individual grants of
stock options made during the last fiscal year.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES PERCENT OF TOTAL OPTIONS/SARS EXERCISE OR
UNDERLYING OPTIONS/ SARS GRANTED TO EMPLOYEES IN FISCAL BASE PRICE EXPIRATION
NAME GRANTED YEAR ($/SH) DATE
------------------------- ------------------------ ------------------------------ ----------- ----------
<S> <C> <C> <C> <C>
Steven Sukman 60,000 11% $3.625 July 11, 2009
500 * $4.50 Sept 23, 2009
</TABLE>
-------------
* Less than one percent
46
<PAGE>
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
The table below sets forth information with respect to option exercises
during the last fiscal year and the value of all options held at fiscal year end
for each of the named executive officers. No SARs have been granted by the
Company to date and no options were exercised by the named executive officers
during fiscal 1999.
<TABLE>
<CAPTION>
SHARES NUMBER OF SECURITIES
ACQUIRED UNDERLYING OPTIONS VALUE OF UNEXERCISED
ON VALUE AS OF FY-END IN-THE-MONEY OPTIONS AT FY-END
NAME EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE (1)
---- -------- -------- ------------------------- -----------------------------
<S> <C> <C> <C> <C>
Curtiz J. Gangi (2) -- -- 553,289/275,000 $720,344/0
Brian Clark -- -- 260,263/87,500 $422,927/0
Douglas Harless (3) -- -- 336,373/165,995 $225,883/$127,554
Steven Sukman (4) -- -- 63,500/30,000 15,000/15,000
</TABLE>
--------------------------
(1) The values of in-the-money options represent the aggregate amount of the
excess of $4.125, the market value of the Common Stock as of the fiscal
year-end, over the relevant exercise price of such options. Of the option
shares set forth in the table, the following were at exercise
prices above the market value of the Common Stock as of the fiscal
year-end: Brian Clark - 87,500; Douglas Harless - 284,868.
(2) On May 4, 2000, Mr. Gangi resigned all positions with the Company. As a
result of certain severance arrangements, the Company repurchased
of Mr. Gangi's outstanding stock options to purchase 750,000 shares. Does
not reflect options to purchase 375,000 shares of common stock granted
in fiscal 2000.
(3) Mr. Harless resigned his employment position effective May 8, 2000.
(4) Does not reflect options to purchase 99,500 shares of common stock
granted in fiscal 2000.
EMPLOYMENT AGREEMENTS
We have entered into separate employment agreements with Brian R. Clark,
John Hough and Steve Sukman. Under these agreements, each executive must devote
his full business time and attention to the affairs of our company.
Brian R. Clark has entered into a three-year employment agreement with our
company, which commenced as of June 1, 1998, to act as Chief Financial Officer
at an annual base salary of $150,000. Mr. Clark is also entitled to receive a
bonus of up to $65,625 upon the achievement of certain performance objectives.
In connection with his employment agreement, Mr. Clark received options to
purchase 117,500 shares of our common stock 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. Mr. Clark also received a five
year loan in the amount of $75,000 at 5% annual interest in connection with his
relocation to New Mexico. The loan is secured by vested stock options having a
value equal to the principal amount of the loan. Mr. Clark was promoted to
President of the Company in March 2000 and received a salary increase to
$172,500 and additional stock options to purchase 117,500 shares of common stock
at an exercise price of $2.72 per share, the fair market value on the date of
grant).
47
<PAGE>
Steve Sukman has entered into a one-year employment agreement with our
company, which commenced as of July 12, 2000, to act as Vice-President at an
annual base salary of $110,000. Mr. Sukman is also entitled to receive a bonus
of up to $35,750 upon the achievement of certain performance objectives. In
connection with his employment agreement, Mr. Sukman received options to
purchase 60,000 shares of our common stock at an exercise price of $3.625 per
share, which vests as follows: 30,000 shares on July 12, 2000 and 30,000 shares
on July 12, 2001.
On November 15, 1999, John Hough entered into a three-year employment
agreement with Virtual Presence Limited, to act as Managing Director at an
annual base salary of $150,000. Mr. Hough is also entitled to receive a bonus
each year of up to $45,000 upon the achievement of certain performance
objectives. Mr. Hough also received a signing bonus of $50,000 on November 15,
1999. In connection with his employment agreement, Mr. Hough received options to
purchase 90,000 shares of our common stock at an exercise price of $3.125 per
share, which vests as follows: 30,000 shares on November 14, 2000, 30,000 shares
on November 14, 2001and 30,000 shares on November 14, 2002.
Under the executives' employment agreements, if an executive is terminated
by our company other than "for cause" (as defined in each employment agreement),
or if an executive dies or becomes permanently disabled or terminates for "good
reason" (as defined in each employment agreement), all of such executive's stock
options will immediately vest upon termination and such executive shall receive
severance payments in an amount equal to (i) one year's base salary in the case
of Mr. Clark and Mr. Hough and (ii) three month's base salary in the case of
Mr. Sukman. Each of the employment agreements also contain provisions relating
to severance payments equal to one year's base salary in the event of a change
of control (as defined in each employment agreement).
Each employment agreement prohibits disclosure of proprietary and
confidential information regarding our company and our business to anyone
outside our company both during and subsequent to employment. In addition, each
executive has agreed, for the duration of his employment and for a period of one
year thereafter, that if the executive is terminated for any reason or resigns,
he will not engage in any competitive business activity; provided, however, that
such non-compete shall be in effect for so long as our company continues to pay
the executive's monthly base salary.
The employment agreements provide that we will indemnify the executive to
the fullest extent permitted by the laws of Delaware and in accordance with our
By-Laws and Certificate of Incorporation.
DIRECTORS' COMPENSATION
We pay each non-employee director a fee of $1,000 for attendance at each
board meeting and reimburse our non-employee directors for expenses incurred in
connection with their attendance at these meetings. Non-employee directors
receive options to purchase 10,000 shares of our common stock upon initial
election to the Board of Directors and options to purchase 10,000 shares of
common stock upon re-election at each annual meeting of stockholders,
exercisable after one-year at an exercise price equal to the fair market value
on the date of grant.
STOCK OPTION PLANS
Our Board of Directors and stockholders adopted the 1995 Stock Option Plan
on November 10, 1995 and the 1996 Stock Option Plan on November 7, 1996 to
induce certain individuals or entities providing service to our company to
remain in the employ of, or continue to serve as directors of, or as independent
consultants to, our company, and to attract new employees, consultants and
non-employee directors. The terms of these plans are generally identical. They
are administered by the Board of Directors, which has the exclusive power to
select the individuals or entities eligible for option grants, and to determine
the terms and conditions of any options granted, including but not limited to
the option price,
48
<PAGE>
method of exercise and the term during which the options may be exercised. The
1995 plan was terminated on January 7, 1997 as to the granting of new options.
As of the date of this prospectus, options to purchase 92,105 shares of common
stock have been granted under the 1995 plan and options to purchase 2,605,486
shares of common stock have been granted under the 1996 plan. The 1996 plan will
terminate not later than November 1, 2005. In October 1998, our stockholders
approved amendments to the 1996 plan to increase the number of additional shares
subject to options available for grant by 3,500,000 shares to 5,139,145 shares.
As a result of the 1-for-3.04 reverse stock split in March 1998, the
exercise price of options granted under the plans increased from $2.50 to $7.60.
In April 1998, the Board of Directors repriced most of the options under the
plans and reduced the exercise price from $7.60 to $2.50, resulting in a
non-cash imputed compensation expense of $948,000.
Additional shares of common stock may become available for grant under the
plans as a result of cancellations or expiration of outstanding options. Options
granted under the plans may be non-qualified options or options qualifying as
incentive stock options within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended. The initial exercise option price of each
incentive stock option granted under the plans shall be not less than the fair
market value (110% of the fair market value if the grant is to an employee
owning more than 10% of the outstanding common stock) of the common stock
subject to the option. The option price of each non-qualified option shall not
be less than 85% of the fair market value of the common stock subject to the
option.
No option granted pursuant to the plans may be exercised more than ten
years after the date of grant, except that incentive stock options granted to
plan participants who own more than 10% of the total combined voting power of
all classes of our stock at the time the incentive stock option is granted may
not be exercised after five years after the date of grant. No plan participant
may be granted incentive stock options which are exercisable for the first time
in any one calendar year with respect to common stock having an aggregate fair
market value in excess of $100,000 on the date of grant, the options vest over a
three-year-period (unless otherwise determined by the Board of Directors),
commencing on the first anniversary date of the grant. No option granted under
the plans is transferable by the recipient of such options other than by death
or to immediate family members.
Generally, an option may be exercised only while the recipient is in the
active employ or service of our company, or within 30 days after termination of
a participant's employment or service as a director other than by reason of
retirement or death, or within one year after termination of employment or
service by reason of death, or within 90 days after termination of a
participant's termination of employment or service by reason of retirement. In
the event of the death or retirement of a participant, each option granted to
him shall become immediately exercisable in full.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with the June 1998 strategic reselling partner agreement that
we entered into with Continuum Resources, two former officers of the company
received a payment of approximately $176,000 and $172,000, respectively, and Mr.
Clark received a payment of approximately $172,000.
Pursuant to Mr. Clark's employment agreement, he has received a five-year
loan from us in the 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.
49
<PAGE>
We believe that the transactions between us and our officers, directors and
employees described above are on terms no less favorable to us than could have
been obtained from unaffiliated parties under similar circumstances.
From our inception, we have maintained and we intend to continue to
maintain at least two independent directors on our Board of Directors. In
connection therewith, any and all material transactions, including material
loans with officers, directors, stockholders holding greater than 5% of the
outstanding shares or affiliates, have been ratified and/or approved and, in the
future, will be ratified and/or approved by a majority of independent directors
who do not have an interest in the transactions, and will be on terms which are
at least as favorable to us as those that can be obtained by unaffiliated third
parties, and all such transactions shall be entered into by us for a bona fide
purpose. Such independent directors will have full access, at our expense, to
our counsel or other independent counsel in connection with such ratification or
approval of any transaction.
LIMITATION ON LIABILITY
Our certificate of incorporation eliminates the personal liability of
directors for monetary damages to the corporation for breach of fiduciary duty,
except for liability for (i) breaches of the director's duty of loyalty to the
company or its stockholders; (ii) acts or omissions not in good faith or
involving intentional misconduct or knowing violations of law; (iii) the payment
of unlawful dividends or unlawful stock repurchases or redemptions; or (iv)
transactions from which the director received an improper personal benefit.
SELLING SECURITY HOLDERS
The following table sets forth information regarding beneficial ownership of our
common stock held by Kingsbridge, Continuum Resources and the other selling
stockholders as of the date of this prospectus.
<TABLE>
<CAPTION>
NUMBER OF SHARES NUMBER OF SHARES
OF COMMON STOCK OWNED OF COMMON STOCK OWNED
NAME AND ADDRESS PRIOR TO THIS OFFERING COMMON STOCK AFTER THIS OFFERING
OF --------------------------- OFFERED -------------------------
STOCKHOLDER NUMBER PERCENT (1) HEREBY NUMBER PERCENT (1)
------------------------------------- ---------- -------------- --------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Kingsbridge Capital Limited 200,000 1.8% 7,000,000 (2) 0 (3) 0
3rd floor, Barclays House
Wickams Cay 1
Road Town, Tortola
British Virgin Islands
Continuum Resources 2,000,000 (4) 15.6% 1,000,000 1,000,000 (4) 7.8%
2424 Wilcrest
Houston, TX
X Securities, Ltd. 37,500 (5) Less than 1% 37,500 0 0
c/o Josephthal & Co. Inc.
200 Park Avenue, 25th Floor
New York, New York 10166
Edmund R. Belak 16,875 (5) Less than 1% 16,875 0 0
2 Hidden Meadow Lane
New Canaan, CT 06840
Mark E. Brefka 8,438 (5) Less than 1% 8,438 0 0
6 West Lane
Greenwich, CT 06831
Jimmie L. Sundstrom 8,437 (5) Less than 1% 8,437 0 0
27 Lake Road
Rye, NY 10580
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF SHARES NUMBER OF SHARES
OF COMMON STOCK OWNED OF COMMON STOCK OWNED
NAME AND ADDRESS PRIOR TO THIS OFFERING COMMON STOCK AFTER THIS OFFERING
OF --------------------------- OFFERED -------------------------
STOCKHOLDER NUMBER PERCENT (1) HEREBY NUMBER PERCENT
------------------------------------- ---------- -------------- --------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Mark P. Ehrlich 3,750 (5) Less than 1% 3,750 0 0
301 E. 79th St., Apt 6A
NY, NY 10021
William Relyea 7,500 (5) Less than 1% 7,500 0 0
333 Shore Road
Greenwich, CT 06830
</TABLE>
----------------------
(1) Percentage is based on 10,808,882 shares outstanding before the AVS merger.
(2) Includes 200,000 shares of common stock issuable upon exercise of a
warrant held by Kingsbridge. The remaining shares represent the maximum
amount of stock issuable to Kingsbridge pursuant to the terms of the equity
line agreement. If the maximum amount of shares were purchased and held by
Kingsbridge, it would hold approximately 39% of our outstanding common
stock. Pursuant to the equity line agreement, however, unless we obtain the
required approval from our stockholders in accordance with Delaware law and
the rules of the NASD, no more than 19.9% of the number of outstanding
shares of common stock may be issued to Kingsbridge. Additionally, the
equity line agreement limits the issuance of securities to Kingsbridge,
unless waived by Kingsbridge, in the event Kingsbridge would beneficially
hold in excess of 9.9% of our common stock as a result of such issuance.
The share amounts do not include the common stock issuable to Kingsbridge
upon conversion of the $1,000,000 convertible note or the common stock
issuable to Kingsbridge upon conversion of warrants to purchase 75,000
shares of our common stock which were granted to Kingsbridge in connection
with the convertible note since the conversion of the note and exercise
of the warrants is not permissible until August 6, 2001.
(3) Assumes that all shares acquired pursuant to the equity line agreement and
the warrant are sold pursuant to this prospectus. Kingsbridge has not had
any material relationship with us or our affiliates other than as a result
of the ownership of common stock or as a result of the negotiation and the
execution of the equity line agreement and the $1,000,000 convertible note.
The shares offered hereby are to be acquired by Kingsbridge pursuant to the
equity line agreement or upon exercise of the warrant.
(4) Includes 1,000,000 shares of common stock issuable upon exercise of a
warrant.
(5) Reflects shares of common stock issuable upon exercise of a warrant which
was originally issued to Josephthal.
DESCRIPTION OF MUSE CAPITAL STOCK
This section of this prospectus describes the material terms of our capital
stock under the certificate of incorporation and bylaws. 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 August 31, 2000, 10,808,882 shares of our
common stock were outstanding. Following the completion of the merger with AVS,
we anticipate that approximately 12,908,882 shares of our common stock will be
outstanding.
51
<PAGE>
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 the
company, the holders of our common stock are entitled to receive pro rata our
net assets remaining after the payment of all creditors and liquidation
preferences, if any.
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
us or our 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 us or our
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 our company or any
stockholder to seek non-monetary relief such as an injunction or rescission in
the event of a breach of a director's duty of care. In addition, our certificate
of incorporation provides that we will indemnify its directors and executive
officers to the fullest extent permitted by Delaware law.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW.
Our Company 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:
52
<PAGE>
(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 37,007 shares of our
common stock at an exercise price of $7.60 per share, which expire in December
2001. There are also outstanding warrants to purchase 423,851 shares of our
common stock at an exercise price of $4.50 per share, which expire in June 2004,
which underlying shares were registered in our initial public offering. In
addition to these issuances:
o 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.
o 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 warrants to purchase 60,000
shares of common stock. The unit purchase option expires on November 18,
2003.
o 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.
o 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.
o 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.
53
<PAGE>
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 IPO. 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 us, 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 IPO.
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.
PLAN OF DISTRIBUTION
To the extent required under the Securities Act, a supplemental prospectus
will be filed, disclosing (a) the name of any broker-dealers; (b) the number of
shares of common stock involved; (c) the price at which such common stock is to
be sold; (d) the commissions paid or discounts or concessions allowed to such
broker-dealers, where applicable; (e) that such broker-dealers did not conduct
any investigation to verify the information set out or incorporated by reference
in this prospectus, as supplemented; and (f) other facts material to the
transaction.
Pursuant to applicable rules and regulations under the Exchange Act, any
person engaged in a distribution of the common stock may not simultaneously
engage in market making activities with respect to the securities for a period
beginning when the person becomes a distribution participant and ending upon the
person's completion of participation in a distribution, including stabilization
activities in the common stock to effect covering transactions, to impose
penalty bids or to effect passive market making bids. In addition and without
limiting the foregoing, in connection with transactions in our common stock, our
company and the selling stockholders will be subject to applicable provisions of
the Exchange Act and the rules and regulations under it, including, without
limitation, Rule 10b-5 and, insofar as our company and the selling stockholders
are distribution participants, Regulation M and Rules 100, 101, 102, 103, 104
and 105 thereof. All of the foregoing may affect the marketability of our common
stock.
54
<PAGE>
KINGSBRIDGE
We have been advised by Kingsbridge that it may sell their shares of common
stock from time to time in transactions on the Nasdaq Stock Market (or any
exchange where the common stock is then listed) in negotiated transactions, or
otherwise, or by a combination of these methods, at fixed prices which may be
changed, at market prices at the time of sale, at prices related to market
prices or at negotiated prices. Kingsbridge may effect these transactions by
selling the common stock to or through broker-dealers, who may receive
compensation in the form of discounts, concessions or commissions from
Kingsbridge or the purchasers of the common stock for whom the broker-dealer may
act as an agent or to whom it may sell the common stock as a principal, or both.
The compensation to a particular broker-dealer may be in excess of customary
commissions.
Kingsbridge is an "underwriter" within the meaning of the Securities Act in
connection with the sale of the common stock offered hereby. Assuming that we
are in compliance with the conditions of the equity line agreement, Kingsbridge
must accept puts of shares from us, subject to minimum and maximum aggregate
dollar amounts, during the term of the equity line agreement. Broker-dealers who
act in connection with the sale of the common stock on behalf of Kingsbridge may
also be deemed to be underwriters. Profits on any resale of the common stock as
a principal by such broker-dealers and any commissions received by such
broker-dealers may be deemed to be underwriting discounts and commissions under
the Securities Act. Any broker-dealer participating in such transactions as
agent may receive commissions from Kingsbridge (and, if they act as agent for
the purchaser of such common stock, from such purchaser). Broker-dealers may
agree with Kingsbridge to sell a specified number of shares of common stock at a
stipulated price per share, and, to the extent such a broker-dealer is unable to
do so acting as agent for Kingsbridge, to purchase as principal any unsold
common stock at the price required to fulfill the broker-dealer commitment to
Kingsbridge. Broker-dealers who acquire common stock as principal may thereafter
resell such common stock from time to time in transactions (which may involve
crosses and block transactions and which may involve sales to and through other
broker-dealers, including transactions of the nature described above) in the
over-the-counter market, in negotiated transactions or otherwise at market
prices prevailing at the time of sale or at negotiated prices, and in connection
with such resales may pay to or receive from the purchasers of such common stock
commissions computed as described above.
Kingsbridge will pay all commissions and certain other expenses associated
with the sale of the common stock. The common stock offered hereby is being
registered pursuant to our contractual obligations, and we have agreed to pay
the costs of registering the shares hereunder, including legal fees of
Kingsbridge counsel up to a maximum of $7,500, transfer taxes and certain other
expenses relating to the resale of the common stock. We have also agreed to
indemnify Kingsbridge against certain liabilities, including, without
limitation, liabilities under the Securities Act, or, if such indemnity is
unavailable, to contribute toward amounts required to be paid in respect of such
liabilities.
We have also agreed to reimburse costs and expenses incurred by Kingsbridge
in connection with this offering. These may include the fees, expenses and
disbursements of counsel for Kingsbridge, the preparation of the equity line
agreement and associated documentation and the registration statement of which
this prospectus forms a part, up to a maximum of $25,000. In addition, we have
agreed to reimburse Kingsbridge for expenses incurred in obtaining insurance
against liability under the Securities Act and Exchange Act, in an amount
initially equal to 1 3/4% of each put amount.
The price at which the common stock will be issued by us to Kingsbridge
will be 88-90% of the five day average of the lowest intra-day trading price of
our common stock prior to the date we issue the shares. The lowest intra-day
trading price shall not include trades of less than 1,000 shares.
55
<PAGE>
CONTINUUM RESOURCES
Continuum Resources is registering the 1,000,000 shares of our common stock
it holds and is not registering the 1,000,000 shares of our common stock which
are issuable upon the conversion of a warrant.
Continuum Resources may offer its shares of our common stock in
transactions in the over-the-counter market, on any exchange where our common
stock is then listed, with broker-dealers or third-parties other than in the
over-the-counter market or on an exchange (including in block sales), in
connection with short sales, in connection with writing call options or in other
hedging arrangements, or in transactions involving a combination of such
methods.
Continuum Resources may sell its shares at market prices prevailing at the
time of sale, at prices related to such prevailing market prices, at negotiated
prices or at fixed prices.
Continuum Resources may use dealers, agents or underwriters to sell their
shares. Underwriters may use dealers to sell such shares. If this happens, the
dealers, agents or underwriters may receive compensation in the form of
discounts or commissions from the selling stockholders, purchasers of shares or
both (which compensation to a particular broker might be in excess of customary
compensation).
Continuum Resources and any dealers, agents or underwriters that
participate with Continuum Resources in the distribution of the shares may be
deemed to be "underwriters" as such term is defined in the Securities Act. Any
commissions paid or any discounts or concessions allowed to any such persons,
and any profits received on the resale of such shares of common stock offered by
this prospectus, may be deemed to be underwriting commissions or discounts under
the Securities Act.
We have agreed to pay certain expenses of the offering and issuance of the
shares covered by this prospectus, including the printing, legal and accounting
expenses we incur and the registration and filing fees imposed by the SEC or the
Nasdaq Stock Market. We will not pay brokerage commissions or taxes associated
with sales by Continuum Resources or any legal, accounting and other expenses of
Continuum Resources.
56
<PAGE>
JOSEPHTHAL
Josephthal held a warrant, which is exercisable into 82,500 shares of our
common stock at a price equal to $3.90 per share. In April 2000, Josepthal
distributed its warrant to:
X Securities, Ltd. 37,500 shares
Edmund R. Belak, Jr. 16,875 shares
Mark E. Brefka 8,438 shares
Jimmie L. Sundstrom 8,437 shares
William Relyea 7,500 shares
Mark P. Erlich 3,750 shares
(collectively, the "Josephthal Group")
The Josephthal Group may offer the shares of our common stock that they
receive after exercising their respective warrants into shares of our common
stock, in transactions in the over-the-counter market, on any exchange where our
common stock is then listed, with broker-dealers or third-parties other than in
the over-the-counter market or on an exchange (including in block sales), in
connection with short sales, in connection with writing call options or in other
hedging arrangements, or in transactions involving a combination of such
methods.
The Josephthal Group may sell their respective shares of our common stock
at market prices prevailing at the time of sale, at prices related to such
prevailing market prices, at negotiated prices or at fixed prices.
The Josephthal Group may use dealers, agents or underwriters to sell their
respective shares of our common stock. Underwriters may use dealers to sell such
shares. If this happens, the dealers, agents or underwriters may receive
compensation in the form of discounts or commissions from the selling
stockholders, purchasers of shares or both (which compensation to a particular
broker might be in excess of customary compensation).
The Josephthal Group and any dealers, agents or underwriters that
participate with them in the distribution of their respective shares of our
common stock may be deemed to be "underwriters" as such term is defined in the
Securities Act. Any commissions paid or any discounts or concessions allowed to
any such persons, and any profits received on the resale of such shares of
common stock offered by this prospectus, may be deemed to be underwriting
commissions or discounts under the Securities Act.
We have agreed to pay certain expenses of the offering and issuance of the
shares covered by this prospectus, including the printing, legal and accounting
expenses we incur and the registration and filing fees imposed by the SEC or the
Nasdaq Stock Market. We will not pay brokerage commissions or taxes associated
with sales by any member of the Josephthal Group or any legal, accounting and
other expenses of any member of the Josephthal Group.
LEGAL MATTERS
The validity of the issuance of our common stock offered hereby has been
passed upon by Proskauer Rose LLP, New York, New York.
57
<PAGE>
EXPERTS
The consolidated financial statements of the company 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 our 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.
ADDITIONAL INFORMATION
We are subject to informational requirements of the Securities Exchange Act
of 1934, as amended, and, in accordance therewith, will file reports and other
information with the Securities and Exchange Commission. The reports and other
information can be inspected and copied at the public reference facilities
maintained by the Securities and Exchange Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 or at the regional offices of the Securities and Exchange
Commission at Northwestern Atrium Center, 500 West Madison Street, Chicago,
Illinois 60661 and Seven World Trade Center, New York, New York 10048. Copies of
the material can be obtained at prescribed rates from the Public Reference
Section of the Securities and Exchange Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549. The Securities and Exchange Commission maintains a web
site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Securities
and Exchange Commission. The address of the web site is http//www.sec.gov.
This prospectus does not contain all of the information set forth in the
registration statement and the exhibits and schedules thereto. For further
information with respect to our company and to the common stock offered hereby,
reference is made to the registration statement, including the exhibits and
schedules thereto. Statements contained in this prospectus as to the content of
any contract or other document referred to in this prospectus are not
necessarily complete, and in each instance you should refer to the copy of the
contract or other document filed as an exhibit to the registration statement,
each statement being qualified in all respects by reference to the copy of the
contract or other document filed as an exhibit, hereto.
58
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
We file 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>
<CAPTION>
<S> <C> <C>
Judiciary Plaza, Room 1024 Seven World Trade Center Citicorp Center
450 Fifth Street, N.W. Suite 1300 500 West Madison St., Ste. 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.
WE HAVE NOT AUTHORIZED ANYONE TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATION ABOUT THE TRANSACTIONS 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 5 to 13 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.
59
<PAGE>
INDEX TO FINANCIAL STATEMENTS
MUSE TECHNOLOGIES, INC. PAGE
----
CONSOLIDATED FINANCIAL STATEMENTS
Report of Feldman Sherb Horowitz & Co., P.C., Independent Auditors......F-2
Balance Sheet...........................................................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-17
Statements of Operations...............................................F-18
Statements of Cash Flows...............................................F-19
Notes to Financial Statements..........................................F-20
VIRTUAL PRESENCE LIMITED REPORT AND ACCOUNTS
General Information....................................................F-25
Directors' Report......................................................F-26
Report of Independent Auditors.........................................F-28
Profit and Loss Account................................................F-29
Balance Sheet..........................................................F-30
Cashflow Statement.....................................................F-31
Notes to the Accounts..................................................F-32
Pro Forma Financial Information........................................F-38
Notes to the Pro Forma Financial Statements............................F-41
ADVANCED VISUAL SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
Report of Arthur Andersen LLP, Independent Public Accountants..........F-42
Balance Sheets.........................................................F-43
Statements of Operations...............................................F-44
Statements of Stockholders' Equity.....................................F-45
Statements of Cash Flows...............................................F-46
Notes to Financial Statements..........................................F-47
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheets.........................................................F-60
Statements of Operations...............................................F-61
Statements of Cash Flows...............................................F-62
Notes to Financial Statements..........................................F-63
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
Balance Sheet..........................................................F-66
Statements of Operations ..............................................F-67
Notes to Condensed Combined Financial Statements ......................F-71
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
<TABLE>
<CAPTION>
ASSETS
<S> <C>
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
============
</TABLE>
See notes to financial statements
F-3
<PAGE>
MUSE TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended September 30,
-------------------------------
1999 1998
---------- ----------
<S> <C> <C>
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
========== =========
</TABLE>
See notes to financial statements.
F-4
<PAGE>
MUSE TECHNOLOGIES, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional Stock
Paid-in Subscription
Shares Amount Capital Receivable
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
BALANCE - October 1, 1997 $7,278,279 $109,174 $3,518,471 $(87,500)
Issuance of common stock pursuant to 4,058 61 30,780 -
Consulting Agreements
Sale of common stock pursuant to 1,412,566 21,188 9,637,285 -
Private Placements
Conversion of notes into 68,880 1,033 308,927 -
Common Stock
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 - - - -
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)
========== ======== =========== ========
<CAPTION>
Total
Treasury Accumulated Stockholders'
Stock Deficit Equity
--------- ----------- -----------
<S> <C> <C> <C>
BALANCE - October 1, 1997 - $(3,597,847) $(57,702)
Issuance of common stock pursuant to - - 30,841
Consulting Agreements
Sale of common stock pursuant to - - 9,658,473
Private Placements
Conversion of notes into - - 309,960
Common Stock
Exercise of stock options - - 275
Non-cash imputed compensation
Expense - - 948,355
Net income - 323,894 323,894
--------- ----------- -----------
BALANCE - September 30, 1998 - (3,273,953) 11,214,096
Issuance of common stock pursuant to
Initial public offering
- - 9,104,093
Purchase of common shares for treasury (776,315) - (776,315)
Issuance of common stock pursuant to
Exercise of cash-less options
- - -
Exercise of stock options - - 84,975
Net loss - (5,112,948) (5,112,948)
--------- ----------- -----------
BALANCE - September 30, 1999 $(776,315) $(8,386,901) $14,513,901
========= =========== ===========
</TABLE>
F-5
<PAGE>
MUSE TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
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
------------------- -------------------
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
723,355 6.7% 5.6%
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
F-7
<PAGE>
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 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.
F-8
<PAGE>
3. PROPERTY AND EQUIPMENT
Property and equipment at September 30, 1999 is as follows:
Computer equipment $ 2,603,453
Furniture and fixtures 196,102
---------------
2,799,555
Less: accumulated depreciation 1,636,758
---------------
$ 1,162,797
===============
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 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.
F-9
<PAGE>
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 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.
F-10
<PAGE>
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> <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.
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:
F-11
<PAGE>
<TABLE>
<CAPTION>
Years Ended September 30,
----------------------------------
1999 1998
---------------- ------------------
<S> <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 September 1, 1998 the Company
entered into a three year employment agreement with an
F-12
<PAGE>
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 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>
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
</TABLE>
F-13
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
- 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. 225,000
----------------
$ 1,330,000
================
</TABLE>
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:
1999 1998
------------ --------------
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%
============ ==============
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.
F-14
<PAGE>
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.
12. 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.
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
F-15
<PAGE>
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 deigns, 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-16
<PAGE>
MUSE TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEET
JUNE 30, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
CURRENT ASSETS
<S> <C>
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-17
<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-18
<PAGE>
MUSE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT 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-19
<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 UK company, and all its subsidiaries for cash, notes, and
issuance of stock.
F-20
<PAGE>
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.
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.
F-21
<PAGE>
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 an 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.
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. 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
F-22
<PAGE>
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 August 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 August 7, 2001.
F-23
<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-24
<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-25
<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 - -
F-26
<PAGE>
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-27
<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-28
<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 (279,030) (449,574) 104,887
interest
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-29
<PAGE>
VIRTUAL PRESENCE LIMITED
------------------------
BALANCE SHEET AS AT 31ST MARCH 1999 AND 1998
--------------------------------------------
ASSETS
<TABLE>
<CAPTION>
Notes 1999 1999 1998
----- ---- ---- ----
(pound) $ (pound)
<S> <C> <C> <C> <C>
CURRENT ASSETS
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
--------- --------- ---------
Total Liabilities and Equity 1,037,662 1,671,881 848,062
========= ========= =========
</TABLE>
F-30
<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
cashflow from operating activities (pound) $ (pound)
<S> <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-31
<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.
F-32
<PAGE>
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.
Cashflow
--------
The cashflow statement has been prepared in accordance with IAS 7.
F-33
<PAGE>
VIRTUAL PRESENCE LIMITED
------------------------
NOTES TO THE ACCOUNTS
FOR THE YEARS ENDED 31ST MARCH 1999 AND 1998
--------------------------------------------
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)
<S> <C> <C> <C>
COST
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-34
<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
Shares in
subsidiary
undertakings
------------
(pound)
COST
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
==============
F-35
<PAGE>
VIRTUAL PRESENCE LIMITED
------------------------
NOTES TO THE ACCOUNTS
FOR THE YEARS ENDED 31ST MARCH 1999 AND 1998
--------------------------------------------
<TABLE>
<CAPTION>
5. STOCKS
1999 1998
------------- -----------------
(pound) (pound)
<S> <C> <C>
Finished goods 24,006 13,202
======= =======
6. DEBTORS
1999 1998
------------- -----------------
(pound) (pound)
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
======= =======
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 within 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>
F-36
<PAGE>
VIRTUAL PRESENCE LIMITED
------------------------
NOTES TO THE ACCOUNTS
FOR THE YEARS ENDED 31ST MARCH 1999 AND 1998
--------------------------------------------
9. CALLED UP SHARE CAPITAL
<TABLE>
<CAPTION>
Authorised Allotted and fully paid
--------------------------- ----------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
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
=========== ============ ============ ===========
</TABLE>
10. EMPLOYEES
There were no employees during the year apart from directors.
<TABLE>
<CAPTION>
1999 1998
------------- -----------------
(pound) (pound)
<S> <C> <C>
The costs were:
Salaries 474,782 303,255
Social security costs 55,172 38,007
-------- -------
529,954 341,262
======== =======
11. RECONCILIATION OF MOVEMENTS ON SHAREHOLDERS' FUNDS
1999 1998
------------- -----------------
(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
------------- -----------------
Emoluments for qualifying services 141,000 117,557
======== ========
</TABLE>
F-37
<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-38
<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
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
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-39
<PAGE>
MUSE TECHNOLOGIES, INC.
PRO FORMA CONDENSED STATEMENT OF OPERATION
FOR THE YEAR ENDED SEPTEMBER 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
MUSE VPL Pro Forma
September 30 September 30 Pro Forma Statement of
1999 1999 Adjustments Operations
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales:
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-40
<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-41
<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
----------------------
Arthur Andersen
Boston, Massachusetts
March 17, 2000
F-42
<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
1998 (liquidation preference of $4,500,002) 18,727 18,727
Series B, designated 1,775,000 shares-
Issued and outstanding--1,641,765 shares in 1999 and
1998 (liquidation preference of $164,176) 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-43
<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
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
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-44
<PAGE>
ADVANCED VISUAL SYSTEMS INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit)
for the Three Years in the Period Ended December 31, 1999
<TABLE>
<CAPTION>
Convertible Preferred Stock Common Stock
------------------------------------------------- --------------------------
Series A Series B
Number of $0.10 Par Number of $0.10 Par Number of $0.01 Par
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
======= ====== ========= ======= ========= =======
<CAPTION>
Total
Retained Cumulative Stockholders'
Paid-in Earnings Translation Equity Comprehensive
Capital (Deficit) Adjustment (Deficit) Income (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-45
<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
----------- ----------- -----------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
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-46
<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
F-47
<PAGE>
ADVANCED VISUAL SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(continued)
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.
(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
F-48
<PAGE>
ADVANCED VISUAL SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(continued)
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.
(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:
F-49
<PAGE>
ADVANCED VISUAL SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(continued)
<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 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.
F-50
<PAGE>
ADVANCED VISUAL SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(continued)
(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
interest at a rate of prime (7.75% at December 31, 1998) plus 1.75% $ - $ 527,692
---------- ----------
Revolving line of credit for borrowings up to $1,000,000 that bears
interest at a rate of prime (8.50% at December 31, 1999) plus 1.50% 879,743 -
Equipment lease that bears interest at 16.96% per annum and matures on
November 13, 2001 233,845 -
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-51
<PAGE>
ADVANCED VISUAL SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(continued)
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
============
F-52
<PAGE>
ADVANCED VISUAL SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(continued)
(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.
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
F-53
<PAGE>
ADVANCED VISUAL SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(continued)
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.
The following table summarizes the AVS 1992 Stock Option Plan
activity:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES OPTION PRICE 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.
F-54
<PAGE>
ADVANCED VISUAL SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(continued)
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, 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.
F-55
<PAGE>
ADVANCED VISUAL SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(continued)
(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>
F-56
<PAGE>
ADVANCED VISUAL SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(continued)
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>
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).
F-57
<PAGE>
ADVANCED VISUAL SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(continued)
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.
(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:
OPERATING LEASE
YEARS ENDING COMMITMENTS
-------------------
2000 $1,315,000
2001 1,244,000
2002 1,195,000
2003 159,000
-------------------
Total minimum lease payments $3,913,000
===================
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.
F-58
<PAGE>
ADVANCED VISUAL SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(continued)
(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.
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-59
<PAGE>
ADVANCED VISUAL SYSTEMS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
Amounts in ($000)
ASSETS
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-60
<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
-------- --------
s<S> <C> <C>
REVENUES
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-61
<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
-------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
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-62
<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, 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 prospectus.
3. ACCCRUED LIABILITIES
Accrued liabilities consist of the following:
June 30, 2000 December 31, 1999
------------- -----------------
Payroll and fringe benefits $ 727 $ 824
Accrued reorganization 50 231
Accrued other 1,651 1,623
------------- -----------------
$ 2,428 $ 2,678
============= =================
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
F-63
<PAGE>
1.3 million employee stock options in exchange for existing 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-64
<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-65
<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> <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)
Cumulative 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-66
<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-67
<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 Pro Forma Statement of
June 30, 1999 June 30, 1999 Adjustment Operations
------------- ------------- ---------- ----------
<S> <C> <C> <C>
Revenues: $1,113 $9,810 - $10,923
------------- ------------- ---------- ----------
Expenses:
Cost of product sold - 2,296 - 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)
Cost in excess of value of repurchased (564) - - (564)
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-68
<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
MUSE VPL MUSE/VPL Pro Forma
September 30, September 30, Pro Forma Statement of
1999 1999 Adjustments Operations
------------------ ------------------ ---------------- ---------------
<S> <C> <C> <C> <C>
Revenues: $1,724 $3,860 $5,584
------------------ ------------------ ---------------- ---------------
Expenses:
Cost of product sold - 1,954 1,954
Selling, general and
administrative 4,181 1,948 6,129
Research and development 2,303 - 2,303
Depreciation 487 194 681
Amortization of goodwill - - 110 (D) 110
------------------ ------------------ ---------------- ---------------
Total operating expenses 6,971 4,096 110 11,177
------------------ ------------------ ---------------- ---------------
Net Operating loss (5,247) (236) (110) (5,593)
------------------ ------------------ ---------------- ---------------
Other income (expense):
Loss on Foreign Currency
Transactions - - - -
Costs in excess of value of
repurchased stock (564) - - (564)
Interest income 729 - - 729
Interest expense (31) (115) - (146)
Other, net - 4 - 4
Restructuring Expenses - - - -
Taxes - - - -
------------------ ------------------ ---------------- ---------------
Total other (expenses) income 134 (111) - 23
------------------ ------------------ ---------------- ---------------
Net loss $(5,113) $(347) $(110) $(5,570)
================== ================== ================ ===============
Net loss per share
Basic $(0.51) - - $(0.53)
================== ===============
Diluted $(0.51) - - $(0.53)
================== ===============
Weighted average common shares:
Basic 10,049 - 431 10,480
================== ================ ===============
Diluted 10,049 - 431 10,480
================== ================ ===============
<CAPTION>
Combined
AVS MUSE/AVS Pro Forma
September 30, Pro Forma Statement of
1999 Adjustments Operations
------------------ ------------- ------------
<S> <C> <C> <C>
Revenues: $13,279 - $18,863
------------------ ------------- ------------
Expenses:
Cost of product sold 2,914 - 4,868
Selling, general and
administrative 7,100 - 13,229
Research and development 3,195 - 5,498
Depreciation 651 - 1,332
Amortization of goodwill - - 110
------------------ ------------- ------------
Total operating expenses 13,860 - 25,037
------------------ ------------- ------------
Net Operating loss (581) - (6,174)
------------------ ------------- ------------
Other income (expense):
Loss on Foreign Currency
Transactions (295) - (295)
Costs in excess of value of
repurchased stock - - (564)
Interest income 30 - 759
Interest expense (212) - (358)
Other, net 53 - 57
Restructuring Expenses (620) - (620)
Taxes (237) - (237)
------------------ ------------- ------------
Total other (expenses) income (1,281) - (1,258)
------------------ ------------- ------------
Net loss $(1,862) - $(7,432)
================== ============
Net loss per share
Basic $(0.51) - $(0.60)
================== ============= ============
Diluted $(0.51) - $(0.60)
================== ============= ============
Weighted average common shares:
Basic 3,641 (1,745) 12,376
================== ============= ============
Diluted 3,641 (1,745) 12,376
================== ============= ============
</TABLE>
See notes to pro forma financial statements.
F-69
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR YEAR ENDED SEPTEMBER 30, 1998
(In thousands, except per share data)
<TABLE>
<CAPTION>
MUSE AVS Pro Forma
September 30 September 30 Pro Forma Statement of
1998 1998 Adjustment Operations
---------------- ---------------- ---------------- ----------------
<S> <C> <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-70
<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.
F-71
<PAGE>
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.
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-41.
F-72
<PAGE>
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 herein by reference to Exhibit
2.1 of Muse Technologies, Inc.'s registration on Form S-4 filed on
August 9, 2000 (Commission File No. 333-43384)).
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 (incorporated herein by reference to Exhibit 2.2 of Muse
Technologies, Inc.'s registration statement on Form S-4 filed on
August 9, 2000(Commission File No. 333-43384)).
2.3 Form of Affiliate Agreement of affiliates of Advanced Visual
Systems Inc. (incorporated herein by reference to Exhibit 2.3 of
Muse Technologies, Inc.'s registration on Form S-4 filed on August
9, 2000 (Commission File No. 333-43384)).
3.1 Certificate of Incorporation of MUSE Technologies, Inc., as
amended (incorporated herein by reference to Exhibit 3.1 of Muse
Technologies, Inc.'s registration statement on Form SB-2
(Commission File No. 333-62495)).
3.2 Bylaws of MUSE Technologies, Inc., as amended (incorporated herein
by reference to Exhibit 3.2 of Muse Technologies, Inc.'s
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.
10.1 Private Equity Line Agreement dated as of June 1, 2000 by and
between Kingsbridge Capital Limited and MUSE Technologies, Inc.
(incorporated herein by reference to Exhibit 1 of Muse
Technologies, Inc.'s registration statement on Form 8-K, filed on
June 8, 2000 (Commission File No. 001-14559)).
10.2 Registration Rights Agreement dated as of June 1, 2000 by and
between Kingsbridge Capital Limited and MUSE Technologies, Inc.
(incorporated herein by reference to Exhibit 2 of Muse
Technologies, Inc.'s registration statement on Form 8-K, filed on
June 8, 2000 (Commission File No. 001-14559)).
10.3 Escrow Agreement dated as of June 1, 2000 among Bank of
Albuqerque, N.A., Kingsbridge Capital Limited and MUSE
Technologies, Inc. (incorporated herein by reference to Exhibit 3
II-1
<PAGE>
of Muse Technologies, Inc.'s registration statement on Form 8-K,
filed on June 8, 2000 (Commission File No. 001-14559)).
10.4 Warrant dated as of June 1, (incorporated herein by reference to
Exhibit 4 of Muse Technologies, Inc.'s registration statement on
Form 8-K, filed on June 8, 2000 (Commission File No. 001-14559)).
10.5 Purchase Agreement dated as of August 7, 2000 by and between
Kingsbridge Capital Limited and MUSE Technologies, Inc.
(incorporated herein by reference to Exhibit 1 of Muse
Technologies, Inc.'s registration statement on Form 8-K, filed on
August 10, 2000 (Commission File No. 001-14559)).
10.6 Registration Rights Agreement dated as of August 7, 2000 by and
between Kingsbridge Capital Limited and MUSE Technologies, Inc.
(incorporated herein by reference to Exhibit 2 of Muse
Technologies, Inc.'s registration statement on Form 8-K, filed on
August 10, 2000 (Commission File No. 001-14559)).
10.7 Convertible Promissory Note dated as of August 7, 2000
(incorporated herein by reference to Exhibit 3 of Muse
Technologies, Inc.'s registration statement on Form 8-K, filed on
August 10, 2000 (Commission File No. 001-14559)).
10.8 Warrant dated as of August 7, 2000 (incorporated herein by
reference to Exhibit 4 of Muse Technologies, Inc.'s registration
statement on Form 8-K, filed on August 10, 2000 (Commission File
No. 001-14559)).
10.9 Employment Agreement between Muse Technologies, Inc. and Steve
Sukman dated July 12, 2000.
10.10 Employment Agreement between Virtual Presence Limited and John
Edmund Hough dated November 15,1999.
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 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.
-----------
* To be filed by amendment.
(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-2
<PAGE>
(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 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.
II-3
<PAGE>
(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.
(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 AND POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, the undersigned
registrant certifies that it has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Albuquerque, State of New Mexico on September 19, 2000.
MUSE TECHNOLOGIES, INC.
By: /s/ Brian R. Clark
-------------------------------
Name: Brian R. Clark
Title: President
KNOW ALL MEN BY THESE PRESENT, that each person or entity whose signature
appears below constitutes and appoints Brian R. Clark and John Hough, and each
of them, its true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for it and in its name, place and stead, in any
and all capacities, to sign any and all amendments, including post-effective
amendments, to this registration statement on Form SB-2 and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done, as fully to all intents
and purposes as it might or could do in person, hereby ratifying and confirming
all that said attorneys-in-fact and agents or any of them, or their or his
substitute or substitutes may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed on September 19, 2000 by the following
persons in the capacities indicated.
SIGNATURE TITLE
President, Chief Financial Officer
/s/ Brian R. Clark (principal financial and accounting
---------------------------------- officer) and Director (principal
Brian R. Clark executive officer)
/s/ John Hough Managing Director of Virtual Presence
---------------------------------- and Director
John Hough
/s/ Edward A. Masi Director
----------------------------------
Edward A. Masi
/s/ Jack C. Berenzweig Director
----------------------------------
Jack C. Berenzweig
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 herein by reference to Exhibit
2.1 of Muse Technologies, Inc.'s registration on Form S-4 filed on
August 9, 2000 (Commission File No. 333-43384)).
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 (incorporated herein by reference to Exhibit 2.2 of Muse
Technologies, Inc.'s registration statement on Form S-4 filed on
August 9, 2000(Commission File No. 333-43384)).
2.3 Form of Affiliate Agreement of affiliates of Advanced Visual
Systems Inc. (incorporated herein by reference to Exhibit 2.3 of
Muse Technologies, Inc.'s registration on Form S-4 filed on August
9, 2000 (Commission File No. 333-43384)).
3.1 Certificate of Incorporation of MUSE Technologies, Inc., as
amended (incorporated herein by reference to Exhibit 3.1 of Muse
Technologies, Inc.'s registration statement on Form SB-2
(Commission File No. 333-62495)).
3.2 Bylaws of MUSE Technologies, Inc., as amended (incorporated herein
by reference to Exhibit 3.2 of Muse Technologies, Inc.'s
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.
10.1 Private Equity Line Agreement dated as of June 1, 2000 by and
between Kingsbridge Capital Limited and MUSE Technologies, Inc.
(incorporated herein by reference to Exhibit 1 of Muse
Technologies, Inc.'s registration statement on Form 8-K, filed on
June 8, 2000 (Commission File No. 001-14559)).
10.2 Registration Rights Agreement dated as of June 1, 2000 by and
between Kingsbridge Capital Limited and MUSE Technologies, Inc.
(incorporated herein by reference to Exhibit 2 of Muse
Technologies, Inc.'s registration statement on Form 8-K, filed on
June 8, 2000 (Commission File No. 001-14559)).
10.3 Escrow Agreement dated as of June 1, 2000 among Bank of
Albuqerque, N.A., Kingsbridge Capital Limited and MUSE
Technologies, Inc. (incorporated herein by reference to Exhibit 3
of Muse Technologies, Inc.'s registration statement on Form 8-K,
filed on June 8, 2000 (Commission File No. 001-14559)).
10.4 Warrant dated as of June 1, (incorporated herein by reference to
Exhibit 4 of Muse Technologies, Inc.'s registration statement on
Form 8-K, filed on June 8, 2000 (Commission File No. 001-14559)).
10.5 Purchase Agreement dated as of August 7, 2000 by and between
Kingsbridge Capital Limited and MUSE Technologies, Inc.
(incorporated herein by reference to Exhibit 1 of Muse
Technologies, Inc.'s registration statement on Form 8-K, filed on
August 10, 2000 (Commission File No. 001-14559)).
10.6 Registration Rights Agreement dated as of August 7, 2000 by and
between Kingsbridge Capital Limited and MUSE Technologies, Inc.
(incorporated herein by reference to Exhibit 2 of Muse
Technologies, Inc.'s registration statement on Form 8-K, filed on
August 10, 2000 (Commission File No. 001-14559)).
10.7 Convertible Promissory Note dated as of August 7, 2000
(incorporated herein by reference to Exhibit 3 of Muse
Technologies, Inc.'s registration statement on Form 8-K, filed on
August 10, 2000 (Commission File No. 001-14559)).
<PAGE>
10.8 Warrant dated as of August 7, 2000 (incorporated herein by
reference to Exhibit 4 of Muse Technologies, Inc.'s registration
statement on Form 8-K, filed on August 10, 2000 (Commission File
No. 001-14559)).
10.9 Employment Agreement between Muse Technologies, Inc. and Steve
Sukman dated July 12, 2000.
10.10 Employment Agreement between Virtual Presence Limited and John
Edmund Hough dated November 15,1999.
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 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.
-----------
* To be filed by amendment.
