<PAGE>
As filed with the Securities and Exchange Commission on May 5, 2000
Registration No. 333-__________
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
VIRTUAL COMMUNITIES, INC.
(Name of small business issuer in its charter)
--------------
<TABLE>
<S> <C> <C>
Delaware 7371 95-4491750
(State or jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
589 Eighth Avenue, 7th Floor Avi Moskowitz, President
New York, New York 10018 589 Eighth Avenue, 7th Floor
(212) 931-8600 New York, New York 10018
(212) 931-8600
(Address and telephone number of
principal executive offices (Name, address and telephone number of
and principal place of business) agent for service)
--------------
Copies to:
Travis L. Gering, Esq.
Wuersch & Gering LLP
11 Hanover Square, 21st Floor
New York, NY 10005
(212) 509-5050
Approximate date of proposed sale to the public: As soon as practicable
after this registration statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continued basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please 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 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 registration statement for the same
offering. [_]
If the delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [_]
CALCULATION OF REGISTRATION FEE
================================================================================
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Proposed Proposed
maximum maximum
Amount of offering aggregate Amount of
Title of each class of securities to be price per offering price registration
securities to be registered registered share(1) fee
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common stock (2) 1,911,863 shares $2.9219 $5,586,272.5 $1,475.56
- ------------------------------------------------------------------------------------------------------------------
Common stock (3) 981,266 shares $14.87 $14,591,425.42 $3,851.76
- ------------------------------------------------------------------------------------------------------------------
TOTAL 2,893,129 shares $20,177,697.92 $5,327.52
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
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(1) The number of shares of the registrant's common stock to be registered in
connection with the exercise of outstanding warrants has been determined based
upon the number of outstanding warrants to purchase up to 981,266 shares of the
company's common stock.
(2) The amount of the registration fee with respect to such securities has been
calculated in accordance with Rule 457(c).
(3) The amount of the registration fee with respect to such securities has been
calculated in accordance with Rule 457(g).
<PAGE>
EXPLANATORY NOTE
This Registration Statement covers the registration of up to an aggregate
of 4,393,129 shares of restricted common stock of Virtual Communities, Inc., a
Delaware corporation. Such shares are being registered on behalf of purchasers
of restricted securities in private placements of the registrant during the
period from December 13, 1999 through April 19, 2000. Such shares to be
registered are constituted of 1,911,863 shares of common stock and up to 981,266
shares of common stock issuable by the registrant upon the exercise of
outstanding warrants.
Pursuant to Rule 429 under the Securities Act, this registration statement
is also a post-effective amendment to (a) the registrant's registration
statement on Form SB-2 (File No. 333-17635), with respect to 1,380,000 units
consisting of one share of common stock and one redeemable class B warrant, and
2,760,000 shares of common stock underlying the class B warrants registered
thereby; and (b) the registrant's registration statement on Form SB-2 (File No.
333-89593), with respect to (i) up to 1,794,335 shares of common stock issuable
upon exercised certain outstanding warrants of the registrant's predecessor
company assumed by the registrant pursuant to the terms of that certain
Agreement and Plan of Merger, dated as of June 2, 1999, as amended, (ii) 500,000
redeemable class B warrants issuable upon exercise of certain outstanding
redeemable class A warrants, and 1,000,000 shares of common stock issuable upon
the exercise of such class A and class B warrants, which class A and class B
warrants are the "Selling Securityholder Warrants" and "Selling Securityholder
Class B Warrants" referred to in the company's Registration Statement on Form
SB-2 (File No. 333-17635), filed with the Commission on February 11, 1997, and
(iii) 120,000 units issuable upon exercise of certain outstanding unit purchase
options, each consisting of one share of common stock, one redeemable class A
warrant and one redeemable class B warrant, 120,000 class B warrants issuable
upon the exercise of the class A warrants, and 360,000 shares of common stock
issuable on exercise of the redeemable class A and class B warrants.
We will not receive any proceeds from the sale of shares by warrant holders. We
will not receive any proceeds from the sale of shares by those who have
purchased securities pursuant to private placements.
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. The prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any State where the offer or sale is not permitted.
<PAGE>
SUBJECT TO COMPLETION--DATED MAY 5, 2000
PROSPECTUS
VIRTUAL COMMUNITIES, INC.
(formerly HEURISTIC DEVELOPMENT GROUP, INC.)
1,911,863 shares of common stock and
981,266 shares of common stock issuable upon exercise of warrants
1,794,335 shares of common stock
500,000 redeemable class B warrants and
500,000 shares of common stock issuable upon exercise
of outstanding redeemable class A warrants and 500,000 shares
of common stock issuable upon exercise of the class B warrants
120,000 units consisting 120,000 shares of common stock,
120,000 redeemable class A warrants and
120,000 redeemable class B warrants
and 120,000 class B warrants issuable upon exercise of the class A
warrants, and 360,000 shares of common stock issuable upon exercise
of the class A and class B warrants
----------------
Investment in these securities involves a high degree of risk.
See "Risk Factors" beginning on page ___.
----------------
Our common stock, our outstanding class A warrants and our outstanding
class B warrants trade on the Nasdaq SmallCap Market under the symbols VCIX,
VCIXW and VCIXZ, respectively. Our outstanding units offered in our 1997 initial
public offering trade on the Nasdaq SmallCap Market under the symbol VCIXU.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
Pursuant to Exemption Application 91/99 filed by Heuristic Development
Group, Inc., the Israeli Securities Authority decided, on May 30, 1999, in
accordance with their authority under Section 41 of the Israel Securities Law,
5728-1968, to exempt Heuristic Development Group, Inc. from publishing a
prospectus approved by the Authority, with respect to the offering of securities
of Heuristic Development Group, Inc.
The date of this prospectus is__________, 2000.
<PAGE>
TABLE OF CONTENTS
Page
----
Part I ...................................................................
Summary Information and Risk Factors
Use of Proceeds ..........................................................
Determination of Offering Price
Dilution
Registered Security Holders
Plan of Distribution
Legal Proceedings
Directors, Executive Officers, Promoters and Control Persons
Security Ownership of Certain Beneficial Owners and Management
Description of Securities
Description of Business
Management's Discussion and Analysis or Plan of Operation
Description of Property
Certain Relationships and Related Transactions
Market for Common Equity and Related Stockholder Matters
Executive Compensation
Virtual Communities, Inc. Consolidated Financial Statements for
the period ending December 31, 1999 and 1998 .................... F-1
Changes in and Disagreements with Accountants on Accounting
And Financial Disclosure
Part II
Item 24. Indemnification of Directors and Officers
Item 25. Other Expenses of Issuance and Distribution
Item 26. Recent Sales of Unregistered Securities
Item 27. Exhibits
Item 28. Undertakings
i
<PAGE>
Part I.
SUMMARY INFORMATION AND RISK FACTORS
This summary highlights selected information from this prospectus. It does
not contain all of the information that may be important to you. You should
carefully read this entire document and the other documents to which we refer.
Together, these documents will give you a more complete description of the
transactions we are proposing.
Virtual Communities, Inc.
Our company is the product of a merger consummated October 29, 1999, in
which Virtual Communities, Inc. merged with and into a wholly owned subsidiary
of Heuristic Development Group, Inc., our predecessor company.
Prior to the merger, under the name Heuristic Development Group, we were a
development stage company originally organized to research, develop, design and
market fitness-related products. Due to disappointing acceptance of our primary
product, the IntelliFit System, we decided to pursue a strategy of acquisition
of an existing company culminating in the merger with Virtual Communities, Inc.
Virtual Communities, Inc., was organized in 1996 to develop, acquire and
operate online communities on the Web that aggregate and publish various news,
media and entertainment content targeted to specific ethnic groups. After the
merger, we changed our name to Virtual Communities, Inc., to reflect that our
primary business is now the development and acquisition of online communities
and related services.
Through its proprietary Community Management Solution(TM) (CMS), the
Company designs and develops web-based vertical communities containing a
comprehensive suite of products and services that includes web publishing and
content management software, integrated e-commerce solutions and best-of-breed
interactive community features. In February 2000, the Company acquired a
majority stake in Cortext, Ltd., an Israeli software developer that developed
the Cortext Software. Cortext, which is based on XML standards and
object-oriented architecture, is a suite of software applications that allow
complex and sophisticated websites to be managed by non-technical personnel. We
also operate five online communities: Virtual Jerusalem, Virtual Holyland,
Virtual Ireland, Virtual Italy and Virtual India.
Our principal executive offices are located at 589 8th Avenue, 7th Floor,
New York, NY 10018, telephone (212) 931-8600. Information contained on our Web
site does not constitute a part of this prospectus.
The Offering
This prospectus relates to our offering of the following securities:
o 1,794,335 shares of our common stock to be issued to holders of
outstanding warrants issued by the former Virtual Communities, Inc.
upon exercise of those warrants.
o 500,000 redeemable class B warrants issuable upon exercise of
outstanding redeemable class A warrants, and 1,000,000 shares of our
common stock issuable upon exercise of those class A and class B
warrants. We issued these class A warrants in 1997 in connection with
our initial public offering.
o 120,000 units issuable upon exercise of outstanding unit purchase
options, each consisting of one share of common stock, one redeemable
class A warrant and one redeemable class B warrant, together with an
aggregate of 360,000 shares or our common stock issuable on exercise
of the class A and class B warrants included in these units.
o 1,911,863 shares of common stock and 981,266 shares of common stock
issuable upon exercise of warrants.
See "THE OFFERING" and "DESCRIPTION OF SECURITIES."
----------------
We have not authorized anyone to give any information or make any
representation about us that differs from, or adds to, the information in this
prospectus or in our documents that are publicly filed with the Securities and
Exchange Commission. The information contained in this prospectus speaks only as
of our date unless the information specifically indicates that another date
applies.
<PAGE>
SUMMARY HISTORICAL FINANCIAL INFORMATION
The following table shows selected financial data of
Virtual Communities, Inc., as of and for the year ended
December 31, 1999 (U.S. Dollars in thousands)
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<S> <C>
Total assets ............................................ $ 2,364
Cash and cash
equivalents ............................................ 469
Total liabilities ....................................... 2,888
Shareholders deficit .................................... (524)
Net loss ................................................ (5,930)
</TABLE>
Virtual Communities, Inc. historical per share data
<TABLE>
<CAPTION>
Year Ended
December 31,1999
----------------
<S> <C>
Net loss per weighted average
common share (basic and diluted) ...................... (0.56)
Weighted average common shares
outstanding ........................................... 10,532,530
Dividends declared per share 0
Book value per share at end of
period(1) ............................................. (.04)
-------------
</TABLE>
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(1) The book value per share is computed by dividing stockholders' equity by
the number of shares of common stock outstanding.
<PAGE>
Virtual Communities, Inc. (the "Company"), a Delaware corporation, is the
product of a merger consummated October 29, 1999 (the "Merger"), in which
Virtual Communities, Inc. ("VCI") merged with and into a wholly-owned subsidiary
of Heuristic Development Group, Inc. ("HDG"). Prior to the Merger, HDG was a
development stage company organized to research, develop, design and market
fitness-related products. VCI was incorporated in 1996 to develop, acquire and
operate online communities on the Web that aggregate and publish various news,
media and entertainment content targeted to specific ethnic groups. VCI
commenced its operation in June 1997. After the Merger, HDG's name was changed
to Virtual Communities, Inc. to reflect that the Company's primary business is
the development and operation of online communities and related services for
third parties and the publishing of its own communities. The Company believes it
currently operates in one business segment.
For accounting purposes, the Merger has been treated as a recapitalization
of VCI with VCI as the acquirer (reverse acquisition). The historical financial
statements prior to October 29, 1999, are those of VCI and as of October 29,
1999 the financial statements reflect the two companies.
RISK FACTORS
In addition to the other information in this report, the following factors
should be carefully considered in evaluating our business and prospects.
We face risks associated with our operations
Virtual Communities, Inc. was founded in August 1996. We have a limited
operating history and cannot predict the viability of our online community
design, development and maintenance business and our own published communities
business.
We have a history of losses and expect to incur losses in the future, and
we may never achieve profitability.
For the years ended December 31, 1998 and 1999, VCI incurred net losses of
$1,434,000 and $5,930,000 respectively, and had an accumulated deficit of
$8,856,000 as of December 31, 1999. To date, neither VCI nor Heuristic
Development Group, Inc., our predecessor company, has been profitable on either
a quarterly or on annual basis, and we expect to incur net losses in the future.
We expect our operating expenses to increase significantly, especially in the
areas of CMS sales and marketing, the expansion of our CMS design and
development and maintenance business, and, as a result, we will need to increase
our revenue substantially to become profitable. If our revenue does not grow as
expected or increases in our expenses are not in line with our forecasts, we
will continue to incur net losses.
Our operating results depend on revenues from CMS clients and advertising
revenues that could be affected by cancellation of key contracts and decreases
in Web site traffic.
Although CMS sales represented 0% and 19% of VCI's revenues for the years
ended December 31, 1998 and 1999, respectively, we anticipate that a majority of
our revenues will derive from CMS sales in the year 2000 and beyond. These
revenues, if and when received by the Company, will derive from a limited number
of customers, who could have a significant impact on revenues in the event they
were to cancel one or more of such CMS agreements. The Company has entered into
four CMS agreements to date all of which agreements contain cancellation clauses
in the
<PAGE>
event of a fundamental breach by the Company in the performance of its
obligations thereunder.
The Company typically accepts equity in lieu of cash payment from clients,
up to approximately 50% of the amount we charge. Typically, that equity has
represented less than 5% of the equity of the CMS client. In most instances this
equity is in the form of privately held restricted securities subject to lock-up
provisions and as a result these shares are not immediately saleable by the
Company for the immediate future. While the Company believes that the equity it
receives in a CMS client will eventually be profitable, we cannot assure you
that this will be the case. Even when the shares received by the Company are
available for resale, there may be no market for such shares enabling the
Company to sell and realize a gain from them.
Taking equity in our CMS clients will also result in less working capital
for the Company. We cannot assure you that the web businesses in which the
Company will have a portion of equity will ever be profitable or that the shares
in such clients will have value at such time when the Company's lock-up
restrictions expire.
In some instances the Company's ability to retain the equity issued to it
from its CMS clients is dependent upon the Company's maintenance of such
clients' online communities pursuant to maintenance agreements entered into with
them. While maintenance fees represents an additional form of revenue for the
Company, in some instances it will expose the Company to additional risks in the
event we do not provide the services as agreed. These risks include the need to
arrange other hosting services for CMS clients in the event the Company cannot
provide such services and/or obtain licenses from third party service providers
at the Company's cost, to operate portions of client web sites.
Historically, VCI has derived a material portion of its revenue from the
sale of advertisements on its online communities. For the years ended December
31, 1998 and 1999, advertising revenue represented 62% and 49% of our total
revenue, respectively. A majority of our advertising revenue will come from
advertising contracts that are usually six to twelve months in length and are
often cancelable upon three months notice. That means our quarterly revenue is a
function of the contracts we will attract and/or retain within the quarter and
our ability to adjust spending in light of any revenue shortfalls. To date, the
advertising revenue from our Web sites comes from a small group of customers
whose composition periodically changes. For example, during the year ended
December 31, 1998 and 1999, the five largest advertisers accounted for
approximately 51% and 47% of total advertising revenue, respectively. As a
result, the cancellation of even a small number of these advertising contracts
could affect our operating results.
Advertising revenue is also linked to the level of traffic on our online
communities, so if traffic is less than the level expected by our advertising
customers, our advertising revenue could be adversely affected. Under most
advertising contracts, we guarantee our advertisers a minimum number of
impressions on our Online communities. Reduced traffic on these online
communities would cause us to fall short in meeting this minimum requirement
and, as a result, we may be required to extend the length of time that an
advertiser may advertise on our online communities without a concurrent increase
in advertising revenue. This kind of extension would reduce the availability of
space for other advertisers, which would lead to a reduction in advertising
revenue.
It is uncertain whether Web advertising will continue to grow at a rate
that will support our revenue projections. The Internet as a marketing and
advertising medium has not been available for a sufficient period of time to
<PAGE>
gauge our effectiveness as compared with traditional media. Many of our
advertisers have only limited experience with the Web as a sales and advertising
medium. In general, advertisers have not yet devoted a significant portion of
their advertising budgets to Web based advertising and may not find such
advertising to be effective for promoting their products and services relative
to traditional print and broadcast media. For 1998, a report by Jupiter
Communications states that advertising on the Web represented less than 5% of
overall advertising revenue in the United States according to industry sources.
You should consider the risks and difficulties frequently encountered by
companies like us, an early stage company involved in Web site design and
development and operating online communities. These risks include, without
limitation, risk that we may not be able to attract or retain Web design and
development clients; the risk that we may not be able to integrate our own
technology and know-how with licensed technology in both the development and
maintenance of our clients' and our own communities; and the risk that we may
not anticipate and adapt to a developing demographic market or the Internet
industry, the level of use and consumer acceptance of the online community
model, and thus our ability to attract users and registrants and the risk that
we may not be able to continue to develop and operate future communities.
If our CMS and advertising revenues fall below the expectations of
securities analysts and investors, the market price of our shares will likely
decline.
If our capital is insufficient to promote our business and we cannot obtain
needed financing, we will not be able to promote our CMS business and online
communities, exploit opportunities and remain competitive.
Since our current revenues are insufficient to pay for our current
operating expenses, following the merger, we will depend on additional
investments to fund our existing and future operations as well as to execute our
acquisition and business plans, and expand our marketing and sales efforts. We
believe that our available cash is sufficient to support our current operations
through June 2000, and therefore we need to raise additional funds to maintain
and develop our position in the marketplace. We anticipate that we will be able
to raise additional funds by calling 2,000,000 warrants issued by us in April
2000 in connection with a private placement of securities. However, our ability
to call these warrants depends upon our obtaining an effective registration
statement filed with the Commission registering the shares underlying such
warrants. In addition, our agreement with the warrant holder provides that we
may only call 1,000,000 warrants immediately upon the effectiveness of such
registration statement and the remaining 1,000,000 warrants three months
following the date of effectiveness and there is no certainty that the holder
thereof will exercise the warrants if we call them. The amount of funds which we
may receive from such call will depend upon the price of the shares of our
common stock at the time of our call.
It may be difficult or impossible for us to obtain additional financing on
favorable terms. Raising funds by issuing equity securities or convertible debt
securities will dilute the percentage ownership of our current stockholders.
Also, if we issue new securities they may have rights senior to the rights of
our common stock. If we cannot obtain needed financing, we will be unable to
execute our business plans and may be forced to liquidate our assets or file for
bankruptcy.
Our independent auditors have expressed doubt over our ability to continue as a
going concern.
<PAGE>
The report of independent public accountants on our December 31, 1999
consolidated financial statements includes an explanatory paragraph stating that
the recurring losses incurred from operations and a net capital deficiency raise
substantial doubt about our ability to continue as a going concern. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
We face increasing competition and competitors with longer operating histories
for our online community design and development services.
We recently started offering third parties, other than our content
partners, Web site design and development services that focus on creating online
communities and Web site content management. The market for these services is
relatively new, intensely competitive and subject to rapid technological change.
We expect competition not only to persist, but also to increase. Increased
competition may result in price reductions, reduced margins and loss of market
share. Our competitors fall into several categories, including Internet service
firms, technology consulting firms, technology integrators, strategic consulting
firms, and in-house information technology, marketing and design departments of
our potential clients. These competitors include Vignette Ltd., Interwoven, Inc.
and Openmarket, Inc.
The barriers to entry for Web site design and development and programming
and development of content management systems are also relatively low, although
higher than less specialized areas of Web site design and development. As a
result, we expect to face additional competition from new market entrants in
these businesses in the future. Since the market for these services is rapidly
evolving, our competitors may be better positioned to service clients. We
compete on the basis of a number of factors, including the breadth and quality
of the services offered, creative design and systems engineering expertise,
pricing, technological innovation, and understanding clients' strategies and
needs. Many of these factors are beyond our control, therefore, existing or
future competitors may develop or offer services that provide significant
advantages over the services offered by us.
Many of our competitors have longer operating histories in the Web market,
greater name recognition, larger customer bases and significantly greater
resources. In addition to current competitors, it is likely that additional
competitors will enter our markets in the future, and that many of these
competitors will have substantially greater resources than us. We cannot assure
you that we will be able to compete successfully in any of our current markets.
We have been substantially dependent on one online community for our revenues.
While we currently operate five online communities (virtualjerusalem.com,
virtualholyland.com, virtualireland.com, virtualitaly.com and virtualindia.com)
and recently launched our CMS business, approximately 80% of our revenues for
1999 were generated directly or indirectly from virtualjerusalem.com. Although
we plan to market and further develop our other online communities, we cannot
assure you that we will successfully complete these plans, or if we complete
these plans, that these communities will generate significant revenues. Our
inability to complete these plans or generate substantial revenue from other
sources would have a material adverse effect on our ability to generate revenue.
Our business model also relies on our plan to further develop our CMS
business for third parties and our ability to provide content management systems
and visitor retention elements for prospective clients. We have sold only four
such systems to date. Our inability to market and sell our community building
services could adversely affect our ability to increase revenues.
<PAGE>
Changes in the political and economic stability of the State of Israel could
adversely affect our operations.
Our major subsidiary, Virtual Communities Israel Ltd.("VCIL"), and Cortext
Ltd., the developer of the Cortext Software which is an integral part of our
CMS, are located in the State of Israel. In addition, a significant number of
our content partners and some of our advertisers are based in Israel.
Accordingly, we are directly influenced by the political, economic and military
conditions affecting Israel. Any military or terrorist action or threat or other
significant hostilities involving Israel, the interruption or curtailment of
trade between Israel and our present trading partners or a significant downturn
in the economy or financial conditions in Israel could have a material adverse
effect on our ability to operate our business. Israel's economy has been subject
to numerous destabilizing factors, including a period of rampant inflation in
the early to mid-1980's, low foreign exchange reserves, fluctuations in world
commodity prices, military conflicts and civil unrest.
In addition, since the establishment of the State of Israel in 1948,
significant hostilities exist, varying in degree and intensity, between Israel
and some Arab countries. Although Israel entered into various agreements with
some Arab countries and the Palestine Liberation Organization, and various
declarations were signed to resolve some of the economic and political problems
in the Middle East, we cannot predict if a full resolution of these problems
will be achieved, or the form of any resolution. Furthermore, all non-exempt
male adult permanent residents of Israel under the age of 50, including certain
of our employees, are obligated to perform military reserve duty and are subject
to being called into active duty under emergency circumstances. While we
operated despite these conditions in the past, we cannot predict the likelihood
of emergency circumstances occurring in the future or the impact of these
conditions on our operations in the future.
Our plans to operate online communities with international community content are
subject to risks that could adversely affect our ability to operate and expand
our online community business.
Our online communities contain international community content, and our
plans to form strategic and joint venture relationships in other parts of the
world will increase our exposure to other risks and problems inherent in
international operations, including:
o the impact of recessions in economies outside the United States;
o greater difficulty in accounts receivable collections;
o unexpected changes in regulatory requirements;
o difficulties and costs of staffing, maintaining effective communications
and managing foreign operations due to distance, language and cultural
barriers or otherwise;
o reduced protection for intellectual property rights;
o political and economic instability;
o the introduction of the Euro; and
o fluctuations in currency exchange rates.
<PAGE>
Some or all of the above factors could have a material adverse effect on
our ability to expand our business by entering into agreements with entities
located in Ireland, Italy, India, Israel and other international markets. In
addition, even if our future plans are successful, we cannot be certain that our
investment in establishing relationships with entities in other countries will
produce the desired levels of revenue.
Any failure of our network infrastructure could adversely effect our operations.
Our success depends upon the capacity, reliability and security of our
networking hardware and software infrastructure. We have developed a hardware
and software system that is designed for reliability, however, on isolated
occasions in the past the system has been subject to isolated failures due to
human error or software failure. The system integrates Web site management,
network monitoring, quality assurance, transaction processing and fulfillment
services. In addition, our CMS system, which is utilized on our online
communities and the communities of the CMS clients with whom we enter into
relationships, and our servers in the United States and Israel, emphasize
extensive automation and the back-up of our Web sites using various technologies
and a degree of redundancy. The system is designed to minimize single points of
failure.
We have built our infrastructure so that it includes approximately 500
gigabytes of disk space which should support over 70 million Web page views per
month. We are continuing to expand and adapt our system infrastructure to keep
pace with the increase in the number of users and registrants who use the free
Internet services we provide. Demands on our infrastructure that exceed our
current forecasts could result in technical operating difficulties for our
online communities and the online communities of our CMS clients.
Any system failure that interferes with the access to our online
communities or those of our CMS clients, and the use by users and registrants of
the Internet services that we and our CMS clients provide, could diminish the
level of traffic on our Web sites. Continuing or repeated system failures could
impair our reputation and brand name and reduce our e-commerce referral and
advertising revenue. At present, we do not know that we will be able to scale
our systems to handle a larger amount of traffic at higher transmission speeds.
Further, any expansion of our network infrastructure will require substantial
financial, operational and management resources, all of which could affect the
results of our operations by diverting these resources from other areas of our
business that we may seek to develop.
User access to, and the functionality of, our online communities are highly
dependent on third parties and are vulnerable to disruptions beyond our control.
We use our own network servers that are housed at Frontier Global Services,
Inc.'s facilities in Herndon, Virginia and New York City, and at our facility in
Israel. Our online communities and those of our CMS clients are connected to the
Internet by Frontier Global Center in the United States and by Netvision Ltd. in
Israel via multiple DS-3, OC-3, and 128Kbs links on a continuous basis. Global
Center is responsible for ensuring that all of our servers have power and
connectivity to the Internet. We manage and monitor our servers and network
remotely from our facility in Israel and, in addition, Frontier Global monitors
our Web sites on a continuous basis.
Although the agreements we have with Frontier Global and Netvision provide
us with remedies for service interruptions, we cannot assure you that we will
have uninterrupted access to the Internet for our communities and the
communities of our CMS clients, or that our users and registrants will be able
<PAGE>
to access them.
We are currently in discussions with Frontier Global regarding certain
amounts charged by them for services provided to us. We believe that we will be
able to resolve such differences in a mutually satisfactory manner, and, in any
event, such differences are not material to our results of operations. However,
in the event we are unable to resolve such differences, we could experience a
disruption in the services provided to us by Frontier Global.
A disruption for any reason in the Internet access provided to us by
Frontier Global or Netvision, any interruption in the service that Frontier
Global or Netvision receives from other providers, or any failure of Frontier
Global or Netvision to handle higher volumes of Internet users to our Web sites
could have a material adverse effect on our business, results of operations and
financial condition by reducing the level of traffic on our Web sites and cause
a breach in our agreements with our CMS clients.
Despite precautions taken by us and by Frontier Global and Netvision, our
system is susceptible to natural and man-made disasters such as earthquakes,
fires, floods, power loss and sabotage.
Our systems are also vulnerable to disruptions from human error, computer
Viruses and attempts by hackers to penetrate our network security. Hackers have
succeeded in penetrating our network security in the past, and we expect these
attempts to continue from time to time. Breaches of our network security could
also disrupt the operation of our Web sites and jeopardize the security of
confidential information stored in our servers. We have recently started
implementing "Firewall" network security in our Israel facility and at Frontier
Global's United States facilities. "Firewall" is an industry standard product,
manufactured by CheckPoint and installed for us by industry experts, that is
designed to prevent unauthorized entry into network security systems.
Although we believe that Firewall will prevent unauthorized entry to our
network security in most instances, we cannot assure you that computer viruses
and hackers will not penetrate our systems in the future.
Any of the events listed above could cause us interference, delays, or
service interruptions and adversely affect our business and results of
operations. Our success is dependent upon, among other things, our ability to
deliver uninterrupted Web site service to our CMS clients and the users and
registrants of our online communities and those of our CMS clients. As a result,
we must protect our computer equipment and the information stored in our servers
against damage by fire, natural disaster, power loss, telecommunications
failures, unauthorized intrusion and other catastrophic events.
Web site services and other services based on software and computer systems
often encounter development and completion delays and the underlying software
may contain undetected errors or failures. In the case of Web sites, these
problems are heightened when the volume of traffic on a site increases. Such
delays and errors and other electronic or telecommunications failures are
generally beyond our control. In addition, we cannot assure you that errors will
not be found in the software underlying our content management systems or other
software that we license for use on our online communities or a community
developed by us for a third party. These errors might include bugs in the code
of standard "off the shelf" software product releases, and may result in delays
in the completion or launch of one of our own communities or a community or
other project that we develop on behalf of others. Other similar factors include
the timing of the commercial release of particular services or products and the
<PAGE>
market acceptance thereof, unanticipated costs to cure any defect if it is
subject to cure, the need to refund money paid to us or to pay for damages
caused by the delay or defect.
We depend on third party content partners and suppliers to attract users
and registrants to our Web sites and provide services and retention elements to
our CMS clients.
The future success of our communities and those of our CMS clients depend
largely on our and their ability to attract and maintain a large base of users
and registrants because the larger our base the more likely commercial
enterprises are willing to advertise and sell their products and services on our
Web sites. Moreover, certain advertisers pay us based upon the number of times a
registrant views a particular advertisement. The volume of users who view our
communities and the size of our registrant base depends largely on the ability
of our current and future content partners, who supply content to our
communities and our ability to reach agreements with web service providers of
interactive elements which we and our CMS clients also use to attract and retain
users and registrants. While no single content partner or third party provider
of licenses is material to our operations, (with the exception of the Cortext
software in which we have a controlling interest in the licensor thereof) we may
not be able to maintain or expand our base of content partners and third party
providers of interactive elements. If we are unable to obtain content or
elements from them, we would reduce our ability to attract and maintain our
users and registrants and would likely lose significant advertising and other
revenue.
We rely on other companies to provide Internet services for our visitors,
registrants and CMS clients including the following companies:
<TABLE>
<CAPTION>
Company Service
------- -------
<S> <C>
Accuweather, Inc. Weather Service
Commtouch Inc. Free Email Service
deltathree.com Inc. Internet Telephony
eCal Corporation Calendars
eShare Technologies Inc. Chat and Forums
FairMarket, Inc. Auctions
homestead.com Incorporated Free Home Pages
iMediation, Inc. Affiliate Software
Intershop Communications, Inc. E-commerce Malls and Stores
iQ.COM Corporation Loyalty Solution
MatchNet.com (Jdate) Dating Service
MBNA America Bank, N.A. Affinity Credit Cards
otherproducts.com LLC (Meandaur) Free Home Pages
Netgravity, Inc. Advertising Management Software
OANDA Corp. Currency Converter
OpenSite Technologies, Inc. Auctions
Reuters Limited News Services and Photographs
Screaming Media-Net, Inc. Content Provider
SmartAge Corp. Banner Exchange Programs
Talk City, Inc. Chat Services
Tribal Voice, Inc. Instant Messaging
</TABLE>
If our relationship with any of these companies were to terminate without
sufficient advance notice, and we were unable to establish relationships with
comparable service providers, our ability to provide Internet services to our
registrants, and to operate our own Web sites and to provide such services to
our CMS clients, would be adversely affected.
<PAGE>
The loss of Avi Moskowitz, our President and Chief Executive Officer,
Michael Harwayne, our Chief Operation Officer, Deborah Gaines, our Vice
President - Editorial Services, or other key personnel, or the inability to
attract and retain additional, qualified personnel in both the United States and
Israel, could adversely affect our ability to manage and grow our businesses.
Our success depends to a significant degree upon the continued
contributions of our executive management team, most of whom have worked
together only for a short time. We do not carry key man life insurance on the
lives of any of our employees except for Avi Moskowitz, our Chairman of the
Board, Chief Executive Officer and President. Our success will also depend upon
the continued service of our management team as well as technical, marketing and
sales personnel, graphic artists and editorial staff. Although we have entered
into employment contracts with all the members of our management team, including
Mr. Moskowitz, all of our employees may voluntarily terminate their employment
at any time.
Our success also depends upon our ability to attract, hire and retain
additional highly qualified management, technical, sales and marketing and
customer support personnel both in the United States and Israel. Locating
personnel with the combination of skills and attributes required to carry out
our strategy is often a lengthy process and competition for qualified employees
in the Internet industry, both in the United States and Israel, is intense. The
loss of key personnel, or the inability to attract, hire and retain additional,
qualified personnel, could have a material adverse effect on our ability to
manage and grow our businesses.
Our operations could be adversely affected if our investments in our online
communities do not generate a corresponding increase in net revenue.
As the number of Web sites grows, brand and site recognition will play an
increasingly important role. Establishing, developing and promoting our online
communities in the face of pressures from our competitors will be critical to
developing our registered user base, content and strategic partners and
commercial relationships. We will be required to continue to devote substantial
financial and other resources to maintaining the unique content of our online
communities through:
o Web advertising and marketing;
o traditional media advertising campaigns in print, radio and billboards; and
o providing a high quality online community experience.
The results of our operations could be adversely affected if our investment
of financial and other resources in developing and promoting our online
communities does not generate a corresponding increase in net revenue, or if the
expense of promoting our communities becomes excessive. Changes in the quality
and type of services we offer and our character as perceived by our registered
users could make our communities less attractive to our users, registrants,
advertisers, content and strategic partners, all of which would have a material
adverse effect on our ability to increase our registered user base and to
generate revenue.
An increasing portion of our business depends on the growing demand for Web site
design and development services.
Because we are in the business of providing Web site design and development
services, our future success depends, in part, on the continued expansion of,
and reliance of consumers and businesses on, the Internet. The Internet may not
be able
<PAGE>
to support an increased number of users or an increase in the volume of data
transmissions. As a result, the performance or reliability of the Internet may
be adversely affected as use increases. The improvement of the Internet in
response to increased demand will require timely improvement of the high speed
modems and other communications equipment that form the Internet infrastructure.
The Internet has already experienced outages and delays as a result of damage to
portions of our infrastructure.
The effectiveness of the Internet may also decline due to delays in the
development or adoption of new technical standards and protocols designed to
support increased levels of activity. We cannot assure you that the
infrastructure, products or services necessary to maintain and expand the
Internet will be developed, and without these developments, there will be
limited, if any, demand for our Web site design and development services.
Because competition in the online community business is intense, and many of our
competitors have greater resources than us, our ability to maintain or improve
our position in this market could be harmed.
The market for community content aggregators on the Internet is new and
rapidly evolving. Competition for registrants, consumers, users and advertisers
is intense and is expected to increase over time. Barriers to entry are
relatively low. Other companies that are primarily focused on creating online
communities and with whom we compete are:
o competitors to virtualjerusalem.com include: Jewish Communities On-Line
(located at America Online), Shamash (www.shamash.org; a non-profit Jewish
communal network), Jewish Family & Life (www.jewishfamily.com by JCN), and the
Jerusalem Post (www.jpost.co.il; the online edition of the newspaper);
o competitors to virtualholyland.com include: crosswalk.com (published by Didax,
Inc.), Jesus2000.com, the Christian Broadcasting Network (www.wcbn.com), and
other Web sites published by ministries and evangelists worldwide;
o competitors to virtualireland.com include: The Irish Times (www.ireland.com),
Local Ireland (www.local.ie; a quasi-governmental Web site financed in part by
Telecom Eireann), Ask Ireland (www.askireland.com); published by the government
of Ireland), Touchtel's tourist information site (www.goireland.com),
paddynet.com, irishabroad.com and celtic.com;
o competitors to virtualitaly.com include: DolceVita (www.dolcevita.com, a
fashion and travel site), Made in Italy (www.made-in-italy.com, a travel and e-
commerce site), and Virtual Italia (www.virtualitalia.com, a general Italian
interest site); and
o competitors to virtualindia.com include: Rediff on the Net (www.rediff.com, an
India-oriented online service), India-Today (www.india-today.com, a news and
cultural site) and 123india.com (www.123india.com, a news information and
software site).
We also face competition and compete for users and traffic with Web
directories, search engines, shareware archives, other content Web sites, online
service providers, and traditional media companies such as ABC, America Online,
CBS, CNET, Excite, Infoseek, Lycos, NBC, Microsoft, Time Warner and Yahoo!
Increased competition from these and other sources could require us to respond
to competitive pressures by establishing pricing, marketing and other programs,
or seeking out additional strategic alliances or acquisitions that may be less
favorable to us than we could otherwise establish or obtain.
<PAGE>
Substantially all of our current advertising customers and content partners
also have established collaborative relationships with some of our competitors
or other Web sites. Our advertising customers might also conclude that other
Internet businesses, such as search engines, commercial online services and Web
sites that offer professional editorial content, are more effective sites for
advertising. Moreover, we may be unable to maintain the traffic on our online
communities or sustain or increase the size of our registered user base, which
would make our communities less attractive than those of our competitors. Any of
these factors could adversely affect our ability to maintain or improve our
competitive position.
We could be liable for legal proceedings that would injure our business
reputation or result in substantial damages against us.
Our failure or inability to meet a client's expectations in the performance
of Web site design and development services could injure either our or the
client's business reputation or result in a claim for substantial damages
regardless of our responsibility for such failure. In addition, the services we
provide to our clients may include access to confidential or proprietary client
information or the sublicense of software or other proprietary systems. Although
we have implemented policies to prevent such client information or licenses from
being disclosed to unauthorized parties or used inappropriately, any such
unauthorized disclosure or use could result in a claim against us for
substantial damages. Our contractual provisions attempting to limit such damages
may not be enforceable in all instances or may otherwise fail to protect us from
liability for damages. We do not currently have errors and omissions insurance.
If we cannot integrate future acquisitions into our existing operations, then we
may be unable to manage our operations and expand our business.
We have been approached from time to time to consider and evaluate
potential business combinations, joint ventures both involving our acquisition
of other companies and potential investments in us or other business
combinations involving our web properties or CMS business. We may engage in
discussions relating to similar transactions in the future. Although we expect
to grow, in part, through business combinations, it is uncertain whether we will
decide to enter into any transaction. If we do enter into a transaction, we
cannot be certain what the terms of the transaction or our timing will be.
Acquiring complementary businesses, products and technologies is an integral
part of our business strategy. Some of the risks attendant to this acquisition
strategy are:
o difficulties and expenses of integrating the operations and personnel of
acquired companies into our operations while preserving the goodwill of the
acquired entity;
o the additional financial resources that may be needed to fund the operations
of acquired companies;
o the potential disruption of our business;
o our management's ability to maximize our financial and strategic position by
incorporating acquired technology or businesses;
o the difficulty of maintaining uniform standards, controls, procedures and
policies;
o the potential loss of key employees of acquired companies;
<PAGE>
o the impairment of relationships with employees, content partners, advertisers
and customers as a result of changes in management; and
o increasing competition with other entities for desirable acquisition targets.
Any of the above risks could prevent us from realizing significant benefits
from our acquisitions.
If our important strategic relationships are discontinued for any reason,
our ability to generate revenue from advertising and e-commerce and our ability
to increase sales of our community building business would be adversely
effected.
Although our strategic relationships with our content partners and Internet
services providers are a key factor in our overall business strategy, our
strategic partners may not view their relationships with us as significant to
their own business. There is a risk that parties with whom we have strategic
alliance agreements may not perform their obligations as agreed. Our
arrangements with strategic partners generally do not establish minimum
performance requirements but instead rely on the voluntary efforts of our
partners. In addition, most of our agreements with strategic partners may be
terminated by either party with little notice. If important strategic
relationships are discontinued for any reason, our ability to generate revenue
from advertising and e-commerce referral revenues and to provide these services
to our CMS clients may be adversely affected.
We face risks typical of the Internet industry
Privacy concerns, government regulation and legal uncertainties could adversely
affect activity on the Internet, including our Web sites.
Laws and regulations that apply directly to communications or commerce over the
Internet are becoming more prevalent. The most recent session of the United
States Congress resulted in Internet laws regarding children's privacy,
copyrights, taxation and the transmission of sexually explicit material. The
European Union recently enacted our own privacy regulations. The law of the
Internet, however, remains largely unsettled, even in areas where there has been
some legislative action. It may take years to determine whether and how existing
laws that govern intellectual property, privacy, libel and taxation apply to the
Internet. The development of laws governing these areas may decrease the growth
in the use of the Internet, including our Web sites, or give rise to claims by
our clients for whom we develop or design Web sites or other third parties. In
addition, the growth and development of the e-commerce market may prompt calls
for more stringent consumer protection laws, both in the United States and
abroad, that may impose additional burdens on companies conducting business
online. The adoption or modification of these laws or regulations could
adversely affect our ability to generate e-commerce referral revenue.
The Federal Communications Commission is currently reviewing our regulatory
positions on data transmissions over telecommunications networks and could seek
to impose some form of telecommunications carrier regulation on
telecommunications functions of information services. State public utility
commissions generally have declined to regulate information services, although
the public service commissions of some states continue to review potential
regulation of such services. Future regulation or regulatory changes could have
an adverse effect on our business and results of operations.
Imposition of new taxes or fees by the United States Federal government, state
<PAGE>
governments or foreign governments on Internet transactions or on the use of the
Internet as a means of communication could adversely effect our advertising or
e-commerce revenue.
Imposition of sales or other taxes on sales of merchandise purchased by
users of our Web sites from our strategic partners' Web sites by states or
countries where these goods are shipped could have a material adverse effect on
the amount of referral fees we receive from these sales. Imposition of new taxes
or fees by the Federal government of the United States or by foreign governments
on Internet transactions or on the use of the Internet as a means of
communication could also adversely effect our advertising or e-commerce revenue.
We could be liable for online content not covered by our insurance.
The nature and breadth of information disseminated on our Web sites could
expose us to liability in various areas, including claims relating to:
o the content and publication of various materials based on defamation, libel,
negligence, personal injury and other legal theories;
o copyright or trademark infringement and wrongful action due to the actions of
third parties;
o use of third party content made available through our Web sites via links to
our content partners or other Web sites or through content and material posted
by members in chat rooms and on bulletin boards;
o damages arising from the use or misuse of the free e-mail services that we
offer; and
o product information and reviews that we offer.
In the past, these types of claims have been made, sometimes successfully,
against online service providers and other print publications. Claims of these
kinds against us would result in us incurring substantial costs and would also
be a drain on our financial and other resources. If there were a sufficient
number or several severe claims of this nature, we would need to implement
measures to reduce our exposure and potential liability. In addition to being a
drain on our resources, this may also require taking measures that could make
our Web sites or services less attractive to our registrants and users. This in
turn could reduce traffic on our Web sites, negatively impact the size of our
registered user base, and reduce our advertising and e-commerce revenues. We
carry general liability insurance in the aggregate amount of $3 million and
umbrella coverage in an aggregate amount of $3 million. This coverage may be
insufficient to cover expenses and losses arising in connection with any claims
against us. To the extent our insurance coverage does not cover liability or
expenses we incur, our financial and other resources could be strained.
Our inability to protect our intellectual property rights could adversely affect
our ability to operate our businesses.
We consider our names, logos and designs as proprietary and try to protect
them under existing United States and international laws relating to protection
of intellectual property. We also developed internal procedures to control
access and dissemination of proprietary information. Despite our precautions,
third parties may succeed in misappropriating our intellectual property or
independently developing similar intellectual property. Protecting our
<PAGE>
intellectual property against infringement could result in substantial legal and
other costs and could divert our limited management resources and attention from
our business plans.
Some of the technology incorporated in our Web sites, and offered to our
content partners and clients of our Web site design and development services, is
based on technology licensed from third parties. As we continue to introduce new
services, we may need to license additional technology. If we are unable to
timely license needed technology on commercially reasonable terms, we could
experience delays and reductions in the quality of our services, all of which
could adversely affect our business and results of operations, our reputation
and the value of our proprietary information could also be adversely affected by
actions of third parties to whom we license our proprietary information and
intellectual property. If someone asserts a claim relating to proprietary
information against us, we may seek licenses to this intellectual property. We
may not, however, be able to obtain licenses on commercially reasonable terms,
if at all. The failure to obtain the necessary licenses or other rights could
prevent or limit our ability to develop our Web sites.
Our inability to incorporate content management software from a third party into
our own Web sites and those of our clients could adversely effect our ability to
develop content on our own Web sites and to expand our Web site design and
development business.
In July 1999, we acquired a license from Cortext Ltd., an Israeli software
developer to content management software for use by us in maintaining content on
our own online communities. We acquired a majority control of Cortext Ltd. in
February 2000. We also offer this software in the operation of the Web sites of
our content partners and community-building clients. We cannot assure you that
we will be able to successfully integrate this software into our own communities
and the communities our CMS clients and to use the same as a platform for the
integration of additional software elements for such communities. If we are
unable to integrate the software into our own, and our clients' Web sites, our
ability to manage content on our communities and to expand our Web site design
and development business could be adversely affected.
Our applications operate in complex network environments and directly and
indirectly interact with a number of other hardware and software systems. We are
unable to predict to what extent our business may be affected if our systems or
the systems that operate in conjunction with our systems experience a material
failure.
Known or unknown errors or defects that affect the operation of our
software and systems could result in delay or loss of revenue, interruption of
services, cancellation of contracts and registrants, diversion of development
resources, damage to our reputation, increased service and warranty costs, and
litigation costs, any of which could adversely affect our business, financial
condition and results of operations.
One of the most likely worst-case scenarios for us is that access to our
Web sites through the Internet would be limited or impossible due to a
telecommunications problem beyond our control. In such a scenario, we would be
dependent on third party telecommunications providers to remedy the problem.
We are subject to risks related to our stock
Our stock price may be highly volatile, which could result in substantial losses
to investors.
The trading price of our common stock is likely to be highly volatile due
<PAGE>
to a variety of factors, including:
o actual or anticipated variations in quarterly operating results and changes in
financial estimates by securities analysts;
o announcements of technological innovations;
o new products or services offered by us or our competitors;
o conditions or trends in the advertising or e-commerce market;
o our announcement of significant acquisitions, strategic partnerships, joint
ventures or capital commitments (or the absence of the same);
o additions or departures of key personnel; and
o sales of common stock or the exercise of our outstanding options, warrants or
unit purchase options.
In addition, the Nasdaq SmallCap Market, where many publicly held Internet
companies are traded, has recently experienced extreme price and volume
fluctuations. These fluctuations are often unrelated or disproportionate to the
operating performance of these companies. These broad market and Internet
industry factors may materially adversely affect the market price of our common
stock, warrants, and units regardless of our actual operating performance.
Your investment in our stock may become illiquid and you may lose your entire
investment.
Under the Nasdaq Stock Market Marketplace Rules, Nasdaq requires Nasdaq
SmallCap Market issuers to comply with applicable requirements for continued
listing on the Nasdaq SmallCap Market. Following the completion of our recent
merger with VCI, Nasdaq initially denied, but subsequently approved, the listing
if our stock and warrants. There is no assurance that we will continue to meet
the continued listing requirements in the future.
If our common stock is not quoted on the Nasdaq SmallCap Market or listed
on another exchange, trading in our common stock would be covered by the
Exchange Act's "penny stock" rules if our common stock is deemed a penny stock
(as defined below). Under these rules, broker-dealers who recommend penny stocks
to persons other than established customers and "accredited investors" must make
a special written suitability determination for the purchaser and receive the
purchaser's written agreement to a transaction prior to sale. Securities are
exempt from these rules if the market price is at least $5.00 per share.
If our securities were to become subject to the regulations applicable to
penny stocks, the market liquidity for these securities would be severely
affected, limiting the ability of broker-dealers to sell these securities and
your ability to sell our common stock in the public market.
Approximately 6,252,250 million, or 37.9%, of our total outstanding shares are
restricted from immediate sale, but may be sold into the market in the near
future, which could cause the market price of our common stock to drop
significantly, even if our business is profitable.
We have outstanding approximately 16,500,422 shares of common stock, based
on shares outstanding as of May 3, 2000 and assuming (which assumptions shall
apply to the entire discussion under this risk factor) no exercise of any of the
outstanding options under our Incentive Stock Option Plans to purchase
<PAGE>
approximately 4,157,422 shares of Virtual Communities, Inc. common stock,
outstanding warrants to purchase approximately 2,662,804 shares of VCI common
stock, outstanding class A or class B warrants or unit purchase options to
purchase approximately 5,620,000 shares of our common stock, or outstanding
warrants to purchase 2,981,265 shares of our common stock issued in connection
with recent private placements of common stock from December 1999 through April
2000.
Of the 16,500,422 outstanding shares, approximately 9,757,896 shares, or
59.1%, are freely tradable without restriction under the Securities Act.
Of the remaining 6,742,526 shares outstanding, these shares will become
available for resale in the public market as described below.
Approximately 4,352,586 of these shares are subject to tiered lock-up
agreements that our shareholders signed in connection with the merger in October
1999. These lock-up agreements generally prohibit the sale of these shares until
August 1, 2000, nine months from the date of the merger.
In addition, the majority of the holders of warrants exercisable into
approximately 1,794,335 shares of our common stock are subject to the tiered
lock-up agreements described above. Notwithstanding the foregoing, we have the
discretion to release any party to the lock-up agreements from the restrictions
imposed on them under compelling circumstances.
Upon the expiration or release in whole or in part of the restrictions
imposed by the lock-up agreements described above, the persons party to those
agreements will be able to sell their shares subject to the restrictions imposed
by the federal securities laws. Such shares have previously been registered by
the Company in connection with the merger in October 1999.
Under the terms of the private placement financing agreements we completed
in April 2000 we agreed to file two registration statements registering 518,700
restricted shares of common stock and 2,662,804 restricted shares underlying the
warrants issued pursuant to the financing. The Company is registering under this
registration statement 1,181,504 of those shares plus 1,381,864 restricted
shares and 315,570 shares underlying warrants issued to several entities through
private placements of the Company's securities completed from December 1999
through February 2000. We intend on filing a second registration registering
2,000,000 shares underlying the Intercoastal Financial Services Corporation
("Intercoastal") warrants in June 2000.
In September 1999, we filed a Form S-8 registration statement under the
Securities Act to register all shares of common stock issuable pursuant to
outstanding options and all shares of common stock reserved for issuance under
our 1996 Stock Option Plan. This registration statement became effective
immediately upon filing, and shares covered by this registration statement
therefore are eligible for sale in the public markets, subject to options
becoming exercisable, the lock-up agreements described above and Rule 144
limitations applicable to affiliates. As of May 1,2000 there were outstanding
options to purchase up to 137,000 shares of common stock that will be eligible
for sale in the public market subject to becoming exercisable and the expiration
of the lockup agreements.
On April 28, 2000 Virtual Communities, Inc. (the "Company") filed a
Registration Statement on Form S-8 to register 4,589,750 shares of Virtual
Communities, Inc.'s common stock, issuable to eligible employees, officers,
directors, advisors and consultants of the registrant under the Virtual
<PAGE>
Communities, Inc. 1997 Stock Option Plan (the "VCI 1997 Plan"), the Virtual
Communities, Inc. 1998 Stock Option Plan (the "VCI 1998 Plan"), the Virtual
Communities, Inc. 1999 Stock Option Plan (the "VCI 1999 Plan" and collectively
with the VCI 1997 Plan and the VCI 1998 Plan, the "VCI Stock Option Plans"), and
the 1999 Stock Incentive Plan of Virtual Communities, Inc. (the "1999
Post-Merger Plan"). The VCI Stock Option Plans were authorized and approved by
the shareholders of Virtual Communities, Inc. prior to its merger into Heuristic
Development Group that subsequently changed its name to Virtual Communities,
Inc. The 1999 Post-Merger Plan was authorized and approved by the shareholders
of Heuristic Development Group, which subsequently changed its name to Virtual
Communities, Inc. Options exercisable into 4,132,422 shares are outstanding of
which approximately 999,000 have vested and are fully exercisable as of May 1,
2000.
As authorized under the provisions of the 1999 Post-Merger Plan, the Board
of Directors of Virtual Communities, Inc. (hereinafter, "VCI") amended the
Post-Merger Plan. Such amendments (i) increased the number of shares of Virtual
Communities, Inc. common stock reserved for issuance under such plan from
1,000,000 shares to 2,000,000 shares, and (ii) increased the maximum annual
percentage of shares available for replenishment of the Post-Merger Plan from 2%
to 5% of the outstanding number of shares of common stock of Virtual
Communities, Inc. Such amendments remain subject to stockholder ratification.
As restrictions on resale end and/or registrations of restricted shares are
effectuated to permit resales of the same, the market price could drop
significantly if the holders of such restricted shares sell them or are
perceived by the market as intending to sell them.
Anti-takeover provisions in our charter could deter a takeover effort,
which could inhibit your ability to receive an acquisition premium for your
shares.
Our board of directors has the authority to issue up to 5,000,000 shares of
preferred stock without the need for stockholder approval. The Board may also
determine the economic and voting rights of this preferred stock. Issuance of
preferred stock could impede or prevent transactions that would cause a change
in control of our company. This might discourage bids for our common stock at a
premium over the market price of our common stock and adversely affect the
trading price of our common stock. We have no current plans to issue shares of
preferred stock.
The forward-looking statements made in this prospectus might prove inaccurate,
resulting in a material difference between such statements and our actual
results.
Some of the statements under "Summary," "Risk Factors," "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business" and elsewhere in this prospectus constitute forward-looking
statements. These statements involve known and unknown risks, uncertainties and
other factors that may cause our actual results, levels of activity, performance
or achievements following the merger to be materially different from any future
results, levels of activity, performance, or achievements expressed or implied
by such forward-looking statements.
Such factors include, among other things, those listed under "Risk Factors"
and elsewhere in this prospectus. In some cases, you can identify
forward-looking statements by terminology such as "may," "will," "should,"
"could," "expects," "plans," "intends," "anticipates," "believes," "thinks,"
"estimates," "predicts," "potential" or "continue" or the negative of such terms
and other comparable terminology.
<PAGE>
THE OFFERING
This prospectus relates to our offering of 1,911,863 shares of common stock
and 981,266 shares of common stock issuable upon exercise of warrants. Such
shares are being registered on behalf of purchasers of restricted Company
securities in private placements which occurred in the period from December 13,
1999 through April 10, 2000. These warrants are exercisable for one share of
common stock each at exercise prices ranging from $2.11 to $14.87 per share. Of
these warrants, 500,000 warrants expire on August 3, 2000. The Company may also
redeem an additional 129,450 warrants at $.75 per share underlying those
warrants, which price decreases to $.50 per share underlying the warrant after
July 5, 2000 and thereafter by $.05 per month to a minimum of $.25.
In addition, we are offering under this prospectus, as a post-effective
amendment pursuant to Rule 429 under the Securities Act, the following
securities previously registered on the registration statements indicated below:
(a) Our registration statement on Form SB-2 (File No. 333-17635), with
respect to 1,380,000 units consisting of one share of common stock and one
redeemable class B warrant, and 2,760,000 shares of common stock underlying the
class B warrants registered thereby; and
(b) Our registration statement on Form SB-2 (File No. 333-89593), with
respect to the following:
(i) up to 1,794,335 shares of common stock issuable upon exercised
certain outstanding warrants by our predecessor company, Heuristic
Development Group, Inc., assumed by the registrant pursuant to the terms of
that certain Agreement and Plan of Merger, dated as of June 2, 1999, as
amended,
(ii) 500,000 redeemable class B warrants issuable upon exercise of
certain outstanding redeemable class A warrants, and 1,000,000 shares of
common stock issuable upon the exercise of such class A and class B
warrants, which class A and class B warrants are the "Selling
Securityholder Warrants" and "Selling Securityholder Class B Warrants"
referred to in our Registration Statement on Form SB-2 (File No.
333-17635), filed with the Commission on February 11, 1997; and
(iii) 120,000 units issuable upon exercise of certain outstanding unit
purchase options, each consisting of one share of common stock, one
redeemable class A warrant and one redeemable Class B warrant, 120,000
class B warrants issuable upon the exercise of the class A warrants, and
360,000 shares of common stock issuable on exercise of the redeemable class
A and class B warrants.
In connection with the merger, holders of outstanding warrants to purchase
shares of pre-merger Virtual Communities, Inc., are entitled to exercise those
warrants for that number of shares of our common stock that such holders would
have received in the merger if the shares of Virtual Communities, Inc. common
stock underlying their warrants were held by them at the effective time of the
merger.
At the time of the merger, there were outstanding warrants to purchase
225,113 shares of Virtual Communities, Inc. common stock at exercise prices
ranging from $0.8052 to $2.10 per share. These warrants were issued to the
placement agent in connection with a placement of Series A and B convertible
preferred stock of pre-merger Virtual Communities, Inc. in early 1999. There
were also outstanding warrants to purchase 1,333,823 shares of common stock , at
exercise prices ranging from $0.30 to $2.10, issued to directors,
<PAGE>
shareholders, employees and vendors in consideration for loans granted to
Virtual Communities, Inc., waivers and deferrals of compensation, guarantees of
bank lines of credit and services rendered to Virtual Communities, Inc.
Accordingly, the 1,794,335 shares of our common stock that we will issue to
holders of the former Virtual Communities, Inc. warrants was determined by
multiplying 1,558,936 (the number of shares of pre-merger common stock issuable
on exercise of such warrants) times 1.151, the conversion ratio determined in
accordance with the merger agreement. All of these warrants are currently
exercisable according to their terms.
Shares and warrants to be issued to holders of outstanding class A warrants
In connection with our initial public offering of units in February 1997, a
group of investors received 500,000 redeemable class A warrants in exchange for
warrants that those investors had received in December 1996 as part of a bridge
financing transaction. We are registering the securities underlying such class A
warrants in the registration statement of which this prospectus is a part.
Each class A warrant entitles the holder to purchase one share of common
stock and one class B warrant at an exercise price of $6.50, subject to
adjustment, at any time until February 11, 2002. Each class B warrant entitles
the holder to purchase one share of common stock at an exercise price of $8.75
at any time until February 11, 2002. The class A and class B warrants are
subject to redemption by us at a redemption price of $0.05 per warrant on 30
days' written notice, provided that the closing bid price of the common stock
averages in excess of $9.10 and $12.25, respectively, for any 30 consecutive
trading days ending within 15 days of the notice of redemption. See "Description
of Securities."
Units to be issued to holders of unit purchase options
We are also registering 120,000 units issuable upon exercise of outstanding
unit purchase options granted to the underwriter and finder in connection with
our initial public offering in February 1997, 120,000 class B warrants issuable
upon the exercise of the class A warrants included in such units, and 360,000
shares of common stock issuable on exercise of the redeemable class A and class
B warrants included in such units. Each unit purchase option entitles the holder
to purchase one share of common stock, one redeemable class A warrant and one
redeemable class B warrant at an exercise price of $6.00 at any time until
February 10, 2002. See "Description of Securities--Unit Purchase Option."
This prospectus is also included in a post-effective amendment to our
registration statement on Form SB-2 (File No. 333-17635), filed with the SEC in
connection with our initial public offering of 1,380,000 units consisting of
common stock, redeemable class A warrants and redeemable class B warrants.
Depending on a number of factors, which include the price of our common
stock, general market conditions, capital raising activities by us, and our need
for additional funds, we may in the near future decide to change the terms of
the class A and class B warrants by lowering one or both of their exercise
prices in order to encourage our warrant holders to exercise their warrants so
that we can raise additional funds from such exercises. To the extent that we
lower the exercise price of the warrants, we will receive less funds that we
would at the current exercise prices. There is no assurance that even if we do
lower the exercise price, our warrant holders will exercise their warrants.
<PAGE>
USE OF PROCEEDS
Assuming all of the warrants formerly issued by pre-merger Virtual
Communities, Inc. are exercised, we would receive approximately $1,355,714 in
proceeds, minus expenses.
Upon exercise of the currently outstanding warrants issued in connection
with our initial public offering, and warrants issuable upon exercise of such
warrants, we would receive gross proceeds as follows (in each case minus
expenses):
o assuming all of the outstanding class A warrants are exercised, we would
receive $12,220,000 in proceeds;
o assuming all of the outstanding class B warrants are exercised, we would
receive an additional $12,075,000 in proceeds; and
o assuming all of the class B warrants issuable upon exercise of the
outstanding class A warrants are exercised, we would receive an additional
$16,450,000 in proceeds.
In addition, we would receive the following gross proceeds, minus expenses,
upon exercise of the unit purchase options and the warrants underlying the unit
purchase options:
o assuming exercise of all of the outstanding unit purchase options,
$720,000;
o assuming exercise of all of the class A warrants issuable upon exercise of
the unit purchase options, $780,000;
o assuming exercise of all of the class B warrants issuable upon exercise of
the unit purchase options, $1,050,000;
o assuming exercise of all of the class B warrants issuable upon exercise of
the class A warrants underlying the unit purchase options, an additional
$1,050,000; and
o assuming the exercise of warrants issued to an investment banker in
connection with the merger, we would receive an additional $336,000.
Assuming exercise of the 981,265 shares underlying the warrants being
registered herein and issued in connection with the Company's private placements
from December 1999 through April 2000 we would receive $9,359,219. Assuming
exercise of an additional 2,000,000 shares underlying the warrants not being
registered herein, we would receive an additional $36,000,000 to $58,000,000.
There can be no assurance of such exercises and consequent receipt of any such
proceeds at this time.
We plan to use the proceeds from the exercise of the warrants for general
corporate purposes, including acquisitions of web properties, equipment,
software and licenses, marketing and advertising of our communities and
Community Management Solution ("CMS") business, and general working capital.
We will not receive any proceeds from the sale of shares by warrant
holders. We will not receive any proceeds from the sale of shares by those who
have purchased securities pursuant to private placements.
<PAGE>
DIVIDEND POLICY
Neither Heuristic Development Group, Inc. nor Virtual Communities, Inc.
have ever paid any dividends, and we do not expect to pay any dividends in the
foreseeable future. Any determination to pay dividends in the future will be at
the discretion of our board of directors, and will be dependent on our future
results of operations, financial conditions, capital expenditures, working
capital requirements and other relevant factors.
REGISTERED SECURITY HOLDERS.
The following table sets forth certain information with respect to each
registered security holder for whom the Company is registering the securities
for resale to the public. The Company will not receive any of the proceeds from
the sale of such securities.
<TABLE>
<CAPTION>
SECURITIES OWNED AMOUNT OF PERCENTAGE OF
PRIOR TO OFFERING SHARES SHARES SHARES
(INCLUDING SHARES OFFERED BENEFICIALLY BENEFICIALLY
ISSUABLE UPON PURSUANT TO OWNED AFTER OWNED AFTER
REGISTERED EXERCISE OF THIS OFFERING OFFERING
STOCKHOLDER (1) WARRANTS)(2) PROSPECTUS (2)(3) (2)(3)
<S> <C> <C> <C> <C>
Paul and Hannah
Lindenblatt (4) 830,446 440,000 390,446 2.4%
Business Systems
Consultants Limited 314,908 314,908 0 *
Rachel Charitable
Trust 340,342 99,999
Musgrave Ltd. 340,342 99,999
Magellan
International, Ltd. 191,208 191,208 0 *
Aspen
International, Ltd. 191,208 191,208 0 *
Acqua Wellington Value Fund,
Ltd. 191,208 191,208 0 *
The Cuttyhunk Fund
Limited 573,625 573,625 0 *
Shoham Investments
Ltd. Inc. 93,633 93,633 0 *
Hindy Taub 56,180 56,180 0 *
Andrew W. Schonzeit 37,453 37,453 0 *
Irwin Zalcberg 37,453 37,453 0 *
Solomon Merkin 168,539 168,539 0 *
Ilan Kaufthal 56,180 56,180 0 *
ABDM Partners 51,170 51,170 0 *
Jonathan Kolatch 7,310 7,310 0 *
Jed Sherwindt 5,848 5,848 0 *
Amos Tohar 11,000 11,000 0 *
Kobi Kantor 1,200 1,200 0 *
Debbie Kamioner 7,490 7,490 0 *
G.L.D. Consulting Corp. 3,745 3,745 0 *
Ilan Kaufthal 11,643 11,643 0 *
Josephthal & Co. 36,246 36,246 0 *
E. Ohayon 20,000 20,000 0 *
Berell Corp. 10,000 10,000 0 *
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Gideon Trading Inc. 175,884 175,884 0 *
Versaware Ltd. (5) 72,564 72,564 0 *
Peter A. Jacobs (6) 3,270 3,270 0 *
West End Holdings, Inc. 3,155 3,155 0 *
Musgrave Ltd. 10,794 10,794 0 *
Rachel Trust 10,794 10,794 0 *
Grato Holdings Ltd. (7) 22,667 22,667 0 *
George Moskowitz (8) 61,348 61,348 0 *
Business Systems Consultants
Ltd. (9) 445,912 445,912 0 *
Joseph Morgenstern 9,184 9,184 0 *
L.K.P. Ltd. (Kirschen) 6,122 6,122 0 *
A & D Printers 1,151 1,151 0 *
David Morris (10) 58,921 58,921 0 *
Avi Moskowitz (11) 161,140 161,140 0 *
David Kahn (12) 46,040 46,040 0 *
Daniel Diker (13) 11,510 11,510 0 *
Michael Sondhelm (14) 11,510 11,510 0 *
Suzanne Cotton Levy 17,266 17,266 0 *
Michael Jacobs (15) 17,266 17,266 0 *
Charley Warady 6,906 6,906 0 *
Peninsula Industries Ltd. 5,397 5,397 0 *
Howard F. Curd (16) 220,922 220,922 0 *
Michael Zariello (16) 55,232 55,232 0 *
David Rosinov (16) 56,304 56,304 0 *
Gilad Ottensauser (16) 73,835 73,835 0 *
Camden Virtual Enterprises 27,616 27,616 0 *
Jack Siegal (16) 27,616 27,616 0 *
Bill Hales (16) 32,548 32,548 0 *
Ran Furman (16) 55,232 55,232 0 *
Joan Morgen (16) 16,570 16,570 0 *
Peter Stern (16) 28,688 28,688 0 *
Jacquiline Waterman (16) 11,046 11,046 0 *
Andrew Adler (16) 4,039 4,039 0 *
Craig Petrassi 4,038 4,038 0 *
George Hoos 8,577 8,577 0 *
Jessup & Lamont Partners (16) 189,155 189,155 0 *
</TABLE>
* Less than 1%.
(1) Except as set forth in the footnotes below, no Selling Security Holders held
any position, office or had any other material relationship with the registrant
or its officers, directors or affiliates during the past three years.
(2) Percentage of the Company's common stock shares beneficially owned is based
upon 16,500,422 shares of common stock outstanding as of May 2, 2000. Such
number of shares does not include 13,950,618 shares issuable upon the exercise
of warrants and options currently outstanding except where any such warrants or
options are beneficially held by the selling stockholder.
<PAGE>
(3) Assumes all of the securities offered hereby shall be sold.
(4) Mr. and Mrs. Lindenblatt are the brother-in-law and sister of Avi Moskowitz,
the Company's chairman of the Board, President and Chief Executive Officer. Such
stockholders are not involved in the management or control of Virtual
Communities, Inc. nor are they otherwise affiliated with us or our management.
(5) Versaware Ltd. is an affiliate of Net Results Holdings, LLC ("NRH"), a
beneficial holder of shares of the Company.
(6) Peter Jacobs is a Director of the Company.
(7) Grato Holdings Limited holds these warrants on behalf of Ramp Trustees
Limited, trustees of a trust of which Mr. David Morris, member of the Board of
Directors, is a potential beneficiary. Potential beneficiaries thereof currently
have no voting power nor the power to direct the vote of such shares nor any
investment power, including the power to dispose or direct the disposition of
the shares that are held by the trusts.
(8) George Moskowitz is the brother of Avi Moskowitz, the Chariman, President
and Chief Executive Officer of the Company.
(9) Business Systems Consultants Ltd. is controlled by a trust of which Mr.
Morris is a potential beneficiary. Mr. Morris disclaims beneficial ownership of
the warrants to purchase shares of our common stock held by Business Systems
Consultants Ltd.
(10) David Morris is a member of the Board of Directors of the Company.
(11) Avi Moskowitz is Chairman, President and Chief Executive Officer of the
Company.
(12) David Kahn is Executive Vice President and Legal Counsel of Virtual
Communities Israel Ltd. ("VCIL"), a subsidiary of the Company.
(13) Daniel Diker is a former Vice President of VCIL.
(14) Michael Sondhelm is a former Vice President of VCIL.
(15) Jesup & Lamont acted as Placement Agent in connection with several
financings completed by VCI (predecessor of registrant), including arranging a
$500,000 bridge loan to VCI in December 1998, which was converted into equity in
1999; two private placements in February and August, 1999, respectively; and the
merger with Heuristic Development Group in October 1999.
(16) Affiliate of Jesup & Lamont.
LEGAL PROCEEDINGS
On April 14, 2000, a Complaint was filed against VCI in the Supreme Court
of the State of New York, County of New York, by six investors in VCI who
acquired Series B Preferred Stock of VCI pursuant to a private placement of
VCI's securities in August 1999 prior to its merger with, and into a
wholly-owned subsidiary of Heuristic Development Group, Inc. on October 29, 1999
(the "Merger"). The plaintiffs claim that they are entitled to additional shares
of VCI Common Stock as a result of a provision in the Private Placement
Memorandum, pursuant to which they acquired their
<PAGE>
securities in VCI, providing for a reset of the conversion price of the
plaintiffs' Series B Preferred Shares into Common Stock of VCI. The original
conversion price set forth in the Memorandum was $2.10, however this conversion
price was subject to a reset to $1.45 in the event that VCI did not close the
Merger by August 31, 1999, which date was subsequently extended to September 30,
1999 by a Supplement to the Private Placement Memorandum dated May 27th 1999.
The Supplement also stated that such date could be further extended to October
31, 1999 in the event VCI received a letter from its outside counsel stating
that the Merger closing was delayed by the SEC for reasons beyond the Company's
control. VCI received such a letter from its outside counsel on September 29,
1999 and the Merger closed on October 29, 1999. Plaintiffs in this action have
demanded a judgment in the form of additional shares, and, alternatively,
granting money damages in favor of the Plaintiffs computed at the highest price
of VCI shares trading on NASDAQ during the period subsequent to the merger date
and attorneys fees, costs and disbursements of the action.
In the event the Plaintiffs are successful in this action they would be entitled
to approximately 52,320 shares of Common Stock and Series B Preferred
Shareholders as a group would be entitled to approximately 175,000 additional
shares of Common Stock of the Company after adjustment for the exchange ratio of
1.151 to 1 used to calculate the number of new shares of Common Stock in the
merged Company that former VCI shareholders would be entitled to pursuant to the
Agreement and Plan of Merger.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Directors and Principal Officers
The following table sets forth the names, ages (as of May 2, 2000) and
positions of all of our directors, executive officers and key personnel.
<TABLE>
<S> <C> <C>
Avi Moskowitz .................. 35 Chairman of the Board, CEO and President
Michael Harwayne ............... 30 Chief Operating Officer
Deborah Gaines ................. 45 Vice President, Editorial Services
Jack Rose ...................... 36 General Counsel and Secretary
Robert J. Levenson ............. 68 Director
Fred S. Lafer .................. 71 Director
Jonathan W. Seybold............. 57 Director
Allan Dalfen ................... 55 Director
Peter A. Jacobs ................ 55 Director
David Morris ................... 30 Director
</TABLE>
Avi Moskowitz became Chairman of the Board, President and Chief Executive
Officer of the Company upon the completion of the Company's merger with VCI in
October 1999. Mr. Moskowitz founded VCI in August 1996 serving as Chairman,
Chief Executive Officer and President until it merged with a subsidiary of the
Company in October 1999. Mr. Moskowitz was also the founder of Virtual
Communities Israel Ltd. and served as the entity's sole Director and Chief
Executive Officer until May 1999. From 1994 until 1996, Mr. Moskowitz was a
principal of NetMedia, Ltd., an Israel Internet service provider. From 1986
through 1994, Mr. Moskowitz was President of MedPlus Inc., a New York-based
value-added reseller of healthcare software systems. Mr. Moskowitz attended
Yeshiva College of Yeshiva University.
Michael S. Harwayne became Vice President of Marketing and Business
Development of the Company upon the completion of the Company's merger with VCI
<PAGE>
in October 1999. He joined VCI in March 1999 and became Chief Operating Officer
of the Company in February 2000. From 1995 to 1999, Mr. Harwayne was employed by
McKinsey & Company, Inc. where he was an Associate until 1997, and then an
Engagement Manager. From 1991 to 1993, he held several positions at the
International Data Group, including account representative and management
associate to PC World magazine and circulation manager of Multimedia World. Mr.
Harwayne received a Bachelor of Arts degree, magna cum laude, from Harvard
College in 1991 and received his MBA at Harvard's Graduate School of Business in
1995.
Deborah Gaines joined the Company as Editorial Director in November 1999
and became Vice President of Editorial Services in January 2000. Before joining
VCI, Ms. Gaines served as Managing Editor for the Hearst magazine group at
Women.com from 1998-99, spearheading the launch of new sites for Redbook and
Good Housekeeping. From 1997-98, she was Managing Editor of iVillage: The
Women's Network. She has also held editorial positions at Money magazine and
Baby magazine, and written about travel for the New York Post, Ladies' Home
Journal, Modern Bride and others. Ms. Gaines graduated from Yale University and
has an M.A. in literature from Columbia University.
Jack Rose joined the Company in April 2000 as General Counsel and
Secretary. Prior thereto, from December 1996 to March 2000, Mr. Rose was Chief
Executive Officer and Chief Technology Officer of ineighbors.com, a community
based web site based in White Plains, New York and a member of Reynolds & Rose,
P.C., a White Plains, New York law firm. From February 1993 to December 1996,
Mr. Rose was an associate attorney with Clifford Chance Rogers & Wells, a New
York City law firm, and from September 1990 to February 1993, an associate
attorney with Weil, Gotschal & Manges, a New York City law firm. Mr. Rose
received his Bachelor of Arts degree in Management Information System and
Operations Management from State University of New York, Albany, in 1986, and a
law degree from Hofstra University School of Law in May 1990. He is admitted to
the New York and Connecticut State Bars.
Jonathan W. Seybold has been a director of the Company since July 1994 and
was Chairman of the Board until the completion of the merger with VCI in October
1999. Mr. Seybold was founder, Chairman and CEO of Seybold Seminars, Inc., a
company which conducts large scale, technology-based trade shows and conferences
and Seybold Publications, a company which publishes reports on publishing
systems, desktop publishing and internet publishing applications. Both companies
were acquired by Ziff-Davis in November, 1990. He was also co-founder and
Chairman of Pretty Good Privacy, Inc. (PGP), a company which provides software
for encryption of digital information. PGP was acquired by Network Associates,
Inc. in December, 1997.
Robert J. Levenson became a director of the Company upon the consummation
of the merger in October 1999. Since 1992, he has been a Director of First Data
Corp. ("FDC"), a NYSE company. From May 1993 through March 2000, he was an
Executive Vice President of FDC. Mr. Levenson is a managing member of Lenox
Capital Group, LLC. He formerly served as Senior Executive Vice President, Chief
Operating Officer, and Member of the Office of the President of Medco
Containment Services, Inc., a provider of managed care prescription benefits.
Mr. Levenson was a Director of Medco Containment Services, Inc. from October
1990 until December 1992. From 1985 until October 1990, Mr. Levenson was Group
President and Director of ADP. Mr. Levenson is also a director of Vestcom
International, Inc., Superior Telecom, Inc. and Emisphere Technologies, Inc.
Fred S. Lafer become a director of the Company upon the completion of the
merger in October 1999. From 1994 to the present, Mr. Lafer has been President
of the Taub Foundation, a charitable foundation. Prior thereto, until 1996, Mr.
<PAGE>
Lafer was Senior Vice President and Secretary of Automatic Data Processing,
Inc., a provider of employer, financial and data services. He is also a member
of the Board of Vestcom International.
Allan Dalfen has been a director of the Company since January 1995. Mr.
Dalfen has served as President of Dalfen Corporation, an investment corporation.
From October 1992 to December 1994, Mr. Dalfen served as President and Chief
Executive Officer of Vestro Foods, Inc. and from 1979 to 1992, Mr. Dalfen served
as President and Chief Executive Officer of Weider Health and Fitness. Mr.
Dalfen is currently President, CEO and a Director of Dairy King Food Services, a
Los Angeles-based food company.
Peter A. Jacobs has been a director of the Company upon completion of the
merger and was a director of VCI since April 1998. Since March 1998, he has been
a director of Hillsdown Holdings PLC, a publicly traded U.K. food and furniture
company, and he has also been Chairman of Hillsdown since March 1999. In
December 1998, Mr. Jacobs became Chairman of Healthcall, Ltd., a doctor's
deputizing service, and in November 1998, he became a director of Bank Leumi
U.K. Since March 1998, Mr. Jacobs has been a director of Allied Domecque, Ltd.,
a U.K.-based food, beverage and spirits company. From May 1991 until August
1999, Mr. Jacobs was Chief Executive Officer of BUPA, the U.K.'s largest private
health care provider and health insurer. Mr. Jacobs received a BSC in Mechanical
Engineering in 1966 and a DMS in Management Studies in 1969 from Aspon
University, Birmingham, England.
David Morris became a director of the Company upon the completion of the
merger and was a director of VCI from April 1998 and continued until the Merger.
Since May 1998, he has been a director of ENG Ltd., a U.K. IT support company
which provides web hosting network management services. Since February 1998, he
has been a director of Vanco Ltd., a provider of wide area management network
systems. Since June 1997, Mr. Morris has been an employee of Monhouse Ltd., a
U.K.-based management company and, since June 1998, he has been a director of
Monhouse. He is also a director of Kerbybridge Properties, a property
investment/development company, and a director of Voyeur Ltd. and PC Clothing,
Ltd., two U.K.-based clothing companies since February 1998. From 1996 through
1997, Mr. Morris was an investment trusts specialist for Brewin Dolphin Ltd., a
U.K. stock brokerage firm. From January 1995 to December 1995, Mr. Morris was
employed by Net Media Ltd., an Israeli Internet service provider, that was
partially owned by Mr. Moskowitz until December 1995. Mr. Morris received a
Bachelor of Arts degree from University of Westminster, London in 1993.
Other Key Personnel
Anthony Ruggiero, 41, joined the Company as Director of Advertising Sales
and Marketing in October 1999. Prior thereto, in Spring 1999, Mr. Ruggiero was
an On-Line Sales Manager for courant.com a division of Time Mirror Corporation
and from 1997 through 1998 Sales Manager for Americast Division of SNET, a New
Haven, Connecticut, company. From 1995 to 1997, he was a Sales Manager for TCI,
a Berlin, Connecticut cable television and telecommunications company. Mr.
Ruggerio received a Bachelors Degree in Finance and Management from Mercy
College, Dobbs Ferry, New York in 1982.
Yolanda Friedman, 35, joined the Company as Director of Business
Development in July 1999. Prior thereto, Ms. Friedman was associated with
McKinsey & Company, New York City, from September 1996 to June 1999, first as a
Business Analyst and thereafter, as an Associate. From June 1995 to August 1995,
she was employed as an Intern with Christie's Auction House, New York City. Ms.
Friedman received a Bachelor of Arts degree in Art History from The Wharton
School and the University of Pennsylvania in 1996.
<PAGE>
Arnold Roth became Chief Operating Officer of the Company's VCIL subsidiary
in February 2000. Prior to joining VCIL, Mr. Roth served as Chief Executive
Officer of Targetix Ltd., a Nes-Ziyona, Israel, Internet company from 1999 to
February 2000. From 1995 to 1999, he was Chief Executive Officer of Clockwork
Group, an Austin, Texas based subsidiary of the Formula Group, Herzliya, Israel.
Prior thereto, he was Chief Executive Officer of Pegasus Medical Inc., a Boston
based medical company prior to its sale to HBOC Inc., and Chief Executive
Officer of Acumen Systems Inc., an Israeli/US text-recognition company. From
1983 to 1988, Mr. Roth was a founder and managing director of Software
Corporation of Australia Ltd., an Australian company listed on the Australian
Stock Exchange. He was a partner in Roth Warren, a Melbourne law firm from its
inception in 1978 until 1985. Mr. Roth received a Bachelors of Economics degree
in 1973 and an LL.B. degree in 1974 from Monash University, Clayton, Australia.
He is admitted to practice as a lawyer in Australia and Israel.
David L. Kahn, 43, has been the Executive Vice President and General
Counsel of the Company's VCIL subsidiary since October 1996. From 1990 to 1996,
Mr. Kahn was associated with Corrine Davar Property Consultants, a Jerusalem
real estate firm. Mr. Kahn received a Bachelors Degree in Political Science from
Yeshiva University, New York in 1978 and a J.D. Degree from Benjamin N. Cardozo
School of Law, New York in 1981.
Ellen Cohl, 33, became the Controller of VCIL in August 1997 and Vice
President -Finance in January 2000. From 1995 through 1997, she was a Senior
Auditor with Luboshitz Kasierer & Co., the Israeli affiliate of Arthur Andersen
& Co., the accountants for VCI, VCIL and VCIIP. During 1994, Mrs. Cohl was a
Special Project Leader at Deloitte & Touche LLP, New York. From July 1992
through April 1994 she was a Senior Auditor with Bank Leumi Trust Company. Mrs.
Cohl is a Certified Public Accountant and received a Bachelor of Science Degree
from New York University in 1988, and a Masters Degree in Business
Administration from Baruch College, The City University of New York in 1995.
All of the above directors hold office until the next annual meeting of the
stockholders in June 2000 and until their successors have been duly elected and
qualified. All of the above executive officers were elected by and serve at the
direction of the Board of Directors of the Company. All of the officers serve at
the discretion of the Board of Directors. There are no family relationships
among any of the directors, executive officers or key personnel.
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of December 15, 1999, information as to
the beneficial ownership of our common stock by:
(1) each person serving as a director on such date,
(2) each person who qualifies as a "named executive officer" as defined in
Item 402(a)(2) of Regulation S-B under the Exchange Act;
(3) all of such directors and executive officers as a group; and
(4) each person known to us as having beneficial ownership of more than 5%
of our common stock.
<TABLE>
<CAPTION>
Name and Address of Beneficial Number of Shares Percentage of Shares
Owner(1) Beneficially Owned Beneficially Owned(2)
- ------------------------------- ----------------------------------------
Name and Address of Beneficial Number of Shares Beneficially Percentage of Shares Beneficially
Owner(2) Owned Owned(1)
-------- ----- --------
<S> <C> <C>
Avi Moskowitz(3) 609,693 3.69%
Peter A. Jacobs(4) 205,989 1.24%
David Morris(5) 97,249 .58%
Michael Harwayne (6) 38,366 .23%
Robert J. Levenson (7) 54,809 .33%
Jonathan Seybold(8) 157,464 .95%
Allan Dalfen(9) 9,000 .05%
Fred Lafer(10) 21,923 .13%
Paul and Hannah Lindenblatt(11) 830,446 5.03%
Roth Trust(12) 1,981,446 12.01%
Net Results Holdings, LLC(13) 1,347,687 8.16%
Grato Holdings (14) 798,553 4.84%
All Directors and Executive Officers 1,194,493 7.23%
</TABLE>
- ----------
(1) Percentage of the Company's common stock shares beneficially owned is based
upon 16,500,422 shares of common stock outstanding as of May 2, 2000. Such
number of shares does not include 15,105,922 shares issuable upon the exercise
of warrants and options currently outstanding.
<PAGE>
(2) Except as otherwise provided, the address for all beneficial owners is c/o
Virtual Communities, Inc., 589 Eighth Avenue, New York, NY 10018. Except as
indicated in the footnotes to this table and pursuant to applicable community
property laws, the beneficial owners have sole voting and investment power with
respect to all shares of VCI common stock set forth opposite their names.
(3) Includes options exercisable for 301,559 shares of our common stock
exercisable within 60 days after May 2, 2000, including 23,017 options held by
Helen Moskowitz, wife of Avi Moskowitz. Also includes warrants exercisable for
161,140 shares of common stock exercisable within 60 days after May 2,2000. Does
not include 1,981,446 shares of our common stock held by the Roth Trust, of
which Mr. Moskowitz is a potential beneficiary. Mr. Moskowitz disclaims
beneficial ownership of these shares.
(4) Includes options exercisable for 38,362 shares of our common stock and
warrants exercisable for 3,270 shares of common stock exercisable within 60 days
after May 2, 2000. Does not include options exercisable into 69,164 shares not
exercisable within 60 days of May 2, 2000.
(5) Includes options exercisable for 38,362 shares of our common stock
exercisable within 60 days after May 2, 2000. Also includes warrants exercisable
for 58,921 shares of our common stock exercisable within 60 days after May 2,
2000. Does not include options exercisable into 69,164 shares not exercisable
within 60 days of May 2, 2000. Does not include 775,886 shares of our common
stock held by Grato Holdings Limited, which holds the shares on behalf of Ramp
Trustees Limited, trustees of a trust of which Mr. Morris is a potential
beneficiary. Also does not include 286,280 shares of our common stock held by
Business Systems Consultants Ltd., which is controlled by a trust of which Mr.
Morris is a potential beneficiary. Also does not include warrants exercisable
for 22,667 shares of our common stock exercisable within 60 days after May 2,
2000, held by Grato Holding Limited, which is controlled by a trust of which Mr.
Morris is a potential beneficiary. Also does not include warrants exercisable
for 445,913 shares of common stock exercisable within 60 days after May 2, 2000,
held by Business Systems Consultants Ltd., which is controlled by a trust of
which Mr. Morris is a potential beneficiary. Mr. Morris disclaims beneficial
ownership of our common stock held by Grato Holdings Limited and Business
Systems Consultants Ltd., and the warrants to purchase shares of our common
stock held by Grato Holdings Limited and Business Systems Consultants Ltd. The
address for Business Systems Consultants Ltd. is 31-33 Le Pollet Street,
Peterport, Guernsey, Channel Islands GY1 4JG.
(6) Does not include options exercisable into 176,734 additional shares of our
common stock held by Mr. Harwayne not exercisable prior to June 10, 2000.
(7) Does not include options exercisable into 50,000 shares of common stock
granted in November 1999 not exercisable within 60 days of May 2, 2000.
(8) Includes 70,732 shares held by the Seybold Family Trust immediately
exercisable warrants to purchase an additional 70,732 shares and options to
purchase 16,000 shares of our common stock. Mr. Seybold is a trustee of such
Trust, the beneficiaries of which are his wife and his children. Does not
include options exercisable into 50,000 shares of common stock granted in
November 1999 not exercisable within 60 days of May 2, 2000. The address of such
trust is P.O. Box 1315 East Sound, Washington 98245. The address of Mr. Seybold
is c/o Virtual Communities, Inc., 589 8th Avenue, New York, New York 10018.
(9) Includes options to purchase 9,000 shares of our common stock. Does not
include options exercisable into 50,000 shares of common stock granted in
<PAGE>
November 1999 not exercisable within 60 days of May 2, 2000.
(10) Does not include options exercisable into 50,000 shares of common stock
granted in November 1999 not exercisable within 60 days of May 2, 2000. Also
does not include 32,886 shares held by three adult children of Mr. Lafer. Mr.
Lafer disclaims beneficial ownership of the shares held by his adult children.
(11) Sister and brother-in-law of Mr. Moskowitz. Mr. Moskowitz disclaims
beneficial ownership of these shares.
(12) The address of the Roth Trust is c/o Line Holdings Ltd., 57-63 Line Wall
Road, Gibraltar. Line Holdings Ltd. holds these shares as trustee of the Roth
Trust. Avi Moskowitz, President and Chief Executive Officer of the Company is a
potential beneficiary of the Roth Trust. Mr. Moskowitz disclaims beneficial
ownership of these shares. Potential beneficiaries thereof currently have no
voting power nor the power to direct the vote of such shares nor any investment
power, including the power to dispose or direct the disposition of the shares
that are held by the trusts. Potential beneficiaries of the trust do not have
the foreseeable right within 60 days to acquire ownership, voting power and/or
investment power over such securities.
(13) Includes warrants exercisable into 72,563 shares of Common Stock held by an
affiliate of Net Results Holdings, LLC ("NRH") exercisable within 60 days after
May 2, 2000. Does not include 133,582 shares of Common Stock held by Harry Fox,
the Chairman and CEO of NRH who is a former director of VCI, nor options
currently exercisable into 19,181 shares of Common Stock exercisable within 60
days after May 2, 2000 which were granted to Mr. Fox in connection with his
service as a VCI director. Also does not include 264,848 shares of Common Stock
transferred by NRH in March 2000 to certain officers, directors and employees of
NRH. The address of NRH is 151 West 25th Street, New York, New York 10001.
(14) Shares are held by Grato Holdings Limited on behalf of Ramp Trustees
Limited, trustees of a trust of which Mr. Morris is a potential beneficiary.
Potential beneficiaries thereof currently have no voting power nor the power to
direct the vote of such shares nor any investment power, including the power to
dispose or direct the disposition of the shares that are held by the trusts.
Potential beneficiaries of the trust do not have the foreseeable right within 60
days to acquire ownership, voting power and/or investment power over such
securities. Includes warrants exercisable for 22,667 shares of Common Stock
exercisable within 60 days after May 2, 2000. The address for Grato Holdings is
57-63 Line Wall Road, Gibraltar. Grato disclaims beneficial ownership of all
such shares that it holds on behalf of the trust.
DESCRIPTION OF SECURITIES
As of the date of this prospectus, our authorized capital stock consists of
50,000,000 shares of common stock, par value $.01 per share, and 5,000,000
shares of "blank check" preferred stock, par value $.01 per share. No other
classes of capital stock are authorized under our certificate of incorporation.
Common stock
The issued and outstanding shares of our common stock are duly authorized,
validly issued and nonassessable. Holders of the our common stock have no
preemptive, redemption, conversion, subscription or sinking fund rights. The
holders are entitled to receive dividends when and as declared by our board of
directors out of funds legally available for payment. Upon our liquidation,
dissolution or winding up, the holders of our common stock may share ratably in
<PAGE>
our assets, subject to the rights and preferences of any outstanding preferred
stock.
Each holder of our common stock is entitled to one vote per share of common
stock held of record by such holder. Our common stockholders do not have any
right to cumulate votes for the election of our directors.
Preferred Stock
Our board of directors has the power, without further vote of the
stockholders, to authorize the issuance of up to 5,000,000 shares of preferred
stock and to fix the terms, limitations, rights, privileges and preferences of
any of these shares of preferred stock. This power includes the ability to
establish voting, dividend, redemption, conversion, liquidation and other rights
and preferences for any or these shares. There are presently no shares of
preferred stock outstanding.
Class A and Class B Redeemable Warrants
Class A Warrants. Each class A warrant entitles the registered holder to
purchase one share of common stock and one class B warrant at an exercise price
of $6.50 at any time until 5:00 P.M., New York City time, on February 10, 2002.
The class A warrants are redeemable on 30 days' written notice at a redemption
price of $.05 per class A warrant if the "closing price" of our common stock for
any 30 consecutive trading days ending within 15 days of the notice of
redemption averages in excess of $9.10 per share. "Closing price" means the
closing bid price if listed in the over-the-counter market on NASDAQ or
otherwise or the closing sale price if listed on the NASDAQ National Market or a
national securities exchange. All class A warrants must be redeemed if any are
redeemed.
Class B Warrants. Each class B warrants entitles the registered holder to
purchase one share of common stock at an exercise price of $8.75 at any time
after issuance until 5:00 P.M. New York City Time, on February 10, 2002. The
class B warrants are redeemable on 30 days' written notice at a redemption price
of $.05 per class B warrants, if the closing price (as defined above) of our
common stock for any 30 consecutive trading days ending within 15 days of the
notice of redemption averages in excess of $12.25 per share. All class B
warrants must be redeemed if any are redeemed.
General. The warrants provide for adjustment of the exercise price and for
a change in the number of shares issuable upon exercise to protect holders
against dilution in the event of a stock dividend, stock split, combination or
reclassification of the common stock or upon issuance of shares of common stock
at prices lower than the market price of the common stock, with exceptions.
We have reserved from our authorized but unissued shares a sufficient
number of shares of common stock for issuance upon the exercise of the class A
warrants and the class B warrants. Shares issued upon exercise of warrants and
payment in accordance with the terms of the warrants will be fully paid and
non-assessable.
For the life of the warrants, the holders thereof have the opportunity to
profit from a rise in the market value of the common stock, with a resulting
dilution in the interest of all other stockholders. So long as the warrants are
outstanding, the terms on which we could obtain additional capital may be
adversely affected. The holders of the warrants might be expected to exercise
them at a time when we would, in all likelihood, be able to obtain any needed
capital by a new offering of securities on terms more favorable than those
<PAGE>
provided for by the warrants.
The warrants do not confer upon the warrantholder any voting or other
rights of a stockholder of the company. Upon notice to the warrantholders, we
have the right to reduce the exercise price or extend the expiration date of the
warrants.
Unit Purchase Options
We granted to the underwriter and a finder in connection with our initial
public offering a unit purchase option and a finder's unit purchase option,
respectively, to purchase up to an aggregate of 120,000 units. These units
consist of one share of common stock, one redeemable class A warrant and one
redeemable class B warrants. The class A warrants and the class B warrants
included in the unit purchase option and the finder's unit purchase option will
only be subject to redemption at any time after the unit purchase option and the
finder's unit purchase option have been exercised and the underlying warrants
are outstanding. The unit purchase option and the finder's unit purchase option
are exercisable during the three-year period commencing February 11, 1999 at an
exercise price of $6.00 per unit (120% of the initial public offering price)
subject to adjustment to protect against dilution.
Transfer Agent
American Stock Transfer & Trust Company, New York, New York, serves as
transfer agent for the shares of common stock and warrant agent for the
warrants.
Registration Rights
We have agreed upon request to register under the Securities Act during the
four-year period commencing February 11, 1998, on two separate occasions, the
securities issuable upon exercise of the unit purchase option and the finder's
unit purchase option, the initial such registration to be at our expense and the
second at the expense of the holders. We have also granted "c" registration
rights to holders of the unit purchase option and finder's unit purchase option.
In addition, we have granted registration rights to Intercoastal to register
2,000,000 shares underlying warrants granted to Intercoastal in connection with
a private placement in April 2000.
INDEMNIFICATION AND INSURANCE
We indemnify and hold harmless our and our subsidiaries' present and former
officers and directors, including former officers and directors of Heuristic
Development Group and pre-merger Virtual Communities, Inc., and its
subsidiaries, against any costs or expenses to the fullest extent permitted by
Delaware law. Also, the rights of present and former directors and officers to
indemnification under the respective companies' former certificates of
incorporation, bylaws and similar documents will continue in force for a period
of six years after October 29, 1999, the effective time of the merger of the
companies. For a period of six years after the effective time of the merger, we
will maintain in effect policies of directors' and officers' liability insurance
covering acts and omissions occurring prior to the effective time of the merger
for the benefit of present and former directors and officers, on terms no less
favorable than those provided by the companies prior to their merger.
LEGAL MATTERS
<PAGE>
The validity of our common stock to be issued upon exercise of the
warrants, if and when such warrants are exercised, will be passed upon for us by
Wuersch & Gering LLP.
EXPERTS
The consolidated financial statements of Virtual Communities, Inc., as of
December 31, 1999 and for each of the two years then ended included in this
prospectus and elsewhere in the registration statement have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
report with respect thereto and are included herein in reliance upon the
authority of said firm as experts in giving said report. Reference is made to
said report, which includes an explanatory paragraph with respect to the
uncertainty regarding our ability to continue as a going concern as discussed in
Note 1 to the financial statements.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements and other
information with the Securities and Exchange Commission. You may read and copy
any reports, statements or other information that we file at the Commission's
public reference rooms in Washington, D.C., New York, New York and Chicago,
Illinois. Please call the Commission at 1-800-SEC-0330 for further information
on the public reference rooms. Our public filings are also available to the
public from commercial document retrieval services and at the Web site
maintained by the Commission at "http://www.sec.gov." Reports, proxy statements
and other information concerning our company also may be inspected at the
offices of the National Association of Securities Dealers, Inc., 1735 K Street,
N.W., Washington, D.C. 20006.
We have filed with the Securities and Exchange Commission a registration
statement on Form SB2 with respect to the securities to be issued in the
offering described in this prospectus. This prospectus is a part of that
registration statement. As allowed by Commission rules, this prospectus does not
contain all the information that stockholders can find in the registration
statement or the exhibits to the registration statement.
DESCRIPTION OF BUSINESS
Virtual Communities, Inc. (the "Company") is a developer and publisher of
online business-to-business and business-to-consumer communities. Through its
proprietary Community Management Solution(TM) (CMS), the Company designs and
develops web-based vertical communities containing a comprehensive suite of
products and services that includes web publishing and content management
software, integrated e-commerce solutions and best-of-breed interactive
community features. The Company also offers its CMS clients with editorial and
marketing services and an advertising sales network. The Company believes CMS
offers a rapid, 90-day, one-stop solution for creating an online community that
contains all the web tools required for managing content, conducting e-commerce
and attracting and retaining online visitors.
The central component of CMS is Cortext(TM) Web Publishing and Content
Management Software ("Cortext"). Cortext is "object-oriented" software
application that allows various components of a web site, including articles,
images, sounds and other web resources, to be easily manipulated through a
database containing such components. In February 2000, the Company acquired a
majority stake in Cortext, Ltd., an Israeli software developer that developed
the Cortext Software. Cortext, which is based on XML standards, provides a rich
<PAGE>
environment for users to create and publish information to the Internet.
CMS also includes an array of software and programming modules that are
used to create dynamic online communities. These modules include online shopping
malls, industry exchanges, auctions, multimedia content, personal email, chat,
classifieds, message boards and forums, instant messaging, polls, quizzes and
sweepstakes. CMS eliminates the need for Web site publishers to enter into
separate relationships with multiple vendors for software licenses and services
required to create and maintain vertical communities. The Company provides
several of its CMS features through license arrangements with third party
service providers including, but not limited to Intershop Communications, Inc.,
Accuweather, Inc., homestead.com Incorporated, iMediation, Inc, Netgravity,
Inc., OpenSite Technologies, Inc., Talk City, Inc. and Tribal Voice, Inc. We
also develop our own programming tools and visitor retention elements through a
subsidiary of the Company located in Israel and which is engaged in software
development and programming and design services on behalf of the Company.
We market and sell CMS directly in the U.S., and in the European Community
through Vanco Limited, a U.K. based technology company with whom we entered into
an agreement in February 2000, pursuant to which Vanco provides us with CMS
marketing and technical services. We intend to develop similar relationships
with third parties in other geographic regions in order to extend our marketing
and CMS deployment activities in those regions. The Company has entered into
definitive agreements for the sale of four CMS systems since commencing CMS
sales in August 1999 and is currently negotiating the sale of several additional
CMS installations. We currently take a portion of our fee in the equity of a
client who secures our CMS services. We also provide hosting and maintenance for
our CMS customers, which commence following the completion of our design and
development services on their behalf. Approximately 19% of our revenues derived
from CMS sales for the year ended December 31, 1999.
In addition to our CMS business, we publish five online communities owned by us
and targeted to members of U.S. demographic groups with interests in their
historical ethnic backgrounds. These online communities include: Virtual
Jerusalem (www.virtualjerusalem.com), a leading Internet site containing Jewish
and Israel related content that has been in operation since 1996, Virtual
HolyLand (www.virtualholyland.com), targeted to the Evangelical Christian
community and launched in late 1998, and Virtual Ireland
(www.virtualireland.com), Virtual Italy (www.virtualitaly.com) and Virtual India
(www.virtualindia.com), which were developed and launched during 1999. The
Company's advertisers on its web sites include Continental Airlines, AerLingus
Airlines, Alitalia Airlines, Bailey's Irish Cream, Carmel Wines, The Royal Wine
Company and the Christian Broadcast Network. We are currently adding shopping
malls and store-building capabilities to our own online communities.
The Company, a Delaware corporation formerly known as Heuristic Development
Group, Inc. ("HDG"), consummated a merger (the "Merger") with Virtual
Communities, Inc. ("VCI"), also a Delaware corporation, in October 1999. Prior
to the Merger, we were a development stage company organized to develop, design
and market fitness-related products. In 1999, we decided to pursue a strategy of
acquisition of an existing company culminating in the merger with VCI. VCI was
organized in 1996 to develop and operate online communities on the Web targeted
to specific ethnic groups. After the Merger, we changed our name to Virtual
Communities, Inc., to reflect that our Company's business is now the development
and operation of online communities and related services for third parties and
the publishing of our own online communities.
<PAGE>
BACKGROUND
Prior to the merger, we were a development stage company originally
organized to research, develop, design and market fitness-related products. Our
primary product was the IntelliFit System, a proprietary computerized system
that generates personalized exercise prescriptions and tracks and records
fitness programs. Due to disappointing acceptance of the IntelliFit System, our
management decided to pursue a strategy of investment in or acquisition of an
existing company, culminating in the merger with VCI. Now that VCI has merged
with our wholly-owned subsidiary, our business is that of VCI. In March 2000, we
merged this wholly owned subsidiary into the parent company.
Accordingly, when we discuss "our" business activities for time periods
prior to the merger in this and other sections of this Registration Statement,
we are referring to the business of VCI prior to the merger unless we expressly
state otherwise.
VCI was incorporated in August 1996 as Virtual Jerusalem Ltd., Inc. It was
founded to develop, acquire and operate online communities on the Web targeted
to members of demographic groups with interests in their historical ethnic
backgrounds and who want to share information with other members with like
interests. In June 1997, VCI acquired substantially all of the assets and
outstanding shares of Virtual Communities Israel Ltd., formerly called Virtual
Jerusalem Ltd. ("VCIL"). Virtual Jerusalem Ltd., was an Israeli corporation
formed in 1996 by the founders of VCI that developed and published an Internet
Web site called Virtual Jerusalem. VCIL currently develops and maintains the
Company's online communities and performs certain programming, design, software
development and web maintenance services on behalf of the Company pursuant to a
Cost Plus Agreement and certain general and administrative duties on behalf of
the Company pursuant to a Financial Services Agreement between the entities.
As a result of our experience in developing and publishing five online
communities from 1996 through 1999 and creating over one hundred Web sites for
content partners, we began offering our CMS design and development services and
software to unrelated third party Web site publishers in July 1999. Although we
historically provided Web site design development and hosting and maintenance
services to our content partners in exchange, in most cases, for access to
content for our online communities, offering CMS customized software and
services to third parties for a fee represents a relatively new business for us.
CMS offers customers a single source technology and service solution,
including scalable content management and publishing software, cutting-edge e-
commerce functionality, best-of-breed community retention features such as chat,
free-email, polls, quizzes, and forums, plus community design and development
services, ongoing maintenance, hosting and 24/7 support. CMS includes Cortext
web publishing and content management software and numerous interactive
elements, some of which we have developed through our VCIL subsidiary and some
of which are licensed from third parties as described in more detail below.
Since mid 1999, we have been increasingly focused on adding software tools and
services to CMS to make it a complete solution required by Web publishers - be
they businesses or other organizations - to manage the information,
advertisements and other interactive elements that make up the content of their
Web sites. We have entered into four CMS agreements with third parties to date
for the provision of these services, and are currently negotiating with several
other parties to provide these services on a fee basis and have received
interest from other entities for CMS. (See "Community Management Solution".)
In addition to marketing CMS and engaging in design, development and
<PAGE>
maintenance activities for our CMS clients, we currently operate five online
communities: Virtual Jerusalem (www.virtualjerusalem.com), Virtual HolyLand
(www.virtualholyland.com), Virtual Ireland (www.virtualireland.com), Virtual
Italy (www.virtualitaly.com). and Virtual India (www.virtualindia.com). Rather
than create our own content, our Web sites aggregate comprehensive news and a
variety of interactive and community-building elements selected from existing
online entities (called "content partners") with which we enter into
relationships. We wrap the content we obtain from these content partners with
additional features and services to create a cohesive Web environment targeted
to a specific demographic profile. In consideration for the use of such content,
we provide our content partners with a variety of benefits, including links to
their Web sites, a portion of advertising revenues and interactive services.
Market for Common Equity and Related Stockholder Matters
Our common stock is traded on the Nasdaq SmallCap Market under the trading
symbol "VCIX." Prior to our recent merger on October 29, 1999, our stock traded
under the trading symbol "IFIT." As of May 2000, we had approximately 630
stockholders of record. The following table sets forth the high and low bid
quotations for our stock, as well as the closing bid quotation, as reported on
the Nasdaq SmallCap Market for the periods indicated.
<TABLE>
<CAPTION>
High Low Close
---- --- -----
<S> <C> <C> <C>
2000
1st Quarter ............... $8.8125 $2.75 $7.4375
1999
1st Quarter ............... $1.625 $0.75 $1.469
2nd Quarter ............... 5.125 1.50 3.188
3rd Quarter ............... 4.50 2.56 4.375
4th Quarter ............... 4.312 3.00 3.25
1998
1st Quarter ............... 2.25 .875 .875
2nd Quarter ............... .875 .50 .688
3rd Quarter ............... 1.125 .50 .688
4th Quarter ............... 1.50 .981 1.00
</TABLE>
INDUSTRY BACKGROUND
Growth of the Internet
The Internet has emerged as a global medium, enabling millions of people
worldwide to share information, communicate and conduct business electronically.
International Data Corporation ("IDC") estimates that the number of Web users
will grow from approximately 142 million worldwide in 1998 to approximately 502
million worldwide by the end of 2002. This growth is expected to be driven by
the large and growing number of personal computers ("PCs") installed in homes
and offices, the decreasing cost of PCs, easier, faster and cheaper access to
the Internet, improvements in network infrastructure, the proliferation of
Internet content and the increasing familiarity with and acceptance of the
Internet by businesses and consumers. The Internet possesses a number of unique
characteristics that differentiate it from traditional media: lack of geographic
or temporal limitations; real-time access to dynamic and interactive content;
and instantaneous communication with a single individual or with groups of
individuals. As a result of these characteristics, Web usage is expected to
<PAGE>
continue to grow rapidly. The proliferation of users, combined with the Web's
reach and lower cost of marketing, has created a powerful channel for conducting
commerce, marketing and advertising.
IDC also estimates that revenue generated from Internet commerce will
exceed $1.3 trillion by 2003. As the Internet has become more accessible,
functional and widely used, it has emerged as a primary business channel.
Businesses are increasingly using the Web both for marketing and distribution of
their services and products and to communicate and conduct business with their
customers and others.
IDC estimates that the number of web pages will grow from 925 million in
1998 to 13.1 billion in 2003. This dramatic growth in content has created a
strong need for solutions to content management problems that will allow for the
rapid and effective delivery of information. These solutions must accommodate
the volume, complexity and variability of web content. In addition, these
solutions must be scalable and allow for use by large numbers of content
contributors. In order to address these needs, companies are increasingly
demanding software systems that automate the workflow of content creation,
management and delivery.
In addition, in an effort to create a more engaging online presence,
companies are seeking to deliver dynamic content and interactive services that
will ensure that visitors will become loyal to their sites, spend time on them
while interacting with other like-minded visitors and engage in e-commerce
activities.
The growth of online communities and free Internet services
Traditional use of the Web has consisted largely of one-way communications
in which users self select and view different Web sites containing
professionally created content on topics of general interest such as news,
sports and weather. However, there is a growing demand for online community
sites where users can publish content and engage in community activities
including home page building, and interactive discussion or "chat" and forums.
In addition, many users are interested in gaining access to other free services
for entertainment, such as interactive games or video, or for their utility to
the end user, such as e-mail, auction services or purchases through an online
store. Online communities provide a medium for such access and interaction.
These communities generate significant volumes of traffic, as visitors tend to
return to those sites where they have established an online presence or have
become familiar with the services. According to statistics published by Media
Metrix, online community sites have recently been one of the fastest growing
sectors of the Web.
E-commerce and advertising
The growing acceptance of the Web represents a significant opportunity for
businesses to conduct electronic commerce ("e-commerce") over the Internet. The
Internet allows companies to develop one-to-one relationships with customers
worldwide without making significant investments in traditional infrastructure
such as retail outlets, distribution networks and sales personnel. The Internet
is an increasingly significant global medium for e-commerce. According to IDC,
transactions on the Internet are expected to increase from approximately $32
billion in 1998 to approximately $426 billion in 2002, with the number of users
that are buyers of products and services rising from 26% to 40% in the same
period.
Increases in consumer purchases on the Internet are expected to be a
<PAGE>
significant factor in the growth of e-commerce. Online shopping is a shopping
experience that offers convenience to the shopper. An online consumer's ability
to quickly comparison shop is greatly enhanced by the ability to quickly access
multiple retailers via the Internet. Products commonly sold on the Internet
include items such as software, books, music CDs, videocassettes, and airline
tickets. More recently, businesses have begun selling specialty retail products,
service items and large ticket household consumer goods, as Internet usage and
familiarity has increased.
According to Forrester Research, total online retail sales in the U.S. are
expected to increase from $7.8 billion in 1998 to $76.3 billion in 2002,
representing a compound annual growth rate of 76.9%. Forrester Research also
projects that the number of U.S. households that shop online will increase from
8.7 million in 1998 to 30.3 million in 2002.
Growth in the Web has also created an important new advertising channel.
Tools not available in traditional advertising media, such as real-time
measurement of "click-throughs" on advertising banners, further increase the
attractiveness of Web advertising by giving advertisers instant feedback on
campaigns. Jupiter Communications projects that the dollar value of advertising
on the Web is expected to increase from approximately $3.0 billion in 1999 to
approximately $7.7 billion in 2002. To date, businesses and advertisers have
typically used traditional navigational sites and professionally created content
sites for the sale and marketing of their products and services online.
Online community sites, however, provide more detailed demographic data and
self-selected groups of consumers with an affinity for particular products.
Advertisers can thus more easily deliver targeted messages in a cost-effective
manner on online community sites.
OUR STRATEGY
CMS Business
In August 1999, our Company decided to re-focus its business model and
leverage its experience in building targeted, vertical online communities. The
Company began marketing its Community Management Solution (CMS), a comprehensive
software and services solution for developing and maintaining web-based
communities. A significant component of this solution, which allows us to offer
our comprehensive community building solution is our acquisition of Cortext
Ltd., an Israeli based company that develops proprietary content management
software technology. Cortext software functions as the platform of CMS.
Cortext's cutting edge technology allows publishers to easily update their
online communities without the need for programmers. The software's object-
oriented architecture, together with its powerful intuitive scripting language,
meets the dynamic requirements of the challenging environment of an online
community. Using Cortext software as our platform for CMS, we are able to
deliver a complete solution for building online communities in less than 90
days.
Our management believes that as competition for Internet viewers increases,
Web publishers will need to add increasing amounts of content, services and
interactive elements to their vertical communities to attract and maintain
viewers. Increased competition will also require them to offer a wider array of
services that enable their users to interact with other users, through chat
rooms, message boards, games, free e-mail services and personal home pages. Our
management believes that managing these communities will likely require
sophisticated software and Web maintenance technologies, including content
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management systems, Web site registration elements, statistical reporting
services and advertising management and placement software.
Based on our projection of the increased complexity of Web publishers'
sites, we believe that a growing number of such publishers will prefer a "one
stop" solution for their online needs that offers a comprehensive package of
enabling and enhancing tools, including development and maintenance options,
content management software and a flexible choice of interactive elements that
will serve as retention elements for their visitors. We believe that companies
offering such services will provide Web publishers with the ability to avoid the
relatively high cost associated with entering into numerous individual license
and service agreements with multiple parties to obtain such services.
Online Communities Business
Our strategy for our five online communities groups that we currently own
and publish, and which are targeted to affinity groups, is to further develop
them by enhancing them with Cortext web publishing and content management
software and providing them with additional "Best of the Web" content,
interactive elements and e-commerce capabilities. In so doing, we expect that we
can further increase the value of these online communities, add additional
visitors and registered users of them and increase revenues derived from each of
them through advertising banner and sponsorship sales and commissions resulting
from e-commerce transactions.
We have selected our target groups around which to create communities based
on their overall size, Internet use and socioeconomic level. These elements help
ensure that the group will be attractive to potential online advertisers and e-
commerce vendors as well as future partners or acquirers of the same. Our
management thinks that there is a substantial opportunity to generate revenue
from e-commerce and advertising that is focused on target groups with these
characteristics which will make these Web properties attractive to potential
purchasers of the same.
Our goal is to further develop these communities into fully mature niche
web properties that we will then be able to sell to third parties interested in
acquiring an online community targeted to a specific segment of the population
with whom they currently have a relationship. Such parties may be interested in
acquiring one of our communities for strategic reasons in the event they
currently publish another site targeted to such community and wish to increase
their market share of the same. An Internet service provider or online business
that wishes to obtain a content-rich portal for its current users may also be
interested in acquiring one of our online communities. An entity that may be
interested in one of our online communities could be one that wishes to create a
substantial e-commerce business tailored to one of our target population groups
and wishes to consolidate a Web entity that possesses large numbers of members
of that community with its own Web site.
The Company may also decide to enter into strategic relationships with
third parties interested in acquiring a percentage ownership in a holding
company that operates one of our communities. In any sale or relationship that
the Company enters into regarding its published communities, the Company intends
to have the same enter into an agreement with the Company for the purpose of
providing the same with our CMS and editorial services.
Our Revenue Sources
While advertising and hosting have contributed approximately 70% of our
1999 revenues we anticipate that the majority of our revenues in 2000 will
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be derived from our CMS design and development services. We project that our Web
site design and development services revenues will become the principal revenue
source for the Company. In addition, we project that our advertising revenues
will also grow significantly.
Below is a more detailed description of our three projected revenue
streams.
CMS Business
We offer CMS design and development services and software to third party
Web publishers on a fee basis. We currently charge for CMS on a basis that
provides for half of payment to be in the form of equity in the client's
business. We offer CMS services on a flexible or customized "modular" basis,
allowing Web site publishers to select individual modules for their specific
needs in addition to the basic Cortext web publishing and content management
software. CMS customers may also obtain additional services and components from
the Company such as editorial and marketing services and licenses for software
specifically required for their particular businesses or needs. To provide the
standard suite of modules to CMS customers, we arrange third party licenses for
them or grant sublicenses for software that we previously licensed from Internet
service providers. In order to deliver design and development services and
software programs to our CMS clients, one of our subsidiaries, Virtual
Communities Israel, Ltd., maintains a staff of Internet designers, programmers
and software developers who create, update and maintain CMS for our clients.
To date we have entered into four CMS agreements with third parties,
including one through our relationship with Vanco Limited (see "Our Marketing
Efforts - CMS Business" below). At the same time we enter into a design and
development agreement with our CMS clients, we also enter into a second
agreement with them for the provision of hosting and maintenance services
following the completion of CMS development for them. The delivery of CMS is
pursuant to a detailed site specification document delivered to the client
within 30 days of the execution of the CMS development agreement. Typical
delivery of deliverables under the site specification is within 30 and 60 days
from the client's acceptance of the specification. Pursuant to our CMS
agreement, we grant a limited, non-exclusive, worldwide, perpetual royalty-free,
nontransferable license to use CMS and its various modules which is installed on
a client's existing site or on a new site designed by the Company. We also
provide licenses for a variety of programming elements designed by us and
interactive elements provided by third parties. We provide for the completion of
CMS within a 90 day period and the term of our maintenance agreements are for
one year automatically renewed for additional one-year terms unless either party
elects to terminate the same. Our CMS agreements include warranties extending
from 60 days to 6 months on CMS following completion of the development thereof
and in one instance, the Company has agreed to refund installment payments made
in the event the CMS client does not accept delivery of the CMS deliverables.
Advertising
Our management thinks that our Web communities have an advertising
advantage over general Web sites in that their target audiences are clearly
defined, well educated and have excess disposable income. These characteristics
are the type of demographic profile that advertisers traditionally seek. We
currently have agreements with a number of advertisers, including: Continental
Airlines, Aer Lingus, Alitalia, Vitamin Shoppe Industries and Econophone.
Current average advertising prices on the Virtual Jerusalem Web community
are approximately $10 to $25 cost-per-thousand page views ("CPM"), depending
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upon the length of the advertisement. To date, our typical advertisement
agreement provides for a three to six month term.
We recently shifted our advertising focus by trying to gather sponsor
advertisers who would sponsor a whole page or channel. These sponsors would
enter into a yearlong commitment, rather than the short-term advertisement
contracts currently provided by us. Our management thinks that these sponsors
should be attracted to these sponsorship offerings since they do not have to
share our advertising space with other advertisers. In addition, this format
provides increased click-through rates while providing more brand building
opportunities for the sponsor. Several of our most recent advertisers entered
into six to twelve month sponsor agreements with us.
E-commerce
We have a license agreement with Intershop Communications, Inc. whereby we
are creating online shopping centers for our communities and offer our CMS
customers the ability to create their own stores and enable merchant partners to
build their own stores within the client's online mall using software developed
by Intershop and customized by the Company. (See "Licenses, Service Agreements
and Trademarks.") To date, we have introduced Intershop-powered malls on our
Virtual Jerusalem, Virtual Ireland and Virtual Italy communities.
We believe that E-commerce vendors will be attracted to our online
communities since each community targets a well-defined, passionate demographic
group. At the same time, our users expect the desired e-commerce vendors to be
attracted to their community due to our unique content. We intend to create
stronger e-commerce relationships with our members by gathering information
about registered users' personal buying habits and "purchase events," such as
birthdays, anniversaries and holidays, and targeting those users with direct e-
mails sent in advance of the purchase events.
To generate e-commerce revenue, we intend on entering into agreements with
vendors that will create their own stores using Intershop's software licensed to
us, which stores will be part of shopping malls on our communities. We hope to
receive a fee of $175 to $550 per month plus a 10% commission as a percentage of
the total transaction amounts made on a store from vendors who create stores on
our communities. We anticipate that each community's e-commerce opportunities
will derive from both global vendors, such as Baileys Irish Cream which has
created a store on Virtual Ireland, as well as local vendors that are
particularly focused on individual communities, such as Yenta's Unique Paper
Judaica on our Virtual Jerusalem community.
Our Marketing Efforts
CMS Business
The market for CMS includes professional and trade associations, niche
publications and entrepreneurs that are potentially interested in creating a
targeted vertical online community, either business-to-business and business-to-
consumer related. There are approximately 130,000 professional and trade
organizations and 20,000 targeted niche publications in the United States alone.
The Gartner group estimates that the 300 current business-to-business online
marketplaces as of December 1999 will grow to 10,000 such marketplaces by 2002.
We are currently marketing CMS in a number of different ways. We have
signed an exclusive agreement with Vanco Limited, the leading independent
network services company in Europe, to distribute CMS in the U.K. and eventually
in the rest of the European Community (see below). We intend to replicate this
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relationship in additional geographic regions. We recently opened a second U.S.
office in Los Angeles to support and maintain CMS sales and operations on the
West Coast. We continue to expand our New York based CMS sales force and
operations team. We have also placed advertisements in a number of major "new
media" magazines including Business 2.0, Industry Standard and Red Herring.
In February 2000, VCI Community Solutions, Inc., a subsidiary of the
Company, entered into a Representation and Technical Support Agreement with
Vanco Consulting Limited, a U.K. company that is a subsidiary of Vanco Ltd., a
European independent network services company ("Vanco"). Pursuant to the
agreement, Vanco markets and provides technical development and support services
for the Company in the European Community in return for which Vanco has received
exclusivity for the right to market and support CMS in E.U. countries. The
Agreement is for a two-year period provided that the Company sells a minimum of
two CMS Systems to parties introduced by Vanco during the first six months of
the term and eight CMS systems during the first year of the term. Vanco will
receive a fixed fee from the Company for each Company client in the EU for whom
it provides marketing, development and technical support services in the form of
a percentage of the cash revenues and equity received by the Company from its
customers. All of the equity received from such customers introduced by Vanco to
the Company will be placed in escrow on behalf of the parties pending a decision
by them to form a joint venture entity within a year from the date of the
agreement. In the event the parties do not do so, the equity will be distributed
60% to the Company and 40% to Vanco.
In addition to its marketing duties under the agreement, Vanco will be
responsible for coordinating the development of an introduced party's online
community project, providing design and programming services, technical support,
training and back up services. Vanco will also be responsible for acquiring all
components of the network structure required to host, operate and back up the
introduced parties' communities with the exception of servers that shall be
provided by VCI. Vanco will also provide 24/7 emergency support lines. VCI is
responsible for providing training to Vanco staff and marketing and technical
consultations and documentation.
Online Communities
We currently market our online communities by:
o engaging in comprehensive advertising campaigns, including print
advertisements, radio spots, direct mail and online advertising, designed
to introduce each of our Web sites to our targeted audience in the United
States;
o disseminating press releases to announce the launch of our new Web sites,
additional features and the addition of new content partners; and
o contracting with our content partners to publicize their affiliation with
our Web sites to their constituent organizations and members, and
encouraging these partners to link their Web sites to our Web sites (e.g.,
the International Christian Embassy in Jerusalem created a link to Virtual
HolyLand).
o indexing our Web sites on the Internet's major search engines.
Specific marketing efforts for Virtual Jerusalem
We have a multi-month significant keyword campaign for the Virtual
Jerusalem Web site on Yahoo! and a major print campaign that includes the
placement of full-page advertisements in most major Jewish weekly and monthly
publications across the United States.
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Specific marketing efforts for Virtual HolyLand
The marketing campaign for Virtual HolyLand includes online, print and
radio advertisements in well known Christian Web sites, magazines and radio
shows including that of Pat Boone, a well-known Christian entertainer who has
served as official spokesperson for Virtual HolyLand in the past, promoting
Virtual Holyland at trade shows and on his nationally syndicated radio program
in consideration for a monthly fee.
Specific marketing efforts for Virtual Ireland
The marketing campaign for Virtual Ireland includes online, print and
television advertisements in an effort to introduce this Web site to the Irish
community in the U.S. during the third and fourth quarters of 1999. We also
sponsor sweepstakes on the Virtual Ireland site for free trips to Ireland in
order to encourage registration on the site.
Specific marketing efforts for Virtual Italy and Virtual India
Marketing campaigns for Virtual Italy and India, to be re-launched in the
second and third quarters of 2000, respectively, will include newspaper and
other print and online advertisements, promotions and grass roots efforts with
organizations in the Italian American and Indian communities, respectively.
Competition
CMS Business
To create vertical online communities, organizations, and traditional
offline businesses, entrepreneurs are presented with a number of choices. They
can select a web development firm, Application Service Provider, ("ASP"),
content publishing software house and a host of other consulting services to
provide a solution to their Web needs. To create a robust community requires
building a Web presence that will generate repeat traffic, create member
registrations, provide targeted and timely content and allow for advertising and
revenue generating e-commerce opportunity. A potential CMS client needs to reach
its market quickly in a cost-efficient manner. In such circumstances outsourcing
an online community to multiple vendors or developing the same in-house is a
costly and time-consuming process requiring $2-4 million and 6-12 months.
CMS provides a significant advantage over its competitors in this regard.
CMS provides a complete, single-source solution to creating, developing and
managing robust online communities. We believe that our fee, split between cash
and equity, is attractively priced to be competitive with other providers of
content management software and community building services. We also believe
that our ability to commit to creating online communities within a 90-day period
provides us with a strong competitive edge due to the desire of potential
clients to create communities as quickly as possible.
We face competition from a number of sources, including potential entities
that perform Web site development services in-house or contract with others for
such services. These sources include Web site service boutique firms, including
Vignette Ltd., a British company, OpenMarket, Inc., a Massachusetts company,
Interwoven, a U.S. company, on-line services companies, advertising agencies,
direct access Internet and Internet-services and access providers as well as
specialized and integrated marketing communication firms, all of which are
entering the Web site design and development market in varying degrees. Many of
our competitors or potential competitors have longer operating histories, longer
<PAGE>
client relationships and significantly greater financial, management,
technological, development, sales, marketing and other resources than we have.
Online Communities
As described below, we have a variety of competitors for each of our
communities and for each of the markets in which these entities operate. In
addition, we acknowledge that there are many other Internet companies, such as
theglobe.com, Geocities and Xoom.com, that attract significant numbers of
registered users to their "community" Web sites that may compete for our
potential users, registrants, content partners, advertisers, e-commerce vendors
and sponsors. However, our management thinks that most of these Web sites focus
primarily on providing free personal web pages to their users and do not offer
the same level of a targeted demographics and information that our Web sites
offer. Moreover, our management thinks that Web sites like ivillage.com target
communities that are so broad (e.g., women) that focused e-commerce and
advertising may become difficult.
Competitors to Virtual Jerusalem
We have numerous competitors in the Jewish and Israeli Web markets,
including, but not limited to: Jewish Communities On-Line (on America OnLine);
JAN (wwwjcnl8.com; general commercial Jewish Web sites); Shamash
(www.shamash.org; a non-profit Jewish communal network); Shema Yisrael
(www.shemayisrael.co.il; a non-profit Ultra Orthodox site); and the Jerusalem
Post (jpost.co.il; the on-line edition of the newspaper).
Competitors to Virtual HolyLand
In the Evangelical Christian market, our primary competitors are
crosswalk.com (published by Didax, Inc.), Jesus2000.com, cbn.com (published by
the Christian broadcasting Network) and other Web sites published by ministries
and evangelists.
Competitors to Virtual Ireland
Our competition for Virtual Ireland include The Irish Times Web site
(www.ireland.com), Local Ireland (www.local.ie; a governmental Web site financed
in part by Telecom Eireann), Ask Ireland (sponsored by the Irish government) and
Touchtel's tourist information site (www.goireland.com). Other competitive Web
sites include paddynet.com, irishabroad.com and celtic.com containing local news
and free e-mail services.
Competitors to Virtual Italy
Our competition for Virtual Italy includes DolceVita (www.dolcevita.com; a
fashion and travel site), Made in Italy (www.made-in-italy.com; a travel and e-
commerce site) and Virtual Italia (www.virtualitalia.com; a general Italian
interest site).
Competitors to Virtual India
Competitors to virtualindia.com include: Rediff on the Net
(www.rediff.com), an India-oriented online service), India-Today (www.india-
today.com, a news and cultural site) and 123india.com (www.123india.com, a news
information and software site).
Potential future competitors
<PAGE>
In addition to current competitors, given the low barriers to entry, it is
likely that additional competitors will enter our markets in the future, and
that many of such competitors will have substantially greater financial,
management, technological, sales, marketing and other resources than we have. We
cannot assure you that in the future we will be able to compete successfully in
any of our current markets, and our inability to do so would have a material
adverse impact on our business, financial condition and operating results.
Cortext Web Publishing and Content Management Software
The central component of CMS is Cortext Web Publishing and Content
Management Software. (see "Technology Acquisitions"). Cortext provides Web
publishers with the tools required for creating and maintaining a continually
generated Web site. Cortext consists of a suite of products designed to solve
the problems of creating and maintaining Web site publishing by aiding in the
following:
o management of data flow from text form to published Web site form through
to data archiving; . editing data at each stage of the publishing process;
o creating attractive and sophisticated designs in HTML language;
o publishing a Web site as required (up to several times a day); and
o technical administration.
Cortext software can be used to build, edit and manage online communities
and Web sites of all sizes and requires little technical experience to permit
flexible development of Web sites. Cortext "object oriented" software manages
the publication of large quantities of data from PCs to Internet sites. The
application program for Cortext is written in open source code Perl language
software and uses industry standard databases. To help ensure the longevity of
Cortext as a publishing tool, Cortext was developed with an open industry
standard development platform and development tools to reduce development risks.
How Cortext Works
Cortext prompts a user for data on a "User Entry Screen" which is a data
entry screen on a database. This screen allows for the simultaneous entry,
modification and deletion of data while immediately and automatically updating
the associated Web pages of a Web site. By utilizing Cortext software, Web
publishers can directly interact with the database screens via the Internet.
Once data reaches a site by means of a standard database, Cortext allows for the
further editing of the published data by enabling the user to select the
articles, stories, graphics, or other components to be published on the
Internet. The remainder of the data may be kept or archived to be used at a
later date. The selected information is then transferred from the database and
published "live" on the Internet by simply selecting the "publish" key. The
publishing process can take place as many times as required, making it
convenient to publish information that changes daily or even hourly, such as
breaking news.
Cortext software also allows for the easy removal of content published on
the Internet. Content may be saved for future use, by moving it to a viewable
and searchable archive or by simply removing it from the database altogether.
Cortext is designed to make it relatively easy and efficient for Web publishers
to alter their content contributions and dynamically update their online
communities as often as they wish while providing a powerful search and
archiving tool that does not require programming or production resources.
Cortext is also designed to allow the loading of existing text files and
<PAGE>
graphics, in any format, to a database Web site, via an Internet browser. This
freely available Web interface allows for this function to be done from one's
office, home or abroad with password security protection.
In July 1999, we entered into a software license agreement with Cortext
Ltd., an Israeli company that develops content management software. Pursuant to
the agreement, Cortext licensed to us, on a worldwide, royalty free, non-
exclusive, transferable, perpetual and sublicenseable basis, a Web publishing
tool kit software developed by Cortext. We may use the software for our online
communities and for web sites maintained by our content partners. The agreement
also allows us to resell and distribute the software to third parties under
certain conditions. The agreement also calls for Cortext to provide support
services for the software and upgrades to the same if and when developed by
Cortext. In addition, Cortext shall provide development services for the
software to us for a period of six months from the completion of milestones set
forth in the license agreement. We acquired a majority stake in Cortext Ltd. in
February 2000.
Community Management Solution (CMS) Modules
Our management believes that based on programming elements we have
developed to date, existing licenses, future licenses that we intend to obtain
from Internet service providers, equipment we have acquired and Virtual
Communities Israel, Ltd.'s design, programming and software development staff,
we can offer an array of interactive modules to Web publishers through our
Community Management Solution (CMS). We already employ many of these modules
successfully on our own online communities. The modules which we either
currently license, or are in the process of securing licenses for, include:
o Site Search and Polling Engines;
o Sweepstakes Modules;
o Greeting Cards;
o Weather Services;
o E-mail an Article to a Friend;
o Free User E-mail Services;
o Registered User Databases;
o E-mail List Servers;
o Advertising Management Systems;
o Bulletin Boards / Forums;
o Comprehensive Statistics and Traffic Measurement Modules;
o Site Indexing;
o E-Commerce Solutions;
o Chat Services;
o Online Classifieds Advertising;
o Free User Created Home Pages;
o Games Modules;
o Calendars; and
o Auctions.
(See "Proprietary Technology, Trademarks and Licenses" for a description of
licenses presently owned by us.)
To create an online community for a Web publisher, we first create a design
template. Content appropriate to the publisher's community is then inserted into
the design template. A design template could potentially include multimedia
(video or audio), graphics or text components, as required. Headlines, search
boxes or Web links to other content stories can be included on each Web page.
Additional modules, including poll questions, quizzes, greeting cards, chat and
other interactive features may also be added. By integrating data and design, we
<PAGE>
provide Web site publishers with complete control over the presentation of their
content on the Internet.
To complete our Web design and development services, our technical and
support services include system administration, programming integration of all
components of a Web site, project management and hosting of Web sites on our
servers. Frontier Global Inc., pursuant to an agreement, monitors our servers
continuously for connectivity and power with us. In addition, we maintain
Firewall protection and other security services such as secure servers for
financial transactions.
Significant Customers. The five largest community advertising clients
accounted for over 47% of total revenue in 1999, with Continental Airlines
accounting for approximately 22% of such total revenue. The agreement with
Continental Airlines, executed in May 1999, is a barter advertising agreement
largely for airline tickets, equivalent in value to $150,000, in exchange for
advertising placements on the Virtual Jerusalem site for equivalent value. This
contract is currently being renewed at approximately the same value. Due to
shift of business to the CMS sector, Management does not believe that our
success will depend largely upon our ability to broaden and diversify our
advertising base. If we lose advertisers, fail to attract new advertisers or are
forced to reduce advertising rates in order to retain or attract advertising
clients, our business, financial condition and operating results would not be
materially adversely affected.
Licenses, Service Agreements and Trademarks
Cortext
For a detailed description of Cortext, see "Cortext Web Publishing and
Content Management Software" and "Technology Acquisitions."
E-Commerce
In September 1999, we entered into an agreement with Intershop
Communications, Inc., a San Francisco, California based developer of e-commerce
software and applications. Pursuant to the agreement, Intershop granted us a
license to software that allows us to design and build on-line stores from
existing templates and create on-line "malls" for each of our communities and
Community Management Solution customers. The software also allows us to create
online stores for our content partners, or, alternatively, provide them with the
ability to build their own e-commerce solution. Pursuant to the agreement,
Intershop provides us with continuous support services and software upgrades. We
pay Intershop a license fee for the software products and an annual customer
service fee for Intershop's ongoing support services and software upgrades. The
agreement is for a period of three years with automatic renewal for additional
one-year terms unless terminated by either party upon 30 days written notice.
The licenses granted to us under the terms of the agreement survive the
expiration or earlier termination of the agreement.
Advertising Management System
We have a license agreement with NetGravity, Inc., a California company
that provides software-enabling licensees to manage advertising on their Web
sites. Our license is a perpetual, worldwide, non-exclusive and non-transferable
license that enables us to manage advertising on our own Web sites and on Web
sites of our content partners as well as any other Web sites residing on our
servers. In exchange for this license we pay NetGravity a one-time license fee
for the first year plus an additional fee for support services during the first
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and successive years of the license. An optional subscription maintenance for
the second year of the license is also available for an additional fee.
NetGravity may terminate the license upon thirty days notice to us if we are
delinquent in our payments to NetGravity.
Server Maintenance and Support
We have a Master Service Agreement with Frontier Global Inc., a California
internet service provider, that provides us with hosting services and
connectivity to the Internet for our servers on which our own Web sites and the
Web sites of our content partners reside. Global Center also provides continuous
supervision of our servers ensuring that such servers are connected to power
sources and viewable on the Internet. Global Center also assists in correcting
any possible malfunctions of our servers, which are housed at Global Center's
server installations in Herndon, Virginia and New York City. For these services,
we pay a monthly fee. Per the agreement, Global Center is not liable for injury
to our business, lost revenues or profits resulting from any negligence on their
part at our server maintenance facilities. The initial term was for a period of
six months starting September 4, 1997 which term has been extended for several
additional six-month periods.
Web User Tracking Software
In December 1999, we entered into a Software License and Support Agreement
with iMediation Inc, ("iMediation"), a California company that provides web user
tracking software. Pursuant to the agreement, iMediation has granted us a three-
year license for its use of iMediation software that enables the automated
tracking of web traffic to or within our online communities and/or those
communities maintained by us. In addition to a software license fee, we pay an
additional fee for software support services during the term. We are entitled to
use the software on up to eight of our communities. Thereafter, we must pay an
additional fee on a per community basis. We have the right to convert this
license into a perpetual license for a flat rate for up to 20 communities. The
agreement is for a total of 3 years, however, it may be terminated at the end of
each year.
Instant Messaging
In March 2000, we entered into an agreement with Tribal Voice, Inc., a
wholly owned subsidiary of CMGI, a Delaware corporation, to create co-branded
versions of its "PowWow" technology for any of our communities. The "PowWow"
technology provides users with text and voice communications (such as instant
messaging), group activities and sharing of information. Tribal Voice also
provides us with continuous support and software upgrades. The agreement is for
a period of three years with automatic renewal for additional one-year terms
unless terminated by either party upon 60 days written notice. We have the
ability to terminate the Agreement at any time during the term upon 30 days'
written notice.
E-mail List Services
We have a license agreement with Revnet Systems, Inc., an Alabama company
that provides software for e-mail list processing applications. The agreement is
a license for a product developed by Revnet called "Unity Mail Server" that
enables the licensee to establish and manage information distribution lists or
groups while allowing participation by third party subscribers. The license
provides for unrestricted subscriber capacity for a period of one-year starting
December 31, 1998, and includes free upgrades and technical support.
<PAGE>
Free E-mail Services
We have a custom e-mail service agreement with CommTouch Software, Inc., a
California company that provides Web-based e-mail products and services. The
agreement requires CommTouch Software to provide us with a customized e-mail
service, including upgrades hosted on CommTouch Software servers. These services
are available for our Web sites and other Web sites residing on our servers.
These services allow us to provide users of our online communities with free e-
mail addresses and allow us to advertise on the e-mail messages mailed by our
users. Per the agreement, CommTouch Software is required to customize the e-mail
services to each of our own Web sites and provide continuous customer support
service. The agreement also obligates us to place Web links on the custom
e-mails back to CommTouch Software's service pages, to actively promote
CommTouch Software's service on our Web sites and in other media in order to
attract end users to the service, to use commercially reasonable efforts to
market and sell advertisements for the custom e-mail service, and to pay
CommTouch Software a quarterly fee according to revenue sharing arrangements.
The term of the agreement is for one year starting June 30, 1999.
Free Home Pages
In August 1999, we entered into an agreement with Homestead Technologies,
Inc., a California company that develops co-branded sites where Internet users
may create free personal homepages. Pursuant to the agreement, Homestead and we
will create sites co-branded using technology developed by Homestead. Homestead
will provide us with all necessary hardware, software, and bandwidth necessary
for the co-branded sites. We are obligated to promote such site on our
communities and email newsletters to our registered database and maintain links
to the co-branded sites from our communities. In consideration for us providing
Homestead with access to our registered user base and collective statistical
data on users of the co-branded sites, Homestead creates the co-branded sites
and pays us a portion of revenues from advertisements placed on the user
homepages. We may also place banners on the co-branded site pages and retain a
percentage of revenues collected from the same. The parties also agree to create
an integrated registration process for the free home page service.
Auction Services
In March 2000 we entered into an agreement with OpenSite Technologies,
Inc., to obtain a perpetual, worldwide license to their AuctionNow software,
which enables the creation of branded, online auction galleries. OpenSite also
provides us with free upgrades and maintenance and support. Under a separate
agreement simultaneously entered into with OpenSite, we are also an authorized
reseller of the OpenSite software.
News Services
In September 1999, we entered into an agreement with Reuters Limited, a
U.K. company, for the supply of Reuters' online media services for distribution
on our communities. The agreement calls for Reuters to supply our world news
services, including a number of daily print and audio stories and photographs
and a license for software designed to receive, classify and manage the news
stories, photos and graphics transmitted from Reuters to us. We pay a monthly
service fee for these news services. The agreement is for a period of two years.
Customized Content
In December 1999, we entered into an agreement with ScreamingMedia.Net,
Inc., a Delaware corporation for customized content for use on VCI's Virtual
<PAGE>
Ireland, Virtual Italy and Virtual India communities. The agreement calls for
ScreamingMedia to supply us with news and information from a wide range of
content providers via ScreamingMedia's content engine technology that employs
custom filters created for each of its clients. In addition to a set-up fee, we
pay ScreamingMedia a monthly fee for the service. The term of the agreement is
one year, with automatic renewal for additional one-year periods unless
terminated by either party on 90 days written notice.
Currency Converter
In February 2000, we entered into an agreement with OANDA Corp. to have the
ability to create co-branded versions, for any of our communities, of its
currency converter software that enables users to access current foreign
exchange data and conversions. OANDA provides us with continual technical
support. Should OANDA fail to ensure continued functionality of the service, we
may terminate the Agreement upon 15 days' written notice. The Agreement is for a
period of two years.
Promotion and Loyalty Programs
In March 2000, we entered into an agreement with iQ.COM Corporation to
license their software, which enables the creation, targeting, distribution and
tracking of sales promotions and loyalty programs. IQ.COM also provides us with
free upgrades and support. Should we not be reasonably satisfied with the
performance of the software, we may terminate the agreement upon 30 days'
written notice. The agreement is for a period of one year with automatic renewal
for additional one-year terms unless terminated by either party upon 60 days
written notice.
Chat Services
We have an agreement with Talk City, Inc., a California company that
provides supporting software that enables Web sites to offer chat services to
their users. Per the agreement, Talk City provides us with all necessary
facilities, servers, connectivity, related equipment and technology to host chat
rooms on our servers. Talk City is responsible for continuous coverage of the
chat rooms to ensure the enforcement of their Code of Conduct. Talk City is
responsible for selling and managing advertising on the chat room sites, however
we may also sell advertising but must pay a percentage of gross revenues
collected by us to Talk City. The agreement requires us to pay Talk City an
annual fee for our three online communities and up to an additional fifteen Web
sites. The term of the agreement is for one year starting June 17, 1999 and is
automatically renewed for additional one-year terms unless canceled on thirty
days notice by either party.
Weather Services
We have a license agreement with Accuweather, Inc., a Pennsylvania company
that provides online weather services. The agreement, as amended, requires that
Accuweather make available to us selected weather forecasts, satellite images
and other weather services for our three existing online communities, including
forecasts for cities of specific interest to each community and general weather
information for over 450 cities around the world. The term of the agreement is
for 18 months starting December 22, 1998, and Accuweather may terminate the
agreement on 30 days written notice in the event of a breach of the agreement by
us. We pay Accuweather a monthly fee for such services, but are entitled to 25%
of any revenues received by Accuweather from users of our Web sites who
independently subscribe for additional Accuweather services.
<PAGE>
OnLine Bulletin Boards/Forums
We have a license from DiscusWare, LLC, for a popular freeware discussion
board software package called "Discus" which we use on our online communities.
Discus allows visitors to our communities to read and post messages. The license
permits us to modify the source code for our own use, however, this license may
not be resold or distributed.
Internet Camera
We have a non-exclusive, non-transferable license agreement with Perceptual
Robotics, Inc., an Illinois company that provides the software, maintenance and
support required to manipulate an interactive camera on the Internet. The
software allows up to twenty simultaneous users to control a telerobotic camera
and view panoramic images within Jerusalem. The license's term is for one year
starting September 3, 1998, for which we paid a flat fee excluding annual
software support and upgrades.
NT Server Licenses and Microsoft Office Software
We have licenses from Microsoft for the use of our Microsoft Office
software on PCs and the PCs of our subsidiaries' employees in the U.S. and
Israel. We also have access licenses from Microsoft for our Windows NT server
software, required for the operation of our computer servers on which our Web
sites and the Web sites of many of our content partners reside.
Maven Index and Search Engine
We have an agreement with Matthew Album, an individual who developed a
comprehensive, proprietary database of over 10,000 Jewish related Web sites
known as the "Maven Index" which resides at www.maven.co.il. Per the agreement,
we provide Maven with technical, Web site design, hosting, marketing and e-mail
services and Mr. Album, in exchange, updates the Maven database regularly and
provides technical services required to operate the database. The term of the
agreement is three years starting March 9, 1998, and contains a license that
permits us to publish Maven on the Virtual Jerusalem site while requiring Mr.
Album to place Web links on Maven to that site's homepage. Mr. Album and we
evenly split revenues from advertisements placed on Maven. In the event the
agreement is terminated by us for cause, or by Mr. Album without cause, we
receive a non-exclusive right to use Maven. For five years following such
termination (provided that Maven remains on the Virtual Jerusalem site), we are
obligated to pay Mr. Album a decreasing portion of the advertising revenues that
we derive from Maven.
We Currently Operate Five Online Communities
We currently operate five online communities: Virtual Jerusalem, Virtual
HolyLand, Virtual Ireland, Virtual Italy and Virtual India. A brief description
of each is provided below.
Virtual Jerusalem
Virtual Jerusalem, located on the Web at www.virtualjerusalem.com,
aggregates a variety of Jewish and Israel related content from the Web as well
as offering interactive features and services. This Web site includes a portal,
called the Maven Index, to over 10,000 Jewish related Web sites. Popular
elements include the Kotel Kam (an Internet zoom camera which transmits live
pictures of the Western Wall), "Send a Prayer to the Western Wall" (permitting
<PAGE>
members to post a message online that is downloaded by us and placed in the
Western Wall) and "Time Travel Through Jerusalem" (which features multi-media
tours by historical figures). Virtual Jerusalem also contains a series of Jewish
Holiday Web pages with games, quizzes and a variety of educational content. The
Web site also offers members a range of community features and services
including forums, free e-mail, personal Web pages, interactive guest book,
global weather forecasts and classified advertisements. Virtual Jerusalem
contains several channels, each of which features topical content that is
updated daily. These Channels, and their descriptions, include: News, Travel,
Business, Torah (religious material), Living (sections on health and parenting,
books, films, Jews in sports, music, dance, humor, art, drama and
self-improvement) Food, History and Teens. In late 1999, we launched
vjradio.com, a Web site on which 24 hour audio programming is available via
real-time streaming technology. Programming includes regularly scheduled Israel
news, music and audio features from Virtual Jerusalem's content partners
interviews with well known Jewish personalities and others with whom we intend
on entering into content relationships for use of their audio content on the
Internet.
Virtual Jerusalem's target market, registered user base, user demographics and
traffic statistics.
According to the 1998 American Jewish Yearbook (published by the American
Jewish Committee), the Jewish population in the United States is approximately
six million, as compared to a world Jewish population of 13 million. According
to Jupiter Communications, approximately 38% of Americans currently use the
Internet. Assuming the same Internet usage by the Jewish population as the
general population, the current number of Jewish Internet users based in the
United States is approximately 2.3 million. Our management thinks that based on
the relatively high socioeconomic profile of this population relative to the
general population as a whole, the number of Jewish Internet users based in the
United States could be as much as 50% more than this figure, or up to
approximately 3.4 million people. Virtual Jerusalem had approximately 190,000
registered users as of May 2, 2000 and recorded approximately 5.7 million page
views in March 2000. Virtual Jerusalem is currently adding 5,000 to 6,000 new
registered users each month.
According to the 1997 Annual Survey of American Jewish Opinion (conducted
for the American Jewish Committee by Market Facts, Inc.), 55% of American Jews
claimed that being Jewish is very important in their lives and 34% percent of
American Jews claimed it was "fairly" important. According to this same survey,
American Jews rated being part of the Jewish people as the quality most
important for personal Jewish identity, and the celebration of Jewish holidays
as the activity most important for personal Jewish identity. Virtual Jerusalem
focuses on both these elements by offering comprehensive news and features
relating to the Jewish community and Israel and a comprehensive selection of
Jewish holiday "megasites" containing a host of interactive elements and
activities geared to all ages.
Virtual Ireland
Virtual Ireland, located on the Web at www.virtualireland.com, was launched
on Saint Patrick's Day 1999 and aggregates content from a variety of Irish Web
sites on the Internet. Virtual Ireland offers members a range of interactive
elements, community features and services including bulletin boards, free e-
mail, global weather forecasts, pen pals, video and audio files, a shopping
center and greeting cards. The Web Site also offers five Channels including:
News, Travel, Geneology, Business and the Craic (Entertainment).
<PAGE>
In addition to using Irish related content from Screaming Media and
Reuters, the Company has agreements with several content partners for the use of
their content on Virtual Ireland. These partners include Appletree Press--
Ireland's Eye (one of Ireland's largest book publishers), WildIreland, IAIS
(Irish American Information Service), The Irish Emigrant (an Irish newspaper),
Irishfood.com (a Web site featuring foods from Ireland), Irishradio.com,
Regional Media Bureau of Ireland (a publisher of 27 local Irish newspapers), The
Irish World Online, Gathering of the Irish (irishclans.com), Boston Irish Pub
and Restaurant Guide, CELT (Corpus of Electronic Texts).
Virtual Ireland's target market, registered user base, user demographics and
traffic statistics
There is an estimated world Irish Diaspora of approximately 70 million
people. In the United States, according to the United States Census Report for
1998, 39 million people consider themselves to be of Irish descent. This report
also estimates that Irish families comprise approximately 9% of the total
population of the United States, but account for approximately 12% of households
with a net worth of more than $1 million. Our management thinks that the strong
ties of Irish descents to their heritage represent a significant potential
demographic market. We are currently running numerous print, radio and
television media directed towards this large American Irish population. Over
68,000 users have registered on Virtual Ireland since our launch in March 1999
and the site recorded approximately 1.5 million page views in March 2000.
Virtual HolyLand
Virtual HolyLand ("VHL"), located on the Web at www.virtualholyland.com,
was launched on Christmas Day 1998 and aggregates content from a variety of
Christian Web sites on the Internet. VHL offers visitors a wide range of
community features and services including chat rooms and forums, free e-mail,
personal Web pages, interactive guest book, global weather forecasts, classified
advertisements, virtual tours of Christian places of interest and a planned
online shopping experience. VHL also offers Channels featuring up-to-the-minute
news from Israel, Millennium-related activities, prayer, travel information and
interactive elements. These Channels include: Christian Life, Land of Promise,
Israel News, ZionTraveler, Prophesy, Christian Bookstore Online and Family.
Virtual HolyLand has agreements with several content partners, including Bridges
for Peace and the International Christian Embassy.
Virtual HolyLand's target market, user demographics and site statistics
According to the National Survey of Religion and Politics, the number of
evangelicals in the United States, as determined by assessing denominational
affiliation, including membership in evangelical churches and ministries, totals
approximately one quarter of the United States population, or approximately 70
million people. Virtual HolyLand is targeted at these estimated 70 million
potential users.
Evangelicals believe in a diversity of religious movements. According to
estimates of the National Survey of Religion and Politics ("NSRP"),
approximately 35% of the population of the United States identify themselves as
evangelical Christians. Baptists, Methodists, Assembly of God followers, and
Pentecostal followers are included in these estimates. According to the NSRP,
three quarters of evangelicals in the United States do not identify with a
specific religious movement and may relate to specific personalities or
ministries such as the Reverends Billy Graham, Oral Roberts, Pat Robertson, John
Haggert, Jack Halyford, Kenneth Hagan, Jimmy Swaggert and Chuck Smith.
<PAGE>
In demographic terms, evangelicals closely resemble the population of the
United States at large with regards to gender and age, and trail the average
population only modestly in education and income. SOMA Communications, Inc., a
Christian broadcast market research firm, estimates that over 70% of Christians
in the United States who use the Internet have annual incomes in excess of
$75,000, and Christianity Today, a publisher of Christian periodicals, estimates
that American Christians are 25% more likely to own a computer and 15% more
likely to own a modem than the general population of the United States. Although
their demographics indicate higher levels of religious commitment, their profile
largely resembles that of the rest of the population of the United States. Based
on estimates of the current Internet usage in the United States of 38% of the
population, our management estimates that there are approximately 27 million
potential users of Virtual HolyLand from this target community alone. VHL had
approximately 26,000 registered users as of May 2, 2000 and recorded
approximately 420,000 page views in March 2000 compared to approximately 10,000
page views in March 1999.
Virtual Italy
Virtual Italy, located on the Web at www.virtualitaly.com, was created on
Columbus Day in October 1999 and relaunched in April 2000. Virtual Italy offers
a variety of content and interactive elements targeted to persons interested in
Italian culture, the Italian American community in particular. In addition to
daily news and weather, Virtual Italy offers free email addresses and personal
homepages, greeting cards, chat rooms and forums, guest books, and quizzes. The
site's channels include: Today in Italy (News), Travel, Geneology, La Cucina
(Cooking) and Divertimenti (Entertainment).
Virtual Italy's target market, registered user base and user demographics and
traffic statistics
There are an estimated 15 million persons in the United States who identify
themselves as Italian Americans according to the Population Division of the 1990
U.S. Census Bureau. However, the Census Bureau estimates that as many as one in
ten Americans are descended from Italian families and that Italian Americans are
the fifth largest ethnic group in the U.S. with their population concentrated in
the Northeast, California, Florida and Illinois. The average Italian American is
a city dweller, college educated and had an average annual income of $33,000.
Due to the recent launch of the Virtual Italy site in October 1999, we have not
collected statistics on the site. We launched Virtual Italy with an ad campaign
on Yahoo! and a public relations effort and we intend to roll out a
comprehensive marketing campaign for the site during the first quarter of 2000.
This will include newspaper and other print and online advertisements,
promotions and grass roots efforts with organizations in the Italian American
community. Approximately 4,000 persons have registered on Virtual Italy since
its creation in October 1999 and we recorded approximately 50,000 page views for
Virtual Italy in March 2000. The Company expects that interest in this community
will increase following its re-launch of the community and hiring an editorial
team in March 2000.
Virtual India
Virtual India, located on the Web at www.virtualindia.com was introduced
during the Diwali Festival in November 1999 and places the latest news from the
India world alongside interactive elements that allow community members to
interact in a family safe environment. Virtual India is targeted to the Indian
American community and others interested in Indian culture and news. Virtual
India offers free email addresses and personal homepages, greeting cards, chat
rooms and bulletin boards, global weather reports, pen pal searches and games.
<PAGE>
The site includes the following channels: News, Travel and Food. We recently
hired an Editor and editorial team to administer the Virtual India site and
enter into additional content partner agreements for use of content on the site.
The formal launch of Virtual India will occur in July 2000.
Virtual India's target market, registered user base and user demographics and
traffic statistics.
There are an estimated half million persons in the United States who
identify themselves as Asian Indian Americans according to the Population
Division of the 1990 U.S. Census Bureau. Though Indian population is growing
with a 111 percent increase between 1980 and 1990, Asian Indians tend to live in
and around major metropolitan areas. Asian Indians made up 1.2 percent of New
York City's population in 1990. In 1990, 30 percent of Asian Indians were
employed in professional specialty occupations, compared with 13 percent of all
U.S. employees. The median annual income for Asian Indian households is $44,700.
Due to the recent launch of Virtual India in November 1999, it has not yet been
possible for us to collect meaningful statistics from the site. We are currently
in the process of hiring extra staff for the site and intend to launch a
strategic marketing campaign during the third quarter of 2000.
Content Partners
A key component of our business strategy for our communities is our
relations with our content partners. Our management thinks that these content
partners recognize the benefits of being anchored to a community which include
some or all of the following:
o exposure of their Web content to additional readership beyond that which
their Web site alone attracts;
o increased traffic on their Web sites generated by the links from our
communities to their sites;
o the opportunity to earn revenues from shared advertising on co-branded Web
pages; and
o the receipt of Internet services from us through an interactive panel which
may be laced on their sites called iPanel which includes links to chat
services, weather guest books, online forums and e-mail lists that would
otherwise require expensive and multiple licenses and technology.
Our Efforts to Accumulate Registered Users
We encourage user registration on our Web sites in several ways. Several
interactive elements on our Web sites, such as our user-controlled web camera on
Virtual Jerusalem and Virtual Holyland require registration in order for users
to access such features. We also encourage visitors to register by offering
sweepstakes for valuable prizes, including weekly trips to Israel (on the
Virtual Jerusalem and Virtual HolyLand Web sites) and trips to Ireland (on the
Virtual Ireland Web site). Entry to the sweepstakes requires registration.
Trademarks
In April 1999, we filed five service mark applications with the Assistant
Commissioner for Trademarks in the United States for the following names and
designs used by us: Virtual Communities, Inc., Virtual Jerusalem, Virtual
HolyLand, Virtual Ireland and IsraelWire, together with designs for each of
them. In April 2000 the Company was issued certificates of registration for the
Virtual Jerusalem and Virtual Holyland service marks. The applications are
currently under review by the U.S. Trademark Office. These names and service
marks
<PAGE>
for these sites are currently used in our business. We intend to file additional
applications for other online communities and Web properties that we may
establish in the future, including an application for vjradio.com. There is no
assurance that we will be successful in obtaining approval of such applications,
and if obtained, of enforcing such service marks. We are aware of the fact that
there are a number of entities incorporated in a number of states in the U.S.
that currently use the name "Virtual Communities" and that at least one such
entity has filed an application for protection for such name, although such
entity provides somewhat different Internet services than we do. Our management
cannot assure you if and when the U.S. Trademark Office will rule on such
applications, or that such applications will ever be granted or enforceable.
Technology Acquisitions
In February 2000, we entered into a Share Purchase Agreement ("SPA") with
Cortext Ltd., and the principal shareholders of Cortext, to acquire a majority
interest in the equity of Cortext Ltd., which was established in 1996. VCI
currently utilizes Cortext's Magazine Software pursuant to a License Agreement
with Cortext dated July 18, 1999 to manage content on several of the ethnic
communities published by VCI and as a central component of its Community
Management Solution (CMS) turnkey solution which it markets and licenses to
third party web publishers and uses for its own online communities.
Pursuant to the terms of the SPA, VCI was issued shares of Cortext so that
it currently holds approximately 54% of the outstanding shares of Cortext
following the payment of certain funds to and on behalf of Cortext. Depending
upon Cortext's completion of certain software development milestones set forth
in the SPA and additional payments by VCI, up to 60% of the equity of Cortext
could be acquired by VCI by August 2000.
Simultaneously with execution of the SPA, VCI and Cortext entered into an
Assignment Agreement with Planet Communications Ltd. ("Planet"), an Israel-based
unaffiliated third party holder of 50% of the rights in Cortext's software
whereby Planet agreed to irrevocably assign all of its rights, title and
interest in the Magazine Software to Cortext in consideration of VCI's payment
of a portion of the transaction consideration on behalf of Cortext and subject
to such third party's retaining the right to sell up to ten end user licenses.
Cortext agreed to provide Planet with certain upgrades and technical support
services in connection with such End User licenses if and when the same are
granted. The majority of the payments to Planet have been made and its
assignment of its rights to the Magazine Software has been effectuated. A
portion of the payments to such third party are to be paid in installments over
a period of six months from the date of the Assignment Agreement and the SPA.
Following the assignment of the rights by Planet, Cortext holds 100% of the
rights in and to the Magazine Software.
Concurrently with the execution of the SPA, Cortext also entered into long-
term employment agreements with its C.E.O. and C.T.O. and amended its By Laws.
Pursuant to the SPA, VCI has the right to name two members to Cortext's Board
and to name a majority of the Board upon the completion of its payments and
acquisition of shares in August 2000.
The Company does not currently need any government approval for delivery of
its principal products or services nor does it expect such approval to be
required during the foreseeable future. The business of the Company is not
materially affected by any governmental regulations nor does the Company expect
to be subject to any special regulations during the foreseeable future, however
there can be no assurance in this regard. The
<PAGE>
Company has not expended any material amounts of money on research and
development activities during the past two fiscal years. The Company has not
incurred any material expenses or costs with respect to compliance with
environmental laws (federal, state and local).
Employees
As of May 2, 2000, we, together with our Israeli subsidiaries, Virtual
Communities Israel Ltd. and V.C.I. Internet Properties Ltd., employed 141 full-
time employees, 79 of whom are located in Virtual Communities Israel, Ltd.'s
offices in Jerusalem, Israel, 2 of whom are located in V.C.I. Internet
Properties, Ltd.'s offices in Eli, Israel, 58 of whom are based in our offices
in New York, New York and 2 who are based in Los Angeles, where the Company
intends to open a CMS Sales and Marketing office in the near future. Over the
next several months, we intend to retain an additional 5 persons for Virtual
Communities Israel, Ltd.'s Jerusalem office where such personnel will be engaged
in Web site production, programming, editorial services, client services and
administration and an additional 10 persons for our New York office where such
personnel will be engaged in sales and marketing, web site development and
editorial services and administration.
EXECUTIVE COMPENSATION
The table below provides information concerning the annual and long-term
compensation for services rendered during the year ended December 31, 1999 by:
Summary Compensation Table
<TABLE>
<CAPTION>
Name and Year Salary Bonus Options Other
principal position Compensation
- --------------------------------------------------------------------------------------
Compensation
- -------------
<S> <C> <C> <C> <C> <C>
Avi Moskowitz 1999 $150,175(1) $ 0 748,150(3) $ 34,901(2)
Chairman of the Board 1998 $104,950 $ 0 439,682(4) $ 17,900
President and CEO 1997
And Chairman
Gregory Zink 1998 $ 97,500
Former Acting CEO 1997 $ 40,000(5)
Steven Gumins (6) 1997 $ 68,750 $ 50,000(8)
Former CEO
Deborah Griffin (7) 1997 $ 64,516 $ 50,000(8)
COO
Theodore Lanes 1998 $ 86,250 $ 10,000
Former CFO 1997 $ 82,500
</TABLE>
(1) Mr. Moskowitz's compensation for 1999 was received pursuant to two separate
agreements, as follows: A. an employment agreement, effective as of January 1,
1998, between Mr. Moskowitz and Virtual Communities Israel Ltd. This employment
agreement was terminated in May 1999. B. an employment agreement, effective as
of June 1, 1999, between Mr. Moskowitz and Virtual Communities Inc.
(2) Includes: $5,000 in the form of the use of a company automobile and related
expenses; $3,798 in the form of life insurance premium; $2,890 in the form of
amounts paid by Virtual Communities Israel Ltd. for "Managers Insurance", a type
<PAGE>
of pension, insurance and severance fund commonly offered by Israeli employers;
and $1,016 in the form of supplemental health insurance and holiday gifts. In
1999, Mr. Moskowitz received, in part for services rendered to Virtual
Communities Israel Ltd. during 1999, $22,197 in the form of reimbursement for
vacation time not taken since 1997.
(3) Represents 230,200 shares of common stock underlying options granted to Mr.
Moskowitz in 1999.
(4) Represents 278,542 shares of common stock underlying options granted to Mr.
Moskowitz in 1997, and 161,140 shares of common stock underlying warrants
issued, to Mr. Moskowitz in 1998.
(5) Amounts paid for consulting services.
(6) In December, 1996, the Company entered into a three-year employment
agreement with Mr. Gumins. The agreement provided for a base annual salary of
$150,000 and bonuses at the discretion of the Board. Mr. Gumins resigned as
Chief Executive Officer in May, 1997.
(7) In December, 1996, the Company entered into a three-year employment
agreement with Ms. Griffin. The agreement provided for a base annual salary of
$150,000 and bonuses at the discretion of the Board. Ms. Griffin resigned as
Chief Operating Officer in May 1997.
(8) Represents severance payment.
Option Grants
The following table provides information regarding warrants issued during
the year ended December 31, 1999 to officers of the Company. Virtual
Communities, Inc. has never granted stock appreciation rights.
Option Grants in Last Fiscal Year Individual Grants
<TABLE>
<CAPTION>
Percent of Total
Options Granted to
Employees
Number of (net of forfeitures)
Securities in Fiscal Exercise or Base
Underlying Year Ended Price Per Share Expiration
Name Options Granted December 31, 1999 ($/Share) Date
- ---- --------------- ----------------- ----------------- -------------
<S> <C> <C> <C> <C>
Avi Moskowitz ........................... 230,200(1) 13.1%(2) $ 2.10 June 30, 2004
Michael Harwayne ........................ 115,100(3) 6.5%(4) $ 0.81 March 2, 2004
50,000(5) 2.8%(6) $ 3.62 Nov. 10, 2004
Deborah Gaines .......................... 86,325(7) 4.9%(8) $ 2.10 Oct. 25, 2004
</TABLE>
(1) These options were issued pursuant to the Company's employment agreement
<PAGE>
with Mr. Moskowitz entered into in June 1999.
(2) Based on an aggregate of 1,757,428 options and warrants issued (net of
forfeitures) to employees in the year ended December 31, 1999, including options
issued to Mr. Moskowitz.
(3) These options were issued under the Company's 1999 ISOP upon Mr. Harwayne's
joining the Company in March 1999. A third of these options vest over a three-
year period commencing on the first anniversary of the date of their grant.
(4) Based on an aggregate of 1,757,428 options and warrants issued (net of
forfeitures) to employees in the year ended December 31, 1999, including options
issued to Mr. Harwayne.
(5) These options were awarded based on Mr. Harwayne's performance in accordance
with his employment agreement with the Company.
(6) Based on an aggregate of 1,757,428 options and warrants issued (net of
forfeitures) to employees in the year ended December 31, 1999, including options
issued to Mr. Harwayne.
(7) These options were issued under the Company's 1999 ISOP upon Ms. Gaines'
joining the Company in October 1999. A third of these options vest over a three-
year period commencing on the first anniversary of the date of their grant.
(8) Based on an aggregate of 1,757,428 options issued (net of forfeitures) to
employees in the year ended December 31, 1999, including options issued to Ms.
Gaines.
Fiscal Year End Option Values
The following table provides information concerning unexercised options
held by officers as of December 31, 1999. None of the officers exercised any
options during the year ended December 31, 1999.
Aggregated Option Exercises in Last Fiscal
Year and Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at Fiscal Year End at Fiscal Year End(1)
--------------------------------- ------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ----- ------------- -------------- ----------- -------------
<S> <C> <C> <C> <C>
Avi Moskowitz.. 185,676 (2) 323,066 (2) $603,447 $1,049,964
161,140 (3) 0 (3) $523,705 0
23,018 (4) 11,512 (4) $74,808 $37,414
Michael Harwayne 0 (5) 165,100 (5) 0 $536,575
Deborah Gaines 0 (6) 86,325 (6) 0 $280,506
</TABLE>
- ----------
(1) Assumes a market price for the Common Stock of the Company at December 3l,
1999 of $3.25 per share.
(2) Represents 508,742 shares of the Company's Common Stock underlying options
<PAGE>
held by Mr. Moskowitz as of December 31, 1999. 278,542 options are exercisable
at $.40 per share and 230,200 options are exercisable at $2.10 per share.
(3) Represents 161,140 shares of the Company's Common Stock underlying warrants
held by Mr. Moskowitz as of December 31, 1999. 115,100 warrants are exercisable
at $1.00 per share and 46,040 warrants are exercisable at $.65 per share.
(4) Represents 34,530 shares of the Company's Common Stock underlying options
held by Helen Moskowitz, wife of Avi Moskowitz, as of December 31, 1999. The
options are exercisable at $.65 per share.
(5) Represents 165,100 shares of the Company's Common Stock underlying options
held by Mr. Harwayne as of December 31, 1999. 115,100 options are exercisable at
$.81 per share and 50,000 options are exercisable at $3.62 per share.
(6) Represents 86,325 shares of the Company's Common Stock underlying options
held by Ms. Gaines' as of December 31, 1999. All the options are exercisable at
$2.10 per share.
DIRECTORS COMPENSATION
None of our directors receive cash compensation, however, directors receive
expense reimbursement for services provided as a director, including attendance
at meetings of the Board of Directors or at meetings of committees of the Board
of Directors of which they are members. David Morris was reimbursed by the
Company for travel and lodging in the amounts of $6,626 in 1999.
Directors are entitled to receive options pursuant to the Company's Stock
Option Plans.
In February 1997, we entered into a consulting agreement with Mr. Seybold,
the Company's former Chairman and a current director, pursuant to which he
received five-year options to purchase 6,000 shares of common stock. All of such
options are exercisable at $5.00 per share commencing one year from the date of
grant. Under the same consulting agreement, Mr. Seybold received 10,000 five-
year options exercisable at the market price at February 11, 1998 ($2.25), for
remaining Chairman of the Board for 1998.
In February 1997, we also granted options to purchase 1,000 shares of our common
stock at an exercise price equal to the fair market price of our common stock on
the date of the grant ($5.00) to each of William Blase, M. Caroline Martin,
Allan Dalfen, Brian Wasserman, Kenneth W. Krugler and Gregory L. Zink, who was
also President of the Company from inception in 1994 until the Company's merger
with VCI in October 1999. Such options are exercisable until October 29, 2001.
As of March 31, 2000, Mr. Blase had exercised 8,000 options.
In April 1998, we granted options to purchase 10,000 shares of our common
stock at an exercise price equal to the fair market value of our common stock on
the date of the grant ($.875) to each of William Blase, M. Caroline Martin,
Allan Dalfen, Brian Wasserman and Kenneth W. Krugler. Such directors each vested
a total of 6,000 of their options prior to the Company's merger with VCI in
October 1999. Such options are exercisable until October 29, 2001. On such date,
we also granted options to purchase 10,000 shares of our Common Stock at an
exercise price equal to the fair market value of our common stock on the date of
the grant ($.875) to Theodore Lanes, who served as our Chief Financial Officer
until the Company's merger with VCI in October 1999. Such options are
exercisable until October 29, 2001.
In April 1999, we also granted options to purchase 22,500 shares of our
<PAGE>
common stock to each of Messrs. Lanes and Zink at an exercise price equal to the
fair market value of our common stock on the date of the grant ($1.00) in
consideration for their services to the Company from April 1, 1999 through June
30, 1999. Such options are all exercisable until October 29, 2001. As of March
31, 2000, Mr. Lanes had exercised all of his options. In April 1999, the Company
also issued options to purchase 2,000 shares of our common stock at $1.50 per
share to each of William Blase, M. Caroline Martin, Allan Dalfen, Brian
Wasserman and Kenneth W. Krugler, former directors of the Company. Such options
are exercisable until October 29, 2001.
On September 10, 1999, Mr. Zink was granted options to purchase 30,000
shares of our common stock at $4.3125 per share as compensation for services
from July 31, 1999 through the consummation of the merger on October 29,1999.
In January 1998, Virtual Communities, Inc. granted to each of David Morris,
Sonja Simon and Peter A. Jacobs options to purchase 57,550 shares of our common
stock pursuant to the 1998 Stock Option Plan, exercisable at a price equal to
$0.65 per share. These options vest in equal amounts over three years.
In September 1999, David Morris was granted an additional option to
purchase 57,550 shares of our common stock pursuant to the 1999 Stock Option
Plan in consideration for financial consulting services provided to Virtual
Communities, Inc. since 1997.
In September 1999, Avi Moskowitz was granted an additional five-year option
to acquire 230,200 shares at $2.10 per share upon entering into an employment
agreement with the Company.
In November 1999, the Company granted five-year options which vest over a
three- year period into 50,000 shares of our common stock to each of Jonathan
Seybold and Alan Dalfen, members of the Board prior to the merger with VCI in
October 1999, and Robert Levenson and Fred Lafer, two newly elected members of
the Board. The options are exercisable at a price of $3.69 per share.
Employment Agreement
In June 1999, Virtual Communities, Inc. entered into an employment
agreement with Avi Moskowitz, our President and Chief Executive Officer. The
agreement is for an initial three-year term, which will extend automatically
unless either party gives written notice at least 90 days prior to the end of
the initial term. If the agreement is automatically renewed, it will continue
until terminated by either party pursuant to the agreement. Mr. Moskowitz
receives an annual base salary of $182,700 (subject to change at the discretion
of the Board of Directors), and will be eligible to receive annual bonuses as
may from time- to-time be awarded by the Board of Directors. The agreement
entitles Mr. Moskowitz to incentive stock options to purchase 230,200 shares of
our common stock, which options vest over three years and are subject to the
1999 Stock Incentive Plan and a related option agreement, and provides that Mr.
Moskowitz is eligible for such other options as may be granted by the Board of
Directors.
Mr. Moskowitz is also entitled to other benefits including the use of an
automobile and life insurance, and is entitled to participate in benefit plans
that may be established by us. During the term of his employment and for one
year thereafter, Mr. Moskowitz is prohibited from engaging in any business
competitive with us. The agreement also imposes confidentiality and assignment
of work product obligations on Mr. Moskowitz. In the event the agreement is
terminated due to Mr. Moskowitz's death, for 6 months following his death we are
obligated to pay the premiums for any continuation coverage for Mr. Moskowitz's
immediate family pursuant to the Consolidated Omnibus Budget Reconciliation Act
<PAGE>
("COBRA"). In the event the agreement is terminated because Mr. Moskowitz
becomes permanently disabled, for 6 months following such termination we are
obligated to pay the premiums for any continuation coverage for Mr. Moskowitz
and his immediate family pursuant to COBRA. At any point during the term of the
agreement, we are able to terminate Mr. Moskowitz "without cause" (as defined in
the agreement) upon 12 months notice, provided Mr. Moskowitz receives his
compensation during the notice period. At any point during the term of the
agreement, Mr. Moskowitz is able to terminate the agreement for "good reason"
(as defined in the agreement), and we will be obligated to pay Mr. Moskowitz's
compensation as if Mr. Moskowitz had been terminated by us without cause.
Pursuant to a separate arrangement, Virtual Communities, Inc. reimbursed
Mr. Moskowitz for $10,000 of the expenses he incurred in moving his family from
Israel to the New York City area.
In February 1999, the Company entered into an employment agreement with
Michael Harwayne to serve as the Company's Vice President of Business
Development and Marketing. In February 2000, he was appointed Chief Operating
Officer. Pursuant to the terms of the agreement, Mr. Harwayne received a salary
of $90,000 per annum for the first four months of the term which amount
increased to $125,000 per annum thereafter. Mr. Harwayne was also granted an
option to acquire up to 100,000 shares of Common Stock of Virtual Communities,
Inc. under the Company's Incentive Stock Option Plan at the fair market value of
the shares at the date of grant for an exercise price of $.81 per share. One
third of such shares vest on each of the first three anniversaries of the date
of Mr. Harwayne's employment. Subject to approval by the Company's Board of
Directors, Mr. Harwayne was also entitled to acquire options exercisable into an
additional 100,000 shares of Common Stock at an exercise price equal to the then
fair market value of the Common Stock of the Company on the date of grant of the
option in the event he reaches certain performance targets as determined by the
Company. 50,000 of such options were granted to Mr. Harwayne in November 1999
and the remaining 50,000 options were granted by the Company in February 2000
when he was promoted to Chief Operating Officer of the Company. Either party may
terminate the Employment Agreement for any reason or without cause, provided
that Mr. Harwayne provides notice in writing no less than sixty (60) days prior
to the effective date of such termination or the Company submits to him notice
in writing no less than ninety (90) days prior to the effective date of such
termination. The agreement contains confidentiality provisions and Mr. Harwayne
has undertaken that he will not engage in a competing business anywhere in the
world during the term and for a period of twelve (12) months thereafter.
In October 1999, the Company entered into an employment agreement with
Deborah Gaines to serve as the Company's Editorial Director. In January 2000, Ms
Gaines was promoted to Vice President of Content Services. Pursuant to the terms
of the agreement, Ms. Gaines received a salary of $90,000 per annum for the
first four months of the term which amount increased to $95,000 per annum
thereafter. Upon her appointment as a Vice President, Ms. Gaines' salary
increased to $125,000 per annum. Ms. Gaines was also granted an option to
acquire up to 75,000 shares of Common Stock of Virtual Communities, Inc. under
the Company's Incentive Stock Option Plan at the fair market value of the shares
at the date of grant for an exercise price of $2.10 per share. One third of such
shares vest on each of the first three anniversaries of the date of Ms. Gaines'
employment. Either party may terminate the Employment Agreement for any reason
or without cause, provided that Ms. Gaines on notice in writing no less than
sixty (60) days prior to the date of such termination. Ms. Gaines' agreement
contains confidentiality provisions and she has undertaken that she will not,
directly or indirectly, on her own behalf or in the service or on behalf of
others, engage in or be involved in any competing business anywhere in the world
during the term and for a period of twelve (12) months thereafter.
<PAGE>
Stock Option Plans
In connection with the signing of the merger agreement, substantially all
of the option holders of the Company signed agreements not to dispose of their
securities for a period of 180 days after the consummation of the merger. In
connection with the merger, our board of directors and stockholders approved a
new 1999 stock incentive plan.
Prior to the merger, VCI had adopted a 1997 Stock Option Plan, 1998 Stock
Option Plan and 1999 Stock Option Plan (the "VCI Plans"). The Company assumed
the VCI Plans, and all outstanding options under them, and the compensation
committee of our Board is the administrator of the VCI Plans as well as the
Company's original plan.
Each plan has terms substantially similar to the other. The purpose of each
plan is to provide an incentive to employees, directors and consultants of our
company and our subsidiaries, and to offer additional inducement in obtaining
the services of such persons. The VCI Board of Directors adopted the 1997, 1998,
and 1999 plans on May 20, 1997, December 13, 1998, and April 28, 1999,
respectively. The shareholders of VCI approved the 1997 plan on May 20, 1997,
and the 1998 and 1999 plans in September 1999.
Each plan provides for the grant of both incentive stock options and non-
qualified stock options. The 1997 and 1998 plans limit the number of shares of
common stock subject to options granted under the plan to any one employee
during any one calendar year to 250,000. The 1999 plan originally set this limit
at 100,000, but was amended and restated to increase this limit to 300,000
shares.
VCI reserved 726,000 shares (835,626 post merger shares) of common stock
for issuance under the 1997 plan. As of May 2, 2000, options for all 835,626
shares were granted and outstanding, and 35,000 options had been exercised. With
respect to the 1998 plan, 524,000 shares (603,124 post merger shares) were
reserved for issuance. As of May 2, 2000, options for all 603,124 (post merger)
shares were granted and outstanding, and no options had been exercised. With
respect to the 1999 plan, 500,000 shares were originally reserved for issuance.
The amended and restated 1999 plan increased the number of shares reserved for
issuance by 500,000 for a total of 1,000,000 shares (1,151,000 post merger
shares). As of May 2, 2000, options for 975,032 shares were granted and
outstanding (975,031 post merger shares), options for 175,968 post merger shares
were available for grant, and 38,328 options had been exercised. In addition, at
our Annual Meeting held in October 1999, our shareholders approved a 1999
Incentive Stock Option Plan and reserved for issuance 1,000,000 shares under the
Plan. Due to significant hiring of employees by the Company and the Company's
use of incentive options to attract qualified personnel during Q4 1999 and Q1
2000, the Company's Board of Directors increased the number of shares reserved
for issuance under our 1999 Plan by 1,000,000 for a total of 2,000,000 shares.
As of May 2, 2000, options for 1,754,000 shares were granted and outstanding
under the plan, options for 246,000 shares were available for grant and no
options had been exercised.
The total number of shares exercisable from options granted under all the
plans is 4,157,422 shares. As of May 2, 2000, options totaling 990,000 shares
have vested.
Each plan is administered by a Board committee thereof subject to the
provisions of each plan, the plan administrator has the authority to determine
which eligible persons shall receive grants, the time of grant, the type of
grant
<PAGE>
and the number of shares underlying the options, the term of the options, the
vesting schedule and other option terms.
The exercise price for options granted under the plans is to be determined
by the plan administrator. However, the exercise price of all incentive stock
options must be at least equal to the fair market value of the underlying shares
on the date of grant. With respect to any optionee who owns capital stock
possessing more than 10% of the voting power of all classes of stock, the
exercise price of any incentive stock option must be not less than 110% of the
fair market value of the underlying shares on the date of grant. Each plan
provides for cashless exercise.
The plan administrator establishes the term of each option granted pursuant
to the plans. The maximum term, however, for incentive stock options is ten
years. With respect to any incentive stock option granted to an optionee who
owns capital stock possessing more than 10% of the voting power of all classes
of stock, the maximum term is five years. Options are subject to earlier
termination as provided in the plans.
Options are exercisable at such times and in such installments as the plan
administrator provides in the terms of the individual option agreement. Subject
to the terms of the plans, an optionee shall not have the rights of a
shareholder until the date of issuance of a stock certificate to the optionee
for the shares underlying the exercised option.
Except as provided in the individual option agreement, any optionee whose
relationship with us has terminated for any reason other than death or
disability may exercise his or her options (if otherwise exercisable) for 3
months following the date of termination if the employee optionee has resigned,
or for one year following the date of termination if the employee optionee is
terminated by us, or the optionee is our director or consultant. If, however,
such relationship is terminated by us for cause or without our consent, the
optionee's options terminate immediately. With respect to non-employee
directors, except as provided in the individual option agreement, a non-employee
director optionee whose directorship with us has terminated for any reason other
than death or disability may exercise his or her options (if otherwise
exercisable) for three months following the date of termination. If such
directorship is terminated for cause, the options terminate immediately.
The plans also provide that in the event of the death or disability of an
optionee, such optionee (or the optionee's representative) is entitled, under
the appropriate circumstances, to exercise their options (if otherwise
exercisable) for up to one year from the date of death or termination due to
disability.
In the event of a stock dividend, recapitalization, certain mergers,
split-up, combination or exchange of shares or similar corporate event which
results in a change in the number or kind of our shares of common stock, the
aggregate number and kind of shares subject to options under the plans and the
related exercise price shall be adjusted accordingly. In the event of "corporate
transactions" or a "change in control" (as defined in the plans), or upon our
dissolution, an optionee's vesting rights under the plans are accelerated.
With respect to the 1997, 1998 and 1999 plans, no option may be granted
after May 31, 2007, December 31, 2001 and December 31, 2001, respectively. Each
plan may be terminated or amended by the Board of Directors generally without
shareholder approval. However, shareholder approval is required for certain
types of amendments as provided in the plans. No termination or amendment of the
plans may be made that adversely affects the rights of an existing option
<PAGE>
holder, without such person's consent. Options granted under the plans may not
be transferred other than by will or pursuant to the laws of descent and
distribution.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The following description of our financial condition and results of operations
should be read in conjunction with the information included in this prospectus.
The description contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ significantly from the results
discussed in the forward-looking statements as a result of the risk factors set
forth above and elsewhere in this prospectus.
Overview
Virtual Communities, Inc. (the "Company") is a developer and publisher of
online business-to-business and business-to-consumer communities. Through its
proprietary Community Management Solution(TM) (CMS), the Company designs and
develops web-based vertical communities containing a comprehensive suite of
products and services that includes web publishing and content management
software, integrated e-commerce solutions and best-of-breed interactive
community features. The Company also provides its CMS clients with editorial and
marketing services. CMS provides a rapid, 90-day, one-stop solution for creating
an online community that contains all the web tools required for managing
content, conducting e-commerce and attracting and retaining online visitors.
The Company, a Delaware corporation formerly known as Heuristic Development
Group, Inc. ("HDG"), consummated a merger (the "Merger") with Virtual
Communities, Inc. ("VCI"), also a Delaware corporation, in October 1999. Prior
to the Merger, we were a development stage company organized to develop, design
and market fitness-related products. In 1999, we decided to pursue a strategy of
acquisition of an existing company culminating in the merger with VCI. VCI was
organized in 1996 to develop and operate online communities on the Web targeted
to specific ethnic groups. After the Merger, we changed our name to Virtual
Communities, Inc., to reflect that our Company's business is now the development
and operation of online communities and related services for third parties and
the publishing of our own online communities. For accounting purposes, the
Merger has been treated as a recapitalization of VCI with VCI as the acquirer
(reverse acquisition). The historical financial statements prior to October 29,
1999, are those of VCI and as of October 29, 1999 the financial statements
reflect the two companies. In March 2000, we merged this wholly owned subsidiary
into the parent company.
VCI was incorporated in August 1996 as Virtual Jerusalem Ltd., Inc. It was
founded to develop, acquire and operate online communities on the Web targeted
to members of demographic groups with interests in their historical ethnic
backgrounds and who want to share information with other members with like
interests. In June 1997, VCI acquired substantially all of the assets and
outstanding shares of Virtual Communities Israel Ltd. formerly called Virtual
Jerusalem Ltd. ("VCIL"), an Israeli corporation formed in 1996 by the founders
of VCI that developed and published an Internet Web site called Virtual
Jerusalem. VCIL currently develops and maintains the Company's online
communities and performs certain programming, design, software development and
web maintenance services on behalf of the Company pursuant to a Cost Plus
Agreement and certain general and administrative duties on behalf of the Company
pursuant to a Financial Services Agreement between the entities.
<PAGE>
We currently operate five online communities: Virtual Jerusalem
(www.virtualjerusalem.com), Virtual HolyLand (www.virtualholyland.com), Virtual
Ireland (www.virtualireland.com), Virtual Italy (www.virtualitaly.com) and
Virtual India(www.virtualindia.com). Rather than create our own content, we
aggregate content, including news and features, from our content partner Web
sites. In consideration for our use of their content, we offer our content
partners a variety of benefits such as a portion of advertising revenues, links
back to their sites, interactive elements, We supplement the content on our Web
communities by adding a variety of interactive and community-enhancing elements,
such as free e-mail, weather, bulletin boards and chat services. We obtain the
rights to use these elements or "modules" by licensing the technologies from
Internet service providers. Our communities are presented in an easy to use
channel format and are designed to create a cohesive and comprehensive Web
environment targeted to specific demographic profiles. Based on our expertise in
designing and developing Web sites for our content partners, we also recently
began offering Community Management Solution (CMS) Web site design and
development services to others on a fee for services basis. Our first online
community, Virtual Jerusalem, was launched in May 1996 by VCIL. Virtual
Jerusalem contains content from many Jewish and Israel-related news providers
and content partners. In addition, Virtual Jerusalem contains many interactive
elements designed to encourage users to return to the site on a regular basis,
including an online radio station, and a search engine with access to over
10,000 other Jewish related Web sites.
In December 1998, we launched our second online community, Virtual
HolyLand, which is targeted to Evangelical Christians, and in March 1999, we
launched our third online community, Virtual Ireland, which is targeted to
people of Irish descent. In October 1999, we launched Virtual Italy targeted to
the Italian American community. In November 1999, we launched Virtual India
targeted to the Indian American community.
To date, we have entered into four agreements for the sale of CMS. Such
agreements call for the design and development of an online community within a
90 day period in consideration for a fee payable over the 90 day period.
Advertising is offered to our advertisers at rates that are based upon an
industry accepted CPM (cost per thousand page views delivered) basis. Discounts
from our standard advertising rates are offered to certain advertisers based on
several factors, including the duration and gross dollar amount of advertising
campaigns. We currently sell banner ads for six to twelve month periods,
although in many instances such contracts are cancelable by an advertiser after
a three-month period. Cancellations by advertisers have been negligible. Barter
advertising accounted for approximately 28% and 27% of our advertising revenues
for the fiscal years ended December 31, 1998 and 1999, respectively. Revenue
from barter transactions is calculated based upon the fair market value of the
goods or services received.
We project increased revenues from banner advertising sales as we continue
to expand our advertising sales staff, and solicit advertisers which seek the
types of Web sites developed by us since such sites deliver an audience
comprised of a specific demographic profile to which such advertisers can tailor
a targeted campaign.
We are also introducing e-commerce programs on our communities powered by
Intershop Software, and introducing similar programs for our other online
communities. We will charge a fee of $175 to $500 for each store placed on one
of our Communities and receive a percentage of gross sales equal to 10%. We
provide links to these third party Web sites for which we receive a percentage
of sales from users who make purchases on those third party sites where such
<PAGE>
users originated from our sites. We expect e-commerce transactions to generate a
significant percentage of our revenues in the future. To the extent that the
number of anticipated users on our online communities is less than anticipated,
that such users do not engage in e-commerce transactions or that we do not
establish attractive e-commerce programs on our communities, revenues generated
from e-commerce will be less than projected.
We believe that the continued expansion of our operations and marketing
efforts is essential to achieving our financial goals. We therefore intend to
continue to substantially increase expenditures in all areas of our operations,
resulting in continued increases in cost of revenues and selling, general and
administrative expenses. To the extent that such expenses precede or are not
subsequently followed by increased revenues, our business, financial condition
and operating results will be materially adversely affected.
Historical Comparison of Years Ended December 31, 1999 and 1998
<PAGE>
Revenue
Total Revenues. Total revenues for fiscal years ended December 31, 1998 and
December 31,1999 were $819,000 and $857,000, respectively. Revenue to date has
almost exclusively been generated by VCI's own online communities, specifically
Virtual Jerusalem. In the third quarter of 1999, revenue from CMS Services
commenced and is expected to outpace our communities revenue by the end of the
first quarter 2000.
CMS Services Revenues. CMS Services revenues commenced in the third quarter
of 1999, and amounted to $165,000, or 19%, of total revenue for the fiscal year
ended December 31, 1999. This revenue was generated in its entirety from one CMS
Customer. Management anticipates that this revenue stream will quickly pick up
momentum and will become our primary source of income by the end of the first
quarter 2000. To date, VCI has entered into four CMS agreements. If VCI fails to
attract new customers, VCI's business, financial condition and operating results
may be materially adversely affected.
CMS services is considered, for accounting purposes, software products and
technology, and therefore, revenue therefrom is recognized in accordance with
Statement of Position (SOP) 97-2, as amended by SOP 98-4 and SOP 98-9.
Therefore, revenue is recognized upon delivery, when collection is probable, the
fee is fixed and determinable, vendor-specific objective evidence exists to
allocate the total fee to the elements of the arrangement and persuasive
evidence of an arrangement exists. Revenue for maintenance and support services
are deferred and recognized ratably over the service period. Online Communities
Revenues. As of end of 1999, our primary source of total revenue to date derived
from banner advertising fees. Revenues from banner advertising accounted for
approximately $511,000, or 62% of revenue, and $418,000, or 49% of total revenue
for fiscal years ended December 31, 1998 and 1999, respectively. The decrease of
approximately 18% primarily resulted from the lag time between the completion of
the advertising contract with our prior travel sponsor, Tower Air in December
1998, and the commencement of the contract with the new travel sponsor,
Continental Airlines in May 1999. Banner advertising is expected to rise
steadily due to an increased sales staff and marketing efforts. In addition, 30%
of the advertising contracts are now for a duration of twelve months, as
compared with 4% in 1998. To date, we have signed banner advertising contracts
for revenues recognizable in the year 2000 approximating $382,000.
Of the total banner advertising revenue earned, barter advertising
accounted for 28% and 27% of such revenues for fiscal years ended December 31,
1998 and 1999, respectively. Revenue from barter transactions is calculated
based upon the fair market value of the goods or services received.
To date, we have not derived significant revenue from e-commerce
commissions. E-commerce commission revenues accounted for 5% and 4% of total
revenues for both 1998 and 1999 fiscal years, respectively. We expect e-commerce
transactions to generate an increasing percentage of our revenues in the future
as e-commerce partners are added to our online communities. In December 1999 we
signed a contract with Intershop, Inc., provider of E- Commerce technologies. We
expect our e-commerce revenue to increase materially upon implementation of
Intershop e-commerce technology with our communities.
Additional site revenue streams are Web site hosting, Web links and
promotion of content partner Web sites on our online communities, and production
services. Hosting, Web link and promotion revenues are recognized ratably over
the service period pursuant to annual agreements that provide for annual fees.
Production revenue is recognized upon performance of production services.
Hosting, Web link
<PAGE>
and promotion revenues accounted for 21% both for 1998 and 1999 fiscal years.
Production revenues accounted for 12% and 6% for fiscal years ended December 31,
1998 and December 31, 1999 respectively. Management expects these revenue
streams to decrease as resources are refocused away from Web site hosting and
production.
Significant Customers. The five largest community advertising clients
accounted for over 47% of total revenue in 1999, with Continental Airlines
accounting for approximately 22% of such total revenue. The agreement with
Continental Airlines, executed in May 1999, is a barter advertising agreement
largely for airline tickets, equivalent in value to $150,000, in exchange for
advertising placements on the Virtual Jerusalem site for equivalent value. This
contract is currently being renewed at approximately the same value. Due to
shift of business to the CMS sector, Management does not believe that our
success will depend largely upon our ability to broaden and diversify our
advertising base. If we lose advertisers, fail to attract new advertisers or are
forced to reduce advertising rates in order to retain or attract advertising
clients, our business, financial condition and operating results would not be
materially adversely affected.
Revenue Mix.
In 1999 CMS revenue and Community generated revenue accounted for 19% and 81%,
respectively, of total revenue. This revenue mix was significantly impacted the
fact that CMS was first launched in August 2000. By the end of the year 2000,
the revenue mix is anticipated to be approximately 67% CMS revenue, 27%
advertising revenue, and 6% E-Commerce revenue.
Cost of Revenue
Cost of revenue consists primarily of expenditures for technical support of
our online communities, Internet access and connectivity, Web site production,
content development and maintenance and client services. Cost of revenue
amounted to $721,000, or 88% of revenue, in 1998 and $1,816,000, or 212% of
revenue, in 1999. This increase is primarily due to the increased hiring of
additional technical and Web development and design personnel in 1999, and the
increased overhead and support services necessary to support expanded
operations. The increase in technical personal is critical to the development,
implementation and support of the CMS services and core technology. In addition,
the increase is attributed to the commencement of a licensing fee in 1999 for
software used as components of CMS.
Sales and Marketing
Selling and marketing expenses consist of salaries, travel expenses for
sales staff, sales commissions, advertising revenue sharing with content
partners, marketing expenses for our online communities and commencing in the
fourth quarter 1999, CMS and marketing materials and promotions. Sales and
marketing amounted to $469,000, or 57% of revenue, in 1998 and $1,583,000, or
185% of revenue, in 1999. The salary expense increased by 151% over 1998 as we
hired additional sales and marketing personnel and, in addition, dedicated a
resource to administer our advertisement management program. In the fourth
quarter 1999 we ran a marketing campaign to launch our CMS services, and at the
same time, began to market aggressively our online communities in order to
increase the numbers of users and encourage their registration on our
communities.
General and Administrative
<PAGE>
General and administrative expenses consist primarily of salaries and legal
and professional services. In addition, our rent, utilities and administrative
employee benefits are included in general and administrative expenses. General
and administrative expenses amounted to $872,000, or 106% of revenue, in 1998
and $2,222,000, or 259% in 1999. This increase was primarily due to the increase
in hiring of additional personnel, and the increase in overhead and support
services necessary to support expanded operations. Additionally, legal fees
increased materially for work related to special projects, new contract
formation, and subsidiary acquisition which occurred subsequently in February
2000.
Merger Costs
Cost related to our Merger amounted to $1,057,000. Of this amount 44%
represents compensation to the broker, in the form of an 8% cash fee on our
closing cash value and non cash compensation in the form of warrants issue at
merger closing. The value of the non cash compensation cost was determined using
Black-Scholes pricing model.
Financing Expenses amounted to $191,000 and $109,000 for fiscal years ended
December 31, 1998 and 1999, respectively. Financing expenses relate to interest
incurred in the ordinary course of business and from costs associated with
shares issues at a discount price or in consideration of a loan.
Provision for Income Taxes
At December 31, 1999, we had approximately $7 million in federal net
operating loss carryforwards. The federal net operating loss carryforwards will
expire between calendar years 2012 and 2019 if not utilized. In addition, the
Tax Reform Act of 1986 contains provisions that may limit the net operating loss
carryforwards available for use in any given period upon the occurrence of
various events, including a significant change in ownership interests. To date,
we have not utilized any portion of our net operating loss carryforwards to
reduce our overall income tax liability.
Liquidity and Capital Resources
Prior to 1999, we funded our operations, working capital needs and capital
expenditures primarily through private placements of our common stock, and the
issuance of short-term convertible loans and notes.
In February 1999, we received $815,000 in net proceeds from the sale of
9,550 shares of our series A preferred stock. At the same time we issued 5,000
shares of our series A preferred stock upon the conversion of a $500,000
convertible secured promissory note issued by us on December 31, 1998. Between
June and September 1999, we received net proceeds of $874,000 from the sale of
10,325 shares of our series B preferred stock.
On December 14, 1999, we received a total of $985,400 for the private
placement sale to accredited investors of 400,000 shares of restricted common
stock and a three-year warrant, exercisable for 40,000 shares of common stock at
a purchase price of $2.46 per share. We made the private placement offering
under Section 4(2) of the Securities Act of 1933, as amended (the "Securities
Act"). The terms of the offering provided for issuance of the restricted common
stock at a purchase price equal to 35% below the market valuation of our
publicly traded common stock and the issuance of a warrant exercisable for the
purchase of one share of common stock for each ten shares purchased. The
warrants become exercisable six months after the date of issuance. The
restricted shares of common stock and the shares of common stock to be issued
upon exercise of the warrant may be offered for public resale only if registered
<PAGE>
under the Securities Act of 1933 or an exemption therefrom. We have agreed to
provide the purchasers with certain registration rights with respect to the
restricted common stock and the common stock underlying the warrants. Such
registration rights commence six months from the date of purchase and if the
registration is declared effective by the Securities and Exchange Commission,
public resale of such securities shall be permitted. We paid approximately
$50,000 and issued warrants exercisable for 120,000 shares of common stock on
the same terms and conditions as the warrants issued in the private placement as
financial advisory consultant fees related to the closing of the first tranche
of the private placement offering. The terms and conditions of the private
placement offering were duly authorized by our Board of Directors as being
reasonable and in the best interests of the Company, with particular regard to
our need for operating capital and the limited availability of other reasonable
financing alternatives at the time.
In January and February 2000, the Company issued 981,864 shares of common
stock at prices per share ranging from $2.11 to $3.42 to 12 individuals and
entities, including three non-U.S. shareholders of the Company, for aggregate
gross proceeds of $2,524,000. In connection with the issuance of 468,098 of such
shares to three existing shareholders of the Company, the Company issued
three-year warrants to acquire a total of 46,808 shares of common stock at
exercise prices ranging from $2.11 to $2.75. The Company paid consultant and
finders fees related to the January and February financing in the form of three-
year warrants exercisable into 108,762 shares of common stock at exercise prices
ranging between $2.11 and $3.42 per share.
In April 2000, the Company sold 517,800 of its shares at $5.80 per share to
four institutional investors in a private placement arranged by Josephthal &
Company and Intercoastal Financial Services Corp. In connection with the sale,
the Company issued 2,000,000 callable warrants to Intercoastal (the "IFSC
Warrants") exercisable for a period of three years at an exercise price of
$18.00 per share. 1,000,000 of these IFSC Warrants are callable by the Company
at 93% of the average price of the Common Stock for the five days immediately
following the call which may be made by the Company following the effectiveness
of a registration statement registering the shares underlying the IFSC Warrants.
The remaining 1,000,000 IFSC Warrants are callable by the Company three months
following the date of effectiveness of such registration statement. The IFSC
Warrants are redeemable by the Company at $0.75 per share decreasing to $0.50 in
July 2000 and thereafter by $0.05 per month until such redemption price reaches
$0.25 per share. In connection with the private placement, the Company issued a)
500,000 four-month warrants to the purchasers of the shares exercisable at
$14.875 per share, b) 129,450 three-year warrants to such purchasers exercisable
at $7.4375 per share which are also redeemable at the same price as the IFSC
Warrants and c) 36,246 warrants exercisable for three years at $5.80 per share
to Josephthal & Company, the company's investment banker in connection with the
transaction in partial consideration for its introduction of IFSC to the
Company.
We maintain an operating line of credit with Israel General Bank in the
amount of $560,000. As of March 31, 2000, the amount outstanding on this line of
credit totaled $515,000. Israel General Bank has also provided us with a $58,000
guarantee for three months rent on the leaseholds occupied by Virtual
Communities Israel, Ltd.
In June 1999, Virtual Communities Israel, Ltd., ("VCIL"), one of our
Israeli subsidiaries, entered into a three-year lease for approximately 10,000
square feet of office space in Jerusalem for approximately $45,000 in quarterly
leasehold costs which payments commenced in December 1999. In January and March
2000, VCIL exercised options for additional space which serves primarily as the
<PAGE>
Company's software development, programming and communities design center. Total
leasehold costs for the new space will equal to approximately $165,000 per year.
In July 1999, we entered into a five-year lease for approximately 5,000 square
feet of office space in New York City for a rental fee of approximately $22,500
per quarter. In October 1999, we exercised our option to lease an additional
5,000 square feet of office space in the same building for a five-year time at a
monthly rental of approximately $8,250. In addition, the lessor of the new
Jerusalem premises is contributing $234,000 in buildout costs that VCIL is
obligated to repay over the course of the lease term. In January 1999, VCIL
entered into a three-year lease for approximately 3,800 square feet of office
space in Jerusalem which it vacated upon our move to new premises in August 1999
and which it intends to sublet upon vacancy of the current sub-lessor in July
2000. Although VCIL believes that it will be able to continue to sublet such
space, our management cannot assure you that it will be successful in doing so,
and in the event such space cannot be sublet, we would be obligated to pay
approximately $15,000 in quarterly leasehold fees in addition to the lease costs
for our new premises until December 2001.
We anticipate that we will continue to increase our capital expenditures in
the near future due to anticipated growth in our operations, infrastructure, and
personnel. In addition to the commitments relating to the new leaseholds,
improvements to infrastructure, additional licenses for interactive elements
(including content management software) and Web site security are expected to
amount to approximately $115,000 monthly through the year 2000.
Projects anticipated during the year 2000 which will require capital
expenditure of approximately $500,000 includes the development of server parks
in New York and London in order to facilitate local technical services for CMS
customers and the opening of an office in California.
In March 2000, the Company entered into a finance lease agreement with
Microtech Leasing Corp., a Princeton, New Jersey company for the lease of up to
$250,000 of computer equipment to the Company. The credit facility provides the
Company with the ability to obtain certain computer equipment financed by the
lease which is secured by such equipment.
Marketing expenditures are expected to approach approximately $50,000 per
month to promote CMS services and, on average, $73,000 per month per each of our
Web sites, by the fourth quarter of 2000, in order to reach projected levels of
CMS customers, registered users, traffic, and revenue from banner advertisements
and e-commerce transactions on online communities. We anticipate that our
existing cash balance combined with the net proceeds which may be realized from
the sale of additional shares pursuant to our private placement offerings, the
anticipated proceeds from exercise of warrants and anticipated revenue from
operations will be sufficient to meet our working capital and capital
expenditure needs through December 31, 2000. If the cash that we generate from
our operations is insufficient to satisfy our liquidity requirements after this
period, then we may need to sell additional securities. The sale of additional
equity or convertible debt securities may result in additional dilution to our
shareholders. We will need to obtain additional capital or modify our growth
strategy. We may not be able to raise any additional capital or obtain such
capital on acceptable terms.
FINANCIAL STATEMENTS
The financial statements of the company are included herein, commencing on page
F-1 hereof.
DESCRIPTION OF PROPERTY
<PAGE>
The headquarters and offices of VCI and VCI's Israeli subsidiaries, VCIL
and VCIIP, are located at 589 Eighth Avenue, New York, New York 10018, Jerusalem
Technology Park, Jerusalem, Israel 91481 and Yishuv Eli 37, Eli, Israel 44828,
respectively.
Management believes that the condition of the Company's property is
reasonably adequate for commercial purposes.
VCI's Web site servers are housed in server parks in Herndon, Virginia and
in New York, New York where they receive 24-hour maintenance and back-up
services pursuant to an agreement with Frontier Global, Inc.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In January 1996, Virtual Communities Israel, Ltd. ("VCIL"), a subsidiary of
the Company, purchased equipment, intellectual property rights and contractual
rights from Avi Moskowitz, our President, Chief Executive Officer and Chairman,
and his wife, Helen Moskowitz, in return for an obligation to pay $100,000. In
June 1997, VCIL sold these assets to VCI, and we assumed the payment obligation.
In December 1998, VCI permitted the Moskowitzes to convert $60,000 of this
obligation into shares of VCI's common stock at a rate of $.47 per share. VCI
paid the remaining $40,000 to the Moskowitzes in the form of cash and by barter
between May 1998 and January 1999.
In June, 1998, Mr. Moskowitz received a warrant exercisable until June 30,
2001 into 115,100 shares of our common stock at an exercise price of $1.00 per
share in connection with his agreement to guarantee bank lines of credit for
VCIL in the amount of $130,000 during 1997 and 1998. In December 1998, Mr.
Moskowitz received a warrant exercisable until December 31, 2001 into 46,040
shares of our common stock at $.65 per share in consideration for the deferral
of a portion of his salary from July through November 1998 and a reduction in
his salary from December 1998 through February 1999.
In April 1997, Virtual Communities, Inc. borrowed $100,000 from Business
Systems Consultants ("BSC"), an entity that is affiliated with the family of
David Morris, a Virtual Communities, Inc. director. In December 1998, Virtual
Communities, Inc. permitted BSC to convert the principal and accrued interest of
$16,900 into 286,280 shares of Virtual Communities, Inc. common stock at a rate
of $.47 per share. While the original conversion rate on the loan was $.60 per
share, Virtual Communities, Inc. lowered the conversion rate as an incentive to
BSC to convert the loan. In consideration of the BSC loan, Virtual Communities,
Inc. also issued to BSC three two-year warrants, each expiring December 31,
2000, to acquire a total of 220,992 shares of Virtual Communities, Inc. common
stock at exercise prices ranging from $.30 to $.65 per share. In June 1997,
Virtual Communities, Inc. issued BSC a two-year warrant, expiring December 31,
2000, to acquire 4,834 shares of Virtual Communities, Inc. common stock at an
exercise price of $.60 per share. This warrant was issued in consideration of a
30-day loan to Virtual Communities, Inc. from BSC in the amount of $50,000,
which Virtual Communities, Inc. repaid in July 1997. In September 1999, David
Morris was issued two three-year warrants to acquire up to 243,902 shares of
common stock at an exercise price of $2.10 per share in consideration of his
father's guarantee of a $500,000 line of credit to Virtual Communities, Inc.
Subsequently, in October 1999, Mr. Morris transferred 219,511 of these warrants
to BSC in consideration for BSC's agreement to cover the guarantee by Mr.
Morris' father.
<PAGE>
In August and September 1999, VCIL increased its line of credit from Israel
General Bank by $500,000 to $560,000. The additional amount of the line is
secured by a guarantee from Conrad Morris, the father of David Morris, a
director of the Company. In consideration for providing the guarantee, Virtual
Communities, Inc. issued to David Morris two three-year warrants exercisable
into a total of 243,902 shares of common stock at an exercise price of $2.10 per
share. One warrant, for the purchase of 90,435 shares vests quarterly so that
22,609 shares vest for each quarter the guarantee remains in effect. The other
warrant, exercisable into 153,466 shares, vests on a semi-annual basis so that a
minimum of 76,733 shares are exercisable for every half-year that the guarantee
remains in effect. Virtual Communities, Inc. also agreed to pay Conrad Morris a
fee equal to two and one quarter percent (2.25%) of the amount of the line as
further consideration for his guarantee. In October 1999, Mr. Morris transferred
219,511 of the 243,902 warrants to Business Systems Consultants in consideration
for its agreement to back the guarantee of Conrad Morris.
In June 1998, Mr. Morris received a warrant exercisable until June 30, 2001
into 34,530 shares of our common stock at an exercise price of $1.00 per share
in connection with his agreement to guarantee a bank line of credit for VCIL in
the amount of $60,000 during 1997 and 1998.
In June 1997, Peter A. Jacobs, a Director of the Company, loaned VCI
$50,000. In January 1998, Mr. Jacobs converted this loan into 95,916 shares of
VCI common stock at a rate of $.60 per share. In February 1998, Mr. Jacobs
loaned VCI an additional $2,706, which amount was converted in December 1998
into 7,207 shares of VCI common stock at the rate of $.47 per share. At the time
of the loan, Mr. Jacobs received a warrant exercisable into 3,270 shares of our
common stock at an exercise price of $.66 per share until October 31, 2000. In
December 1998, Mr. Jacobs also purchased 61,233 shares of common stock from VCI
for $25,000, or $.47 per share.
In 1996 and 1997, Net Results Holdings, LLC ("NRH") loaned to Virtual
Communities Israel, Ltd., on an interest-free basis, an aggregate of $250,000.
Harry Fox, a former director of VCI, is a 33.6% shareholder of NRH and its Chief
Executive Officer. In August 1998, VCI permitted NRH to convert the loan into
1,673,554 shares of Virtual Communities, Inc. common stock at a rate of
approximately $.17 per share. NRH and certain officers and directors of NRH own
approximately 10.1% of our outstanding capital stock.
During 1997 and 1998, Virtual Communities Israel, Ltd. ("VCIL") rented
approximately 2,500 square feet of office space and obtained administrative
services from Versaware, Ltd., an Israeli subsidiary of Versaware Technologies,
Inc. ("Versaware"). Harry Fox, a former director of VCI prior to its merger with
the Company in October 1999, is the Chairman and Chief Executive Officer, and a
31% shareholder, of Versaware. VCIL paid Versaware, Ltd. $97,000 in 1997, and
$129,000 in 1998 for this space and these services. With respect to the
Versaware arrangement:
In February 1998, VCI issued to Versaware, Ltd., a two-year warrant,
expiring February 15, 2000, subsequently extended to October 2000, to purchase
16,306 shares of common stock at an exercise price of $.66. This warrant was
issued in consideration of Versaware, Ltd.'s agreement to provide VCIL a 90-day
extension for the payment of approximately $47,000 due to Versaware, Ltd.
through May 15, 1998.
In August 1998, VCI issued to Versaware, Ltd. a two-year warrant, expiring
August 24, 2000, to purchase 15,375 shares of common stock at an exercise price
of $.66 in consideration of Versaware, Ltd.'s agreement to give VCIL a 100-day
extension for the payment of approximately $75,119 due to Versaware, Ltd.
through August 24, 1998.
<PAGE>
In December 1998, VCI issued to Versaware, Ltd. a two-year warrant,
expiring December 31, 2000, to purchase 40,882 shares of common stock at an
exercise price of $.66 in consideration of Versaware, Ltd.'s agreement to give
VCIL a 125-day extension for the payment of approximately $115,000 due to
Versaware, Ltd. through from September through December 1998.
In addition, during 1997 and 1998, Virtual Communities, Inc. sublet office
space and obtained office services from NRH. Harry Fox, a former director of
Virtual Communities, Inc., is a 33.6% shareholder of NRH and our Chief Executive
Officer and a director. Pursuant to this arrangement, VCI paid NRH $9,000 during
1997, and $19,000 during 1998. As of July 1999, VCI ceased subletting office
space from NRH.
In February 1998, VCI borrowed $50,000 from George Moskowitz, the brother
of Avi Moskowitz, our President, Chief Executive Officer and Chairman. This
convertible loan bore interest at the rate of 10% per annum. In consideration
for the loan and for a 5-month extension of the maturity date, VCI issued to
George Moskowitz a two-year warrant, expiring February 2000, which expiration
date was later extended to October 2000, to purchase 61,233 shares of common
stock at an exercise price of $.66 per share. Mr. Moskowitz exercised a portion
of the warrant exercisable into 37,878 shares in March 2000. The loan, and
interest thereon, was repaid by the VCI in January 1999. In August 1998, George
Moskowitz loaned VCI an additional $50,000. This loan bore interest at the rate
of 12% per annum and was due in September 1998. In consideration for this loan,
VCI provided George Moskowitz with $4,200 of goods and services available to VCI
through barter arrangements with our customers and agreed to issue George
Moskowitz 11,510 shares of common stock for each 30-day period the loan remained
outstanding following the maturity date. In December 1998, VCI issued to George
Moskowitz 41,955 shares of common stock in consideration of his agreement to
extend the loan through December 1998. In addition, in December 1998, Mr.
Moskowitz converted the principal and accrued interest on the loan into 128,202
shares of common stock at the rate of $.47 per share.
In connection with a private placement of securities by the Company from
December 1999 though February 2000, we received a total of $985,400 in December
1999 for the sale to Paul and Hannah Lindenblatt, the sister and brother-in-law
of Avi Moskowitz, our Chairman of the Board, President and Chief Executive
Officer, of 400,000 shares of restricted common stock and a three-year warrant,
exercisable for 40,000 shares of common stock at a purchase price of $2.46 per
share. We made the private placement offering under Section 4(2) of the
Securities Act of 1933, as amended (the "Securities Act"). The terms of the
offering provided for issuance of the restricted common stock at a purchase
price equal to 35% below the market valuation of our publicly traded common
stock and the issuance of a warrant exercisable for the purchase of one share of
common stock for each ten shares purchased. The warrants become exercisable six
months after the date of issuance. The restricted shares of common stock and the
shares of common stock to be issued upon exercise of the warrant may be offered
for public resale only if registered under the Securities Act of 1933 or an
exemption therefrom. We have agreed to provide the purchasers with certain
registration rights with respect to the restricted common stock and the common
stock underlying the warrants.
The Lindenblatts are not involved in the management or control of the
Company nor are they otherwise affiliated with us or our management, and their
respective holdings of common stock after such purchase represent in the
aggregate approximately 5% of outstanding shares of our common stock. The sale
of the first tranche of the private placement to the purchasers was made without
regard to any familial relationship, at arms length, on the same terms and
conditions of the private placement offering to other accredited investors.
<PAGE>
The second tranche of such private placement of securities was made in
January 2000 when the Company sold 286,280 shares of restricted common stock and
a three-year warrant, exercisable into 28,628 shares of common stock at a
purchase price of $2.11 per share, to BSC.
Such registration rights commence six months from the date of purchase and
if the registration is declared effective by the Securities and Exchange
Commission, public resale of such securities shall be permitted. We paid
approximately $50,000 in financial advisory consultant fees and issued warrants
exercisable into 205,884 shares at exercise prices ranging from $2.11 to $2.46
related to the closing of the first and second tranches of the private placement
offering. The remainder of the private placement was made to non-affiliated,
accredited investors in subsequent tranches through February 2000, for aggregate
proceeds of approximately $3.5 million, including the proceeds from the sale of
the securities to the Lindenblatts and BSC. The Company issued additional
warrants exercisable into 41,058 shares of our common stock at exercise prices
ranging from $2.67 to $3.42 per share in connection with additional sales made
under the private placement. The terms and conditions of the private placement
offering were duly authorized by our Board of Directors as being reasonable and
in the best interests of the Company, with particular regard to our need for
operating capital and the limited availability of other reasonable financing
alternatives.
<PAGE>
VIRTUAL COMMUNITIES, INC.
AND SUBSIDIARIES
Contents
<TABLE>
<CAPTION>
Page
----
<S> <C>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-2
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheet F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Changes in Shareholders' Deficiency F-5
Consolidated Statement of Cash Flows F-6
Notes to the Consolidated Financial Statements F-7 - F-25
</TABLE>
# # # # # # #
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
Virtual Communities, Inc.
We have audited the accompanying consolidated balance sheet of Virtual
Communities, Inc. (a Delaware corporation) and subsidiaries as of December 31,
1999, and the related consolidated statements of operations, changes in
shareholders' deficiency and cash flows for each of the two years 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 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 Virtual Communities, Inc. and
subsidiaries as of December 31, 1999, and the results of their operations and
their cash flows for each of the two years ended December 31, 1999 in conformity
with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1B to
the consolidated financial statements, the Company is has suffered recurring net
losses from operations and has a shareholder deficiency. Accordingly, the
Company is dependent on obtaining additional sources to finance its operations.
These matters raise substantial doubt about the Company ability to continue as a
going concern. Management's plans in regard to these matters and financings
completed subsequent to the balance sheet date are also described in Note 1B.
The accompanying consolidated financial statements do not include any
adjustments relating to the recoverability and classification of asset carrying
amounts or the amounts and classification of liabilities that might result
should the Company be unable to continue as a going concern.
Arthur Andersen LLP
New York, New York
April 14, 2000
F-2
<PAGE>
VIRTUAL COMMUNITIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(U.S. Dollars in thousands except per share data)
<TABLE>
<CAPTION>
December 31
1999
-------
<S> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 469
Trade receivables, net of allowance for doubtful debts of $23 191
Other receivables 128
-------
Total current assets 788
Property and Equipment, net of accumulated depreciation and
amortization 1,150
Severance Pay Deposits 83
Other Assets 343
-------
Total Assets $ 2,364
-------
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current Liabilities
Short-term bank borrowings and current maturities of long-term loan $ 731
Shareholders' loans 150
Accounts payables and accrued expenses 1,511
-------
Total current liabilities 2,392
Long-Term Liabilities
Long-term loan 167
Accrued severance pay 329
-------
Total long-term liabilities 496
-------
Total liabilities 2,888
-------
Commitments and contingencies (Note 9)
Shareholders' Deficiency
Preferred stock of $0.01 par value
Authorized - 5,000,000 shares; none issued and outstanding --
Common stock of $0.01 par value
Authorized - 45,000,000 shares; issued and outstanding -
14,630,224 shares 146
Additional paid-in capital 8,336
Accumulated deficit (8,856)
-------
(374)
Treasury stock 149,900 shares at cost (150)
-------
Total shareholders' deficiency (524)
-------
Total liabilities and shareholders' deficiency $ 2,364
=======
</TABLE>
The accompanying notes form an intergal part of the financial statements
F-3
<PAGE>
VIRTUAL COMMUNITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(U.S. Dollars in thousands except per share data)
<TABLE>
<CAPTION>
For the year ended
December 31
-----------
1999 1998
------------ ------------
<S> <C> <C>
REVENUES $ 857 $ 819
------------ ------------
OPERATING COST AND EXPENSES
Cost of revenues 1,816 721
Selling and marketing expenses 1,583 469
General and administrative expenses 2,222 872
Merger costs 1,057 --
------------ ------------
Total operating costs and expenses 6,678 2,062
------------ ------------
Operating loss (5,821) (1,243)
Financing expenses, net 109 191
------------ ------------
Net loss $ (5,930) $ (1,434)
============ ============
NET LOSS PER SHARE, BASIC AND DILUTED $ (0.56) $ (0.17)
============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING,
BASIC AND DILUTED 10,532,530 8,485,904
============ ============
</TABLE>
The accompanying notes form an intergal part of the financial statements
F-4
<PAGE>
VIRTUAL COMMUNITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' DEFICIENCY
(U.S. Dollars in thousands except per share data)
<TABLE>
<CAPTION>
Number of Number of Common stock Additional Accumulated Treasury Total
Series A Series B ------------------ paid-in deficit stock
preferred preferred Shares Amount capital
shares shares
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance as of
January 1, 1998 -- -- 4,354,588 $ 44 $ 604 $ (1,492) $ -- $ (844)
Common stock issued -- -- 2,256,383 22 827 -- -- 849
Common stock issued
upon conversion of
loans -- -- 3,087,008 31 554 585
Options issued -- -- -- -- 72 -- -- 72
Net loss -- -- -- -- -- (1,434) -- (1,434)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance as of
December 31, 1998 -- -- 9,697,979 $ 97 $ 2,057 $ (2,926) $ -- $ (772)
Common stock issued -- -- 529,519 5 1,067 -- -- 1,072
Series A preferred
stock issued upon
conversion of
convertible loans 5,000 -- -- -- 500 -- -- 500
Series A preferred
stock issued, net of
issuance costs 9,550 -- -- -- 815 -- -- 815
Series B preferred
stock issued, net of
issuance costs -- 10,325 -- -- 874 -- -- 874
Common stock issued
upon conversion of
Series A and B
preferred stock (14,550) (10,325) 2,645,770 26 (26) -- -- --
Common stock issued
upon the Merger -- -- 1,751,956 18 2,777 -- (150) 2,645
Warrants issued -- -- -- -- 268 -- -- 268
Common stock issued
upon exercise of
warrants -- -- 5,000 -- 4 -- -- 4
Net loss -- -- -- -- -- (5,930) -- (5,930)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance as of
December 31, 1999 -- -- 14,630,224 $ 146 $ 8,336 $ (8,856) $ (150) $ (524)
========== ========== ========== ========== ========== ========== ========== ==========
</TABLE>
The accompanying notes form an intergal part of the financial statements
F-5
<PAGE>
VIRTUAL COMMUNITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(U.S. Dollars in thousands except per share data)
<TABLE>
<CAPTION>
For the year ended
December 31
-----------
1999 1998
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(5,930) $(1,434)
Adjustments to reconcile net loss to net cash
used in operating activities (see below) 1,284 274
------- -------
Net cash used in operating activities (4,646) (1,160)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (962) (77)
Investment in other assets (293) --
------- -------
Net cash used in investing activities (1,255) (77)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Short-term bank borrowings, net 583 32
Receipt of shareholders' loans 150 200
Repayment of shareholders' loans (200) --
Receipt (repayment) of convertible loans (75) 624
Issuance of shares 2,765 921
Cash acquired in the Merger 2,573 --
------- -------
Net cash provided by financing activities 5,796 1,777
------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (105) 540
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 574 34
------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 469 $ 574
======= =======
ADJUSTMENT TO RECONCILE NET LOSS TO NET CASH USED IN
OPERATING ACTIVITIES:
Items not affecting operating cash flows:
Depreciation and other $ 207 $ 78
Accrued severance pay, net 203 14
Issuance of warrants 268 --
Changes in operating assets and liabilities:
Increase in trade receivables, net (52) (19)
Increase in other receivables (66) (21)
Increase in payables and accrued expenses 724 222
------- -------
$ 1,284 $ 274
======= =======
SUPPLEMENT DISCLOSURES OF CASH FLOW INFORMATION:
CASH PAID FOR INTEREST $ 31 $ 23
======= =======
NONCASH TRANSACTIONS
Issuance of shares upon conversions of loans $ 500 $ 585
======= =======
Purchased of fixed assets on credit $ 214 $ --
======= =======
</TABLE>
The accompanying notes form an intergal part of the financial statements
F-6
<PAGE>
VIRTUAL COMMUNITIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(U.S. Dollars in thousands except per share data)
Note 1 - GENERAL
A. Virtual Communities, Inc. (the "Company"), a Delaware corporation, is
the product of a merger consummated October 29, 1999 (the "Merger"),
in which Virtual Communities, Inc. ("VCI") merged with and into a
wholly-owned subsidiary of Heuristic Development Group, Inc. ("HDG").
Prior to the Merger, HDG was a development stage company organized to
research, develop, design and market fitness- related products. VCI
was incorporated in 1996 to develop, acquire and operate online
communities on the Web that aggregate and publish various news, media
and entertainment content targeted to specific ethnic groups. VCI
commenced its operation in June 1997. After the Merger, HDG's name was
changed to Virtual Communities, Inc. to reflect that the Company's
primary business is the development and operation of online
communities and related services for third parties and the publishing
of its own communities. The Company believes it currently operates in
one business segment.
As a result of the Merger, VCI shareholders received 1.151 shares Of
HDG common stock for each share of VCI common stock held by them.
HDG's Board of Directors and management resigned and were replaced
with VCI's Board of Directors and management. Following the Merger,
VCI shareholders held 88.6% of the common stock of the Company with
HDG shareholders holding the remaining 11.4%. In connection with the
Merger, HDG began trading its securities (former symbol: IFIT) on the
NASDAQ Small Cap Market under the symbols: "VCIX" - for the common
stock, "VCIXU" for the Units, "VCIXW" for the Class A Warrants and
"VCIXZ" for the Class B warrants.
The results of operation of HDG for the period January 1, 1999 to October 29,
1999 are as follows:
<TABLE>
<S> <C>
Selling, marketing and general
and administrative expenses $ 589
Merger costs 140
Financing income, net (137)
-----
Net loss $ 592
=====
</TABLE>
F-7
<PAGE>
VIRTUAL COMMUNITIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
(U.S. Dollars in thousands except per share data)
Note 1 - GENERAL (Cont.)
A. (Cont.)
The historical financial statements of VCI are presented with no
change except for the retroactive restatement of number of shares and
earnings per share data, based on the exchange ratio of shares issued
in the Merger.
Prior to the Merger, in June 1997, VCI acquired the majority of the
net assets and shares of Virtual Communities Israel Ltd. ("VCIL" -
formerly Virtual Jerusalem Ltd.), an Israeli company. VCIL commenced
operations in January 1996. VCIL develops and maintains the Company's
online communities and performs certain programming, design, software
development and web maintenance services on behalf of the Company
pursuant to a Cost Plus Agreement, and certain general and
administrative duties on behalf of the Company and pursuant to a
Financial Services Agreement between the entities.
The Company markets and sells its online community design, development
and Web maintenance services to web site publishers through VCI
Community Solutions, Inc., a wholly-owned subsidiary established by
VCI in August 1999. These services include the Company's proprietary
Community Management Solution ("CMS"), a turnkey solution for the
creation of online communities that includes content management and
publishing software, e-commerce functionality and a comprehensive set
of community retention features designed to attract and retain
visitors to a community. The Company provides several of its CMS
features through license arrangements with third party service
providers and by developing its own programming tools. As of December
31, 1999 the Company entered into one agreement for its CMS system.
F-8
<PAGE>
VIRTUAL COMMUNITIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
(U.S. Dollars in thousands except per share data)
Note 1 - GENERAL (Cont.)
A. (Cont.)
The Company's online communities are targeted to members of
demographic groups with interests in their historical ethnic
backgrounds and who want to share information with other members with
same interests. The Company currently operates five online communities
that it owns outright: Virtual Jerusalem (www.virtualjerusalem.com), a
leading Internet site containing Jewish and Israel related content
that has been in operation since 1996, Virtual HolyLand
(www.virtualholyland.com), targeted to the Evangelical Christian
community and launched in late 1998, and Virtual Ireland
(www.virtualireland.com), Virtual Italy (www.virtualitaly.com) and
Virtual India (www.virtualindia.com) which were developed by VCI and
launched in 1999. The Company has agreements with content partners and
third party service providers who provide these communities with
content and features such as chat rooms, message boards, weather and
e-commerce capabilities. The Company also owns and publishes a web
site called "Israel Wire" which provides online news from Israel
through an Israeli subsidiary, VCI Internet Properties Ltd. which it
formed in June 1998.
B. The Company incurred net losses in 1999 amounting approximately to
$5.9 million and anticipates that it will continue to incur losses for
some time. The Company's continued existence is dependent on its
ability to generate more revenues and on obtaining additional
financing from its shareholders and external sources. Subsequent to
the balance sheet date, the Company entered into several private
placements selling an aggregate of 1,499,664 shares of common stock
for aggregate proceeds of $5,524 to accredited investors at prices
ranging from $2.11 to $5.80 per share. In connection with these sales,
the Company issued warrants exercisable into an aggregate of 2,821,266
shares of common stock at exercise prices ranging from $2.11 to $18.00
(See Note 12B and 12C). Management expects the proceeds from these
private placements and the proceeds from the expected exercise of the
warrants to be sufficient to finance the Company's operations through
December 31, 2000. However, there can be no assurance that the Company
will obtain all the financing necessary for its operations. These
matters raise substantial doubt about the Company's ability to
continue as a going concern. The accompanying consolidated financial
statements do not include any adjustments that might be necessary
should the Company be unable to continue as a going concern.
F-9
<PAGE>
VIRTUAL COMMUNITIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
(U.S. Dollars in thousands except per share data)
Note 2 - ACCOUNTING POLICIES
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. The significant accounting
policies followed in the preparation of the financial statements, applied
on a consistent basis, are as follows:
A. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of VCI and
its wholly-owned subsidiaries. All material intercompany accounts and
transactions have been eliminated in consolidation.
B. USE OF ESTIMATES
The preparation of the consolidated 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 disclosures of contingent assets and
liabilities at the dates of the consolidated financial statements and
the reported amounts of revenue and expenses during the reporting
periods. Actual results may differ from those estimates.
C. CASH AND CASH EQUIVALENTS
All highly liquid investments with an original maturity of three
months or less are considered cash equivalents.
D. PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of accumulated
depreciation and amortization. Depreciation and amortization is
calculated using the straight-line method over the estimated useful
lives of the assets ranging as follows:
<TABLE>
<CAPTION>
Years
-----
<S> <C>
Computers 3 - 4
Furniture and office equipment 7 - 14
</TABLE>
F-10
<PAGE>
VIRTUAL COMMUNITIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
(U.S. Dollars in thousands except per share data)
Note 2 - ACCOUNTING POLICIES (Cont.)
E. INCOME TAXES
The Company adopted SFAS No. 109, "Accounting for Income Taxes". Under
SFAS No. 109, deferred tax assets and liabilities are recognized for
the future tax consequence attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable.
Income in the years in which those temporary differences are expected
to be recovered or settled. The effect on deferred tax assets or
liabilities of a change in tax rates is recognized in the period in
which the tax change occurs. Valuation allowances are established,
when necessary, to reduce deferred tax assets amounts expected to be
realized.
F. REVENUE RECOGNITION
The Company's primary source of revenue to date has been from online
Web site advertising fees. The Company recognizes revenues earned from
advertising fees ratably over the term of the advertising contract.
The Company also earns revenues from hosting and exposure of content
partner owned Web sites, and from site production services. Hosting
and exposure revenues are recognized ratably over the service period
(mainly one year). Revenues from production services are recognized
upon completion of such services and acceptance by client.
Revenues from sales of software products and technology are recognized
in accordance with Statement of Position (SOP) 97-2, as amended by SOP
98-4 and SOP 98-9, upon delivery, when collection is probable, the
vendor's fee is fixed or determinable, vendor-specific objective
evidence exists to allocate the total fee to the elements of the
arrangement and persuasive evidence of an arrangement exists. Provided
that all other elements of SOP 97-2 are met, revenues are recognized
upon delivery, whether the customer is a distributor or the final end
user. Revenues for maintenance and support services are deferred and
recognized ratably over the service period.
F-11
<PAGE>
VIRTUAL COMMUNITIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
(U.S. Dollars in thousands except per share data)
Note 2 - ACCOUNTING POLICIES (Cont.)
G. BARTER ARRANGEMENTS
The Company enters into barter arrangements with certain customers,
whereby the Company's advertising, hosting and exposure or production
services are exchanged for goods or services such as airline tickets,
content material and promotional services.
Revenues and expenses from barter transactions are measured on the
basis of the fair value of the goods or services sold or, if more
clearly evident, the fair value of the assets or services
received.Advertising barter revenues are determined by the fair market
value of the goods or services received based on the respective
customer's listed prices.The fair value of barter hosting and exposure
revenues and production services is determined by the standard rates
charged to cash buyers.
The Company's revenues from barter transactions for the year ended
December 31, 1999 and 1998 was $203 and $279, respectively (See Note 2
N)
Barter expenses are included in selling, marketing, general and
administrative expenses section of the statements of operations, as
incurred.
H. COST OF REVENUES
Cost of revenues consists primarily of direct labor costs and content
material and licenses.
F-12
<PAGE>
VIRTUAL COMMUNITIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
(U.S. Dollars in thousands except per share data)
Note 2 - ACCOUNTING POLICIES (Cont.)
I. LONG-LIVED ASSETS
The Company records its long-lived assets at costs. In accordance with
Statement of Financial Accounting Standards ("SFAS") No. 121.
"Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to Be Disposed Of," the Company reviews its long-lived
assets for impairment whenever events or changes in circumstances
indicate that the carrying amounts of the assets may not be
recoverable. Furthermore, the assets are evaluated for continuing
value and proper useful lives by comparison to expected future cash
projections. Management has performed a review of all long-lived
assets and has determined that no impairment of the respective
carrying values has occurred as of December 31, 1999.
J. LOSS PER SHARE
The Company adopted the provision of SFAS No. 128, "Earnings per
Share", which establishes new standards for computing and presenting
earnings per share ("EPS"). The new standard requires the presentation
of basic EPS and diluted EPS. Basic EPS is calculated by dividing
income available to common shareholders by the weighted average
numbers of shares of common stock outstanding during the period.
Diluted EPS is calculated by dividing income available to common
shareholders by the weighted average number of common shares
outstanding adjusted to reflect potentially dilative securities. All
outstanding options and warrants have been excluded from the
calculation of diluted EPS, as they would be antidilutive.
K. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalent, accounts,
receivable, accounts payable and bank loans approximate fair value,
due to the short-term maturity of these instruments. The carrying
amount of long-term loan approximates fair value.
F-13
<PAGE>
VIRTUAL COMMUNITIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
(U.S. Dollars in thousands except per share data)
Note 2 - ACCOUNTING POLICIES (Cont.)
L. STOCK BASED COMPENSATION
The Company adopted the provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation", and elected to continue the accounting set
forth in Accounting Policy Board No. 25, "Accounting for Stock Issued
to Employees" ("APB No. 25"), and to provide the necessary pro forma
disclosures as if the fair value method has been applied.
M. CONCENTRATION
For the year ended December 31, 1999, the Company has 2 customers
which represent 22% and 19% of total revenues. For the year ended
December 31, 1998 the Company has 1 customer which represents 16% of
total revenues.
N. NEW ACCOUNTING PROUNCEMENTS
In January 2000, the Emerging Issues Task Force (the "EITF") reached a
consensus on EITF Issue 99-17, "Accounting for Advertising Barter
Transactions." The EITF agreed that advertising barter transactions
entered into after January 20, 2000 should be accounted for at fair
value on a one-for-one basis with revenue from similar advertising
sold in a cash transaction that occurred in the preceding six months
with comparable terms, such as length of program, cost and type of
advertisement. A cash transaction may be used only once as the basis
for providing fair value evidence for a barter transaction. As a
result, revenue from barter is effectively limited to no more than 50%
of total revenue per year. EITF 99-17 is applicable only to
transactions entered into after January 20, 2000. The Company has
adopted EITF 99-17 effective January 1, 2000. As a result, the Company
also anticipates that its future reported barter revenue will decrease
as a percentage of total revenue. On a pro forma basis, the Company's
barter revenue would have been approximately $157 for the year ended
December 31, 1999 had EITF 99-17 been applicable for such period.
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities ("SFAS No. 133"). SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities. It requires that an entity recognize all derivatives as
either assets or liabilities on the balance sheet at their fair value.
SFAS No. 133 was subsequently amended by SFAS No. 137, which deferred
the effective date of SFAS No. 133 to fiscal years beginning after
June 15, 2000. The Company currently does not use derivatives and
therefore this new pronouncement is not applicable.
F-14
<PAGE>
VIRTUAL COMMUNITIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
(U.S. Dollars in thousands except per share data)
Note 2 - ACCOUNTING POLICIES (Cont.)
N. NEW ACCOUNTING PROUNCEMENTS (Cont.)
In December 1999, the SEC issued SAB No. 101, "Revenue Recognition in
Financial Statements". SAB 101 expresses the views of the SEC staff in
applying generally accepted accounting principles to certain revenue
recognition issues. The Company has concluded that the implementation
of this SAB will not have a material impact on its financial position
or its results of operations.
Note 3 - PROPERTY AND EQUIPMENT, NET
<TABLE>
<CAPTION>
December 31
1999
------
<S> <C>
Computers $1,355
Furniture and office equipment 92
------
1,447
Less - accumulated depreciation 297
------
Net book value $1,150
======
</TABLE>
Depreciation expenses amount to $207 and $78 for the year ended
December 31, 1999 and 1998, respectively.
Note 4 - SHORT-TERM BANK BORROWINGS AND CURRENT MATURITIES OF LONG-TERM LOAN
<TABLE>
<CAPTION>
December 31
1999
----
<S> <C>
Bank overdrafts $285
Bank loans 399
Current maturities of long-term loan 47
----
$731
====
</TABLE>
Bank overdrafts (in New Israeli Shekels) bear interest of
approximately 16% per annum. Bank loans (in U.S.$) bear interest of
approximately 7.6% and Libor + 2.0% per annum (approximately 8.2% at
December 31, 1999).
F-15
<PAGE>
VIRTUAL COMMUNITIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
(U.S. Dollars in thousands except per share data)
Note 5 - SHORT TERM SHAREHOLDERS LOANS
In January 1999, the Company received a six month, interest-free loan
in the principal amount of $150 from a shareholder of the Company. The
loan incurred interest at the rate of 10% per annum commencing July
1999. The lender was entitled to convert all or a portion of the loan
into common stock of the Company at a rate of $0.58 per share, which
approximated fair market value at that date, until such time as the
Company repays the loan, provided, however, that the Company's
investment bankers agree to such conversion.
Subsequent to balance sheet date the loan was converted into 297,672
shares of common stock after giving effect to the Merger exchange rate
of 1.151.
Note 6 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
<TABLE>
<CAPTION>
December 31
1999
------
<S> <C>
Accounts payable $ 979
Accrued payroll and related costs 251
Accrued expenses 201
Deferred revenues 80
$1,511
</TABLE>
Note 7 - LONG TERM LOAN
The Company's facilities in Israel are leased under a 3 year lease
agreement. The lessor of the facilities has incurred building
improvements costs, of which $234 the Company's subsidiary is
obligated to pay back over the term of the lease. As of December 31,
1999, this obligation amounts to $214, of which $167 is classified as
long term.
Note 8 - ACCRUED SEVERANCE PAY
The Company's obligation for severance pay to employees in Israel is
partially covered by payments to insurance companies. The accrual for
severance pay and deposits with insurance companies in respect of
severance pay are included in the balance sheet.
F-16
<PAGE>
VIRTUAL COMMUNITIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
(U.S. Dollars in thousands except per share data)
Note 9 - COMMITMENTS AND CONTINGENCIES
Leases
The Company and its subsidiaries lease certain facilities under operating
leases expiring in various years through 2005. Future minimum payments due under
these leases are as follows:
<TABLE>
<CAPTION>
Year ending December 31,
------------------------
<S> <C>
2000 $ 524
2001 595
2002 533
2003 229
2004 233
Thereafter 58
------
Total $2,172
======
</TABLE>
Of this amount, a lease commitment of a subsidiary in the amount of $867 is
linked to the Israeli Consumer Price Index.
Lease expenses amount to $214 and $122 for the year ended December 31,
1999 and 1998, respectively.
Legal Proceedings
Certain shareholders, who held some of VCI Series B preferred stock prior
to the Merger, have notified the Company that they believe that they are
entitled to additional shares common stock and that they intend to commence an
action in connection with such claims. They contend that the reset price for the
conversion of the former Series B preferred stock to the common stock of the
Company pursuant to the Merger agreement should have been $1.45 rather than the
$2.10 used by the Company. While the holders thereof have not filed a suit to
date, their claim amounts to approximately 170,000 additional shares of Common
Stock of the Company. The Company and its counsel believe that this claim is
without merit. The Company intends to defend vigorously any action which may be
filed against the Company and its officers and directors in connection with the
aforementioned claim.
Employment Agreement
In June 1999, the Company entered into a three year employment agreement
with its President and Chairman providing for a base salary of $183 per year and
an annual bonuses as may be awarded by the Board of Directors. The agreement
also providing for options to purchase 230,200 shares of the Company's common
stock subject to the 1999 Stock Option Plan and for additional options as may be
granted by the Board of Directors.
Note 10 - SHARE CAPITAL
During 1999, prior to the Merger, the Company issued 129,519 shares of
common stock of the Company at $0.47 per share to a consultant of the
Company, and to a non-affiliated investor. This price approximated
fair market value at the dates of such issuances. In December 1999,
the Company issued, as part of a private placement offering (see Note
12B), 400,000 shares at $2.46 per share to a non- affiliated investor.
B. In February 1999, the Company raised gross proceeds of $955 (before
issuance costs) through the issuance of 9,550 shares of Series A
preferred stock to 35 accredited investors. At the same time, a $500
Secured Convertible Promissory Note provided by the Company to Virtual
Acquisition Co. LLC (a company affiliated with principals of Jesup &
Lamont, a New York investment bank) on December 31, 1998, was
converted into 5,000 shares of Series A preferred stock. Holders of
Series A preferred stock had the right to convert their stock into
common stock of the Company at a conversion ratio of $0.80 per share.
The 14,550 shares of Series A preferred stock were converted as part
of the Merger into 2,079,862 shares of common stock after giving
effect to the Merger exchange ratio of 1.151.
F-17
<PAGE>
VIRTUAL COMMUNITIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
(U.S. Dollars in thousands except per share data)
Note 10 - SHARE CAPITAL (Cont.)
C. In June 1999, the Company raised gross proceeds of $932 (before
issuance costs) through the issuance of 9,325 shares of Series B
preferred stock to 24 accredited investors. In September 1999, the
Company issued 1,000 shares of Series B preferred stock for $100 to an
individual who was elected as a member of the Board of the Company.
Holders of the Series B preferred stock had the right to convert their
stock into common stock of the Company at a conversion ratio of $2.1
per share.
The 10,325 Series B preferred stock was converted, as part of the
Merger into 565,908 shares of common stock after giving effect to the
Merger exchange ratio of 1.151.
D. VCI reserved 835,626, 603,124 and 1,151,000 shares of common stock
under its 1997, 1998 and 1999 Stock Option Plan respectively. In
addition, HDG shareholders approved the issuance of a HDG 1999 Stock
Options Plan effective upon the Merger which reserved a total of
1,000,000 additional common shares. The Company also granted warrants
to certain employees (see Note 10E). As of December 31, 1999, 294,363
options were available for future grants. A summary of the Company's
stock options and warrants activity during 1999 is presented below:
<TABLE>
<CAPTION>
Number of Weighted - Weighted -
options average average
and Exercise fair value
warrants price of options
granted
----------- ---------- -----------
<S> <C> <C> <C>
Balance at January 1, 1998 487,449 $ 0.40
Granted 815,876 0.65 $ 0.11
Forfeited (69,636) 0.40
---------
Balance at December 31, 1998 1,233,689 0.57
Granted 2,501,143 2.08 $ 0.96
HDG outstanding options as of
the day of the Merger 170,044 1.86
Forfeited (56,150) 0.67
---------
Balance at December 31, 1999 3,848,726 $ 1.60
=========
</TABLE>
F-18
<PAGE>
VIRTUAL COMMUNITIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
(U.S. Dollars in thousands except per share data)
Note 10 - SHARE CAPITAL (Cont.)
D. (Cont.)
The following table summarizes information about options and warrants
outstanding and exercisable at December 31, 1999:
<TABLE>
<CAPTION>
Options and warrants outstanding Options and warrants exercisable
------------------------------------------------- --------------------------------
Range of Number Weighted- Weighted- Number Weighted-
exercise outstanding at average average exercisable at average
prices December 31, remaining exercise December 31, exercise
1999 contractual life prices 1999 prices
$ $ $
-------- ------ ---------------- --------- ------ ---------
<S> <C> <C> <C> <C> <C>
0.40-0.81 1,448,569 3.09 0.60 665,951 0.55
1.00-1.45 925,501 3.77 1.16 250,670 1.02
2.10-2.25 804,656 4.12 2.10 253,903 2.11
3.50-3.93 547,000 4.92 3.68 - -
4.06-4.25 123,000 4.90 4.27 42,000 4.51
--------- ---------
3,848,726 1,212,524
========= =========
</TABLE>
The Company applies APB No. 25 and related interpretations in
accounting for its 1997, 1998 and 1999 Stock Option Plans.
Accordingly, compensation cost has been recognized for stock option
plan based on the intrinsic value of the option at the date of grant.
No compensation cost has been charged for stock options for the years
ended December 31, 1999 and 1998.
Had compensation cost been determined under the alternative fair value
accounting method provided for under SFAS No. 123, "Accounting for
Stock-Based Compensation" the Company's net loss and net loss per
share would have been increased to the following pro forma amounts:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Net loss:
As reported $ (5,930) $ (1,434)
Pro forma (6,110) (1,470)
Net loss per share:
As reported (0.56) (0.17)
Pro forma $ (0.58) $ (0.17)
</TABLE>
Under SFAS 123 the fair value of each option grant is estimated on the
date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for grants in 1998 and
1999: (1) expected life of the option of 3 years (1998 - same); (2)
dividend yield of 0% (1998 - same); (3) expected volatility as of the
Merger of 135% (1999 before the Merger and 1998 - 0%) (4) risk-free
interest rate of 5% (1998 - 6%).
F-19
<PAGE>
VIRTUAL COMMUNITIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
(U.S. Dollars in thousands except per share data)
Note 10 - SHARE CAPITAL (Cont.)
E. As of December 31, 1999, the Company has outstanding warrants
exercisable into 8,304,592 shares of common stock as follows:
- Class A Warrants (traded on NASDAQ as "VCIXW") exercisable into
2,000,000 shares of common stock at $6.50 per share until
February 2002;
- Class B Warrants (traded on NASDAQ as "VCIXZ") exercisable into
1,500,000 shares of common stock at $8.75 per share until
February 2002;
- Class B Warrants exercisable into 2,000,000 shares of common
stock at $8.75 share issuable upon the exercise of the Class A
Warrants;
- Underwriter's Unit Purchase Option exercisable into 120,000
shares of common stock;
- VCI Warrants issued prior to the Merger immediately exercisable
into 1,794,342 shares of common stock (after giving effect to the
merger exchange ratio of 1.151 to 1) at exercise prices ranging
from $0.30 to $2.10 (including 553,339 to employees). The
warrants have different expiration dates ranging from August 2000
to June 2004. All of such warrants have been registered pursuant
to a Registration Statement on Form SB2/A declared effective by
the Securities and Exchange Commission on January 14, 2000. The
majority of such warrants are subject to lock up agreements
restricting the sale of 75% of the shares underlying the warrants
until May 1, 2000 and 50% of such shares until August 1, 2000, at
which time such lock-up period expires. Subsequent to balance
sheet date, three VCI warrants have been exercised into 133,480
shares of common stock of the Company.
- Warrants issued to Jesup & Lamont Capital Corporation as partial
consideration for its services in connection with the Merger
exercisable until October 28, 2004 into 160,206 shares of common
stock at a price of $2.10 per share.
F-20
<PAGE>
VIRTUAL COMMUNITIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
(U.S. Dollars in thousands except per share data)
Note 10 - SHARE CAPITAL (Cont.)
E. (Cont.)
- Warrants issued by HDG prior to and upon the completion of the
Merger exercisable into a total of 570,044 shares of common stock
at exercise prices ranging from $0.50 to $5.00 per share with
expiration dates ranging from October 2001 to August 2006.
- Warrants exercisable into 160,000 shares issued in December 1999
in connection with a private placement of the Company's
securities. The warrants are exercisable until December 31, 2002
at an exercise price of $2.46 per share and are subject to
certain registration rights.
Note 11 - TAXES ON INCOME
A. At December 31, 1999, the Company had federal and state net operating
loss carryforwards of approximately $7 million. Such losses can be
utilized against future taxable income and expire primarily between
2012 and 2019. These losses may be limited due to certain
circumstances, such as ownership changes.
A full valuation allowance of approximately $3 million has been
provided on the deferred tax asset associated mainly with the loss
carryforwards since the Company has no assurance of realizing such
asset.
B. The Israeli subsidiaries are subject to the Israeli Income Tax Law
(Adjustments for Inflation), 1985, which provides for an adjustment
for the effects of inflation on taxable income in respect of that
portion of shareholders' equity not invested in inflation-resistant
assets. The carryforward loss for tax purposes at December 31, 1999
approximate $100 and it has no expiration date.
F-21
<PAGE>
VIRTUAL COMMUNITIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
(U.S. Dollars in thousands except per share data)
Note 12 - SUBSEQUENT EVENTS
A. Acquisition of Cortext Ltd.
In February 2000, VCI entered into a Share Purchase Agreement ("SPA")
with Cortext Ltd. ("Cortext"), a corporation registered under the laws
of the State of Israel, and the principal shareholders of Cortext, to
acquire a majority interest in the equity of Cortext. Cortext was
established in 1999 and is engaged in the development and licensing of
content management software for web publishers. VCI currently utilizes
Cortext's Magazine Software pursuant to a License Agreement with
Cortext dated July 18, 1999 to manage content on several of the ethnic
communities published by VCI and as a central component of its CMS
turnkey solution which it markets and licenses to third party web
publishers.
Pursuant to the terms of the SPA, VCI was issued shares of Cortext so
that it holds approximately 54% of the outstanding shares of Cortext
following the payment of certain funds to and on behalf of Cortext.
Depending upon Cortext's completion of certain software development
milestones set forth in the SPA and additional payments by VCI, up to
60% of the equity of Cortext could be acquired by VCI by August 2000.
Simultaneously with execution of the SPA, VCI and Cortext entered into
an Assignment Agreement with Planet Communications Ltd. ("Planet"), an
Israel-based unaffiliated third party holder of 50% of the rights in
Cortext's Magazine Software whereby Planet agreed to irrevocably
assign all of its rights, title and interest in the Magazine Software
to Cortext in consideration of VCI's payment of a portion of the
transaction consideration on behalf of Cortext and subject to such
third party's retaining the right to sell up to ten Magazine Software
End User licenses. Cortext agreed to provide Planet with certain
upgrades and technical support services in connection with such End
User licenses if and when the same are granted. The majority of the
payments to Planet have been made and its assignment of its rights to
the Magazine Software has been effectuated. A portion of the payments
to such third party are to be paid in installments over a period of
six months period from the date of the Assignment Agreement and the
SPA. Following the assignment of the rights by Planet, Cortext holds
100% of the rights in and to the Magazine Software.
F-22
<PAGE>
VIRTUAL COMMUNITIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
(U.S. Dollars in thousands except per share data)
Note 12 - SUBSEQUENT EVENTS (Cont.)
A. Acquisition of Cortext Ltd. (Cont.)
Pursuant to the SPA and the Assignment Agreement, the total amount of
payments to be made by VCI to and on behalf of Cortext for the full
purchase of up to 60% of equity in Cortext, including repayment of
certain Cortext loans, is expected in the aggregate to be $760 for the
entire transaction.
The transaction was accounted for as a purchase. The purchase method
of accounting allocates the aggregate purchase price to the assets
acquired and liabilities assumed based upon their respective fair
values. The excess of the purchase price over the fair value of assets
and liabilities acquired of approximately $398 was allocated to
goodwill.
B. Private Placement Financing
In December 1999, the Company announced a private placement offering
up to $5,000 in restricted common stock and warrants to accredited
investors. The warrants become exercisable six months from the date of
issuance. The private placement investors agreed to a four to six
month lock-up period from the date of issuance of the restricted
securities, after which time the Company has provided certain
registration rights to permit public trading of the common stock and
shares of common stock underlying the warrants.
In January and February 2000, in consideration of the offering the
Company issued 981,864 shares of common stock at prices per share
ranging from $2.11 to $3.42 to 12 individuals and entities, including
three existing non-U.S. shareholders of the Company, for aggregate
gross proceeds of $2,524. In connection with the issuance of 468,098
of such shares to three existing shareholders of the Company, the
Company issued three-year warrants to acquire a total of 46,808 shares
of common stock at exercise prices ranging from $2.11 to $2.75. The
Company paid consultant and finders fees related to this financing in
the form of three-year warrants exercisable into 108,762 shares of
common stock at exercise prices ranging between $2.11 and $3.42 per
share.
F-23
<PAGE>
VIRTUAL COMMUNITIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
(U.S. Dollars in thousands except per share data)
Note 12 - SUBSEQUENT EVENTS (Cont.)
C. April 2000 Private Financing
In April 2000, the Company sold 517,800 of its shares at $5.80 per
share to four institutional investors in a private placement arranged
by Josephthal & Company and Intercoastal Financial Services Corp. for
an aggregate gross proceeds of approximately $3 million. In connection
with the sale, the Company issued 2,000,000 callable warrants to
Intercoastal (the "IFSC Warrants") exercisable for a period of three
years at an exercise price of $18.00. 1,000,000 of these IFSC Warrants
are callable by the Company at 93% of the average price of the common
stock for the five days immediately following the call which may be
made by the Company following the effectiveness of a registration
statement registering the shares underlying the IFSC Warrants. The
remaining 1,000,000 IFSC Warrants are callable by the Company three
months following the date of effectiveness of such registration
statement. The IFSC Warrants are redeemable by the Company at $0.75
per share decreasing to $0.50 in July 2000 and thereafter by $0.05 per
month until such redemption price reaches $0.25 per share. In
connection with the private placement, the Company issued a) 500,000
four-month warrants to the purchasers of the shares exercisable at
$14.875 per share, b) 129,450 three-year warrants to such purchasers
exercisable at $7.4375 per share which are also redeemable at the same
price as the IFSC Warrants and c) 36,246 warrants exercisable for
three years at $5.80 per share to Josephthal & Company, the company's
investment banker in connection with the transaction in partial
consideration for its introduction of IFSC to the Company.
D. Equipment Lease
In March 2000, the Company entered into a finance lease agreement with
Microtech Leasing Corp., a Princeton, New Jersey company for the lease
of up to $250 of computer equipment to the Company. The credit
facility provides the Company with the ability to obtain certain
computer equipment financed by the lease which is secured by such
equipment. The Company also agreed to provide Microtech with a UCC
financing statement covering the equipment leased pursuant to the
agreement. The lease cannot be canceled by the Company during the term
of the lease of the equipment which term is set forth on a lease
schedule.
F-24
<PAGE>
VIRTUAL COMMUNITIES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
(U.S. Dollars in thousands except per share data)
Note 12 - SUBSEQUENT EVENTS (Cont.)
E. Lease of Additional Facilities by VCIL
In January and March 2000, VCIL exercised options for additional space
in the Jerusalem Technology Park, Israel, which serves primarily as
the Company's software development, programming and communities design
center. Total leasehold costs for the new space will equal to
approximately $165 per year.
F. Increase in the Number of Authorized ISOP Shares.
In March 2000, the Board of Directors increased the authorized number
of shares under the HDG 1999 Stock Option Plan by 500,000 for a total
of 1,500,000 shares.
# # # # #
F-25
# # # # #
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Restated Certificate of Incorporation and By-Laws of the Registrant
provide that the Registrant shall indemnify any person to the full extent
permitted by the Delaware General Corporation Law (the "DGCL"). Section 145 of
the DGCL, relating to indemnification, is hereby incorporated herein by
reference.
In accordance with Section 102(a)(7) of the DGCL, the Certificate of
Incorporation of the Registrant eliminates the personal liability of directors
to the Registrant or its stockholders for monetary damages for breach of
fiduciary duty as a director with certain limited exceptions set forth in
Section 102(a)(7).
Item 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
All expenses other than the Commission's filing fees are estimated.
<TABLE>
<CAPTION>
Amount
-------
<S> <C>
SEC Registration Fee ........................ $ 2,255
Printing Fees and Expenses .................. 15,000
-------
Accounting Fees and Expenses ................ 5,000
-------
Legal Fees and Expenses ..................... 20,000
-------
Miscellaneous Expenses ...................... 5,000
-------
-------
Total ..................................... $27,275
</TABLE>
Item 26. RECENT SALES OF UNREGISTERED SECURITIES.
In December 1996, the company issued 20 units, each unit consisting of a
note in the principal amount of $50,000 bearing interest at 10% per annum and
warrants to purchase 25,000 shares of common stock at an exercise price of $3.00
per share to accredited investors for an aggregate purchase price of $1,000,000.
The units were issued pursuant to an exemption from registration provided
by Regulation D promulgated under Section 4(2) of the Securities Act. D.H. Blair
Investment Banking Corp. acted as the Registrant's placement agent in connection
with this private placement. In connection therewith, the registrant paid sales
commissions in the aggregate amount of $100,000 and a non- accountable expense
allowance in the aggregate amount of $30,000.
In October 1999, the Company issued a three year warrant exercisable into
160,206 shares of Common Stock at an exercise price of $2.10 per share to Jesup
& Lamont Capital Markets, Inc. as partial consideration for services rendered by
it to the Company in connection with the Company's merger with HDG.
On December 14, 1999, the Company received a total of $985,400 for the
private placement sale to accredited investors of 400,000 shares of restricted
common stock and a three-year warrant, exercisable for 40,000 shares of common
stock at a purchase price of $2.46 per share. The Company made the private
placement offering under Section 4(2) of the Securities Act of 1933, as amended
(the "Securities Act"). The terms of the offering provided for issuance of the
restricted common stock at a purchase price equal to 35% below the market
valuation of the Company's publicly traded common stock and the issuance of a
warrant exercisable for the purchase of one share of common stock for each ten
shares purchased. The warrants become exercisable six months after the date of
<PAGE>
issuance. The restricted shares of common stock and the shares of common stock
to be issued upon exercise of the warrant may be offered for public resale only
if registered under the Securities Act of 1933 or an exemption therefrom. The
Company has agreed to provide the purchasers with certain registration rights
with respect to the restricted common stock and the common stock underlying the
warrants. Such registration rights commence six months from the date of purchase
and if the registration is declared effective by the Securities and Exchange
Commission, public resale of such securities shall be permitted. The Company
paid approximately $50,000 and issued warrants exercisable for 120,000 shares of
common stock on the same terms and conditions as the warrants issued in the
private placement as financial advisory consultant fees related to the closing
of the first tranche of the private placement offering. The Company expects to
continue the private placement offering to accredited investors in subsequent
tranches through the first quarter of 2000, up to an aggregate amount of $5
million, on terms substantially similar to the first tranche. The terms and
conditions of the private placement offering were duly authorized by the
Company's Board of Directors as being reasonable and in the best interests of
the Company, with particular regard to the Company's need for operating capital
and the limited availability of other reasonable financing alternatives.
The purchasers of the first tranche of the private placement described
above were Paul and Hannah Lindenblatt, the sister and brother-in-law of Avi
Moskowitz, the Company's chairman of the Board, President and Chief Executive
Officer. The purchasers are not involved in the management or control of the
Company nor are they otherwise affiliated with the Company or its management,
and their respective holdings of common stock after such purchase represent in
the aggregate less than 5% of outstanding shares of the Company's common stock.
The sale of the first tranche of the private placement to the purchasers was
made without regard to any familial relationship, at arms length, on the same
terms and conditions of the private placement offering to other accredited
investors.
In December 1999, the Company agreed to issue a three year warrant
exercisable into 120,000 shares to Venture Capital USA, Inc. ("VCUSA") in
connection with certain financial consulting services provided to the Company at
an exercise price of $2.46 per share.
In January 2000, the Company issued a three year warrant exercisable into
28,628 shares of Common Stock at an exercise price of $2.11 per share to
Business Systems Consultants, Ltd. ("BSC"), pursuant to a private placement sale
of 286,280 shares to BSC, for a purchase price of $604,050.80.
In February 2000, the Company issued a three year warrant exercisable into
90,909 shares of Common Stock at an exercise price of $2.75 per share to Rachel
Charitable Trust, pursuant to a private placement sale of 90,909 shares, for a
purchase price of $250,000.
In February 2000, the Company issued a three year warrant exercisable into
90,909 shares of Common Stock at an exercise price of $2.75 per share to
Musgrave Ltd., pursuant to a private placement sale of 90,909 shares, for a
purchase price of $250,000.
In February 2000 the Company issued an aggregate of 449,438 shares at $2.67
per share pursuant to a private placement to six individuals and entities for
gross proceeds of $4,200,000. In connection therewith, the Company issued
warrants exercisable into 19,663 shares at $2.67 per share to three individuals.
In February 2000 the Company issued an aggregate of 64,327 shares to three
individuals at $3.42 per share for total proceeds of $220,000. In connection
therewith, the Company issued three year warrants exercisable into 3,216 shares
at $3.42 per share exercisable to one party.
In April 2000, the Company issued to Intercoastal Financial Services Corp.
(IFSC: 2,000,000 callable warrants exercisable for three years at an exercise
price of $18.00 increasing to up to $29.00 per share depending upon the date of
exercise in consideration for IFSC's arranging the Company's sale of a total of
(1) 517,870 shares of common stock to four institutional investors for an
aggregate purchase price of $3,000,000; (2) 500,000 four-month warrants
exercisable by such investors at $14.875 per share and (3) 129,450 three-year
warrants exercisable at $7.4375 per share. In connection therewith, the Company
also issued 36,246 warrants exercisable at $5.80 per share.
<PAGE>
Item 27. EXHIBITS.
(a) The following is a list of Exhibits filed herewith as a part of this
Registration Statement:
Exhibit No. Description of document
- ----------- -----------------------
2(1) Agreement and Plan of Merger between Heuristic Development Group
and Virtual Communities dated June 2, 1999, as filed with the
Commission as Exhibit 2.1 to Heuristic Development Group's Form
10-Q for the quarter ended on June 30, 1999, is incorporated by
reference.
2(2) Amendment to Agreement and Plan of Merger between Heuristic
Development Group and Virtual Communities, dated September 8, 1999,
as filed with the Commission as Annex L to Heuristic Development
Group's Registration Statement on Form S-4 Amendment No. 1 (File
No. 333-87373), is incorporated by reference.
2(3) Amendment No. 2 to Agreement and Plan of Merger between Heuristic
Development Group and Virtual Communities, dated October 29, 1999,
as filed with the Commission as Exhibit 2(3) to Virtual
Communities, Inc.'s Registration Statement on Form SB-2 Amendment
No. 1 filed on January 4, 2000, is incorporated by reference.
3(1) Certificate of Incorporation of Heuristic Development Group, as
amended, as filed with the Commission as Exhibit XI to Appendix A
to Heuristic Development Group's Registration Statement on Form S-
4 Amendment No. 1 filed on September 30, 1999 (File No. 333-
87373), is incorporated by reference.
3(2) Bylaws of Heuristic Development Group, as amended, as filed with
the Commission as Exhibit XII to Appendix A to Heuristic
Development Group's Registration Statement on Form S-4 Amendment
No. 1 filed on September 30, 1999 (File No. 333-87373), is
incorporated by reference.
5(1) Opinion of Wuersch & Gering, LLP.
10(1) Software License and Support Agreement between iMediation Inc. and
Virtual Communities, dated December 30, 1999, as filed with the
Commission as Exhibit 10(1) to Virtual Communities, Inc.'s
Registration Statement on Form SB-2 Amendment No. 1 filed on
January 4, 2000, is incorporated by reference.
10(2)(a) Partner Agreement between Intershop Communications, Inc. and
Virtual Communities, dated September 30, 1999, as filed with the
Commission as Exhibit 10(2)(a) to Virtual Communities, Inc.'s
<PAGE>
Registration Statement on Form SB-2 Amendment No. 1 filed on
January 4, 2000, is incorporated by reference.
10(2)(b) Professional Services Agreement between Intershop Communications,
Inc. and Virtual Communities, dated September 30, 1999, as filed
with the Commission as Exhibit 10(2)(b) to Virtual Communities,
Inc.'s Registration Statement on Form SB-2 Amendment No. 1 filed on
January 4, 2000, is incorporated by reference.
10(3) Agreement between Jewish Telegraphic Agency, Inc. and Virtual
Jerusalem, dated September, 1996, filed with the Commission as
Exhibit 10(1) to Heuristic Development Group's Registration
Statement on Form S-4 on September 17, 1999 (File No. 333-87373),
is incorporated by reference.
10(4) Letter Agreement between Continental Airlines, Inc. and Virtual
Communities, Inc. dated May 18, 1999, as filed with the Commission
as Exhibit (10)2 to Heuristic Development Group's Registration
Statement on Form S-4 on September 17, 1999 (File No. 333-87373),
is incorporated by reference.
10(5) Agreement between Jewish Television Network and Virtual Jerusalem,
Ltd. dated March 23, 1997, as filed with the Commission as Exhibit
10(3) to Heuristic Development Group's Registration Statement on
Form S-4 on September 17, 1999 (File No. 333-87373), is
incorporated by reference.
10(6) Agreement between Matthew Album and Virtual Communities, Inc.,
dated March 2, 1998, as filed with the Commission as Exhibit 10(4)
to Heuristic Development Group's Registration Statement on Form S-
4 on September 17, 1999 (File No. 333-87373), is incorporated by
reference.
10(7) Agreement between Haaretz Daily Newspaper Ltd. and Virtual
Communities, Inc., dated July 15, 1998, as filed with the
Commission as Exhibit 10(5) to Heuristic Development Group's
Registration Statement on Form S-4 on September 17, 1999 (File No.
333-87373), is incorporated by reference.
10(8) Netgravity Adserver License Agreement between Netgravity, Inc. and
Virtual Communities dated June 30, 1999, as filed with the
Commission as Exhibit 10(6) to Heuristic Development Group's
Registration Statement on Form S-4 on September 17, 1999 (File No.
333-87373), is incorporated by reference.
10(9) Software License Agreement between Cortext Ltd. and Planet
Communications Ltd., on the one hand, and Virtual Communities,
Inc., on the other hand, dated July 16, 1999, as filed with the
Commission as Exhibit 10(7) to Heuristic Development Group's
Registration Statement on Form S-4 on September 17, 1999 (File No.
333-87373), is incorporated by reference.
10(10) Web Design and Development Agreement between VCI Community
Solutions, Inc. and Tromaville.com, Inc., dated August 6, 1999, as
filed with the Commission as Exhibit 10(8) to Heuristic Development
Group's Registration Statement on Form S-4 on September 17, 1999
(File No. 333-87373), is incorporated by reference.
10(11) Frontier Global Center, Inc. Master Service Agreement between
Frontier GlobalCenter, Inc. and Virtual Communities dated March 15,
1998, as filed with the Commission as Exhibit 10(9) to Heuristic
Development Group's Registration Statement on Form S-4 on September
17, 1999 (File No. 333-87373), is incorporated by reference.
10(12) Financial Services Agreement between Virtual Communities, Inc. and
Virtual Communities Israel, Ltd. dated September 1, 1999, as filed
with the Commission as Exhibit 10(10) to Heuristic Development
Group's Registration Statement on Form S-4 on September 17, 1999
<PAGE>
(File No. 333-87373), is incorporated by reference.
10(13) Cost Plus Agreement between Virtual Communities, Inc. and Virtual
Communities Israel, Ltd. dated September 1, 1999, as filed with the
Commission as Exhibit 10(11) to Heuristic Development Group's
Registration Statement on Form S-4 on September 17, 1999 (File No.
333-87373), is incorporated by reference.
10(14) Lease Agreement between Allied Investments Ltd., as Lessor, and
Virtual Jerusalem, as Lessee, dated December 29, 1998, as filed
with the Commission as Exhibit 10(12) to Heuristic Development
Group's Registration Statement on Form S-4 on September 17, 1999
(File No. 333-87373), is incorporated by reference.
10(15) Letter Guarantee to Allied Investments from Israel General Bank
Ltd.. dated December 23, 1998, as filed with the Commission as
Exhibit 10(13) to Heuristic Development Group's Registration
Statement on Form S-4 on September 17, 1999 (File No. 333-87373),
is incorporated by reference.
10(16) Lease Agreement between J.T.P. The Jerusalem Technology Park Ltd.,
as Lessor, and Virtual Communities Israel, Ltd., as Lessee, dated
May 19, 1999, as filed with the Commission as Exhibit 10(14) to
Heuristic Development Group's Registration Statement on Form S-4 on
September 17, 1999 (File No. 333-87373), is incorporated by
reference.
10(17) Letter Guarantee to J.T.P. The Jerusalem Technology Park Ltd. from
Israel General Bank Ltd.. dated August 16, 1999, as filed with the
Commission as Exhibit 10(15) to Heuristic Development Group's
Registration Statement on Form S-4 on September 17, 1999 (File No.
333-87373), is incorporated by reference.
10(18) Lease Agreement between Eighth Avenue Loft Associates and Virtual
Communities, Inc. dated June 14, 1999, as filed with the Commission
as Exhibit 10(16) to Heuristic Development Group's Registration
Statement on Form S-4 on September 17, 1999 (File No. 333-87373),
is incorporated by reference.
10(19) Employment Agreement between Deborah Gaines and Virtual
Communities, dated October 25, 1999, as filed with the Commission
as Exhibit 10(19) to Virtual Communities, Inc.'s Registration
Statement on Form SB-2 Amendment No. 1 filed on January 4, 2000, is
incorporated by reference.
10(20) Employment Agreement between Avi Moskowitz and Virtual Communities,
Inc. dated June 1, 1999, as filed with the Commission as Exhibit
10(17) to Heuristic Development Group's Registration Statement on
Form S-4 on September 17, 1999 (File No. 333-87373), is
incorporated by reference.
10(21) Employment Agreement between Michael Harwayne and Virtual
Communities, Inc. dated February, 1999, as filed with the
Commission as Exhibit 10(18) to Heuristic Development Group's
Registration Statement on Form S-4 on September 17, 1999 (File No.
333-87373), is incorporated by reference.
10(22) Employment Agreement between Mark McCourt and Virtual Communities,
Inc. dated February, 1999, as filed with the Commission as Exhibit
10(19) to Heuristic Development Group's Registration Statement on
Form S-4 on September 17, 1999 (File No. 333-87373), is
incorporated by reference.
10(23) Warrant to Purchase Shares of Common Stock of Virtual Communities,
Inc. No. W-15, between Virtual Communities and Avi Moskowitz dated
December 31, 1998, as filed with the Commission as Exhibit 10(20)
to Heuristic Development Group's Registration Statement on Form S-
4 on September 17, 1999 (File No. 333-87373), is incorporated by
reference.
10(24) Warrant to Purchase Shares of Common Stock of Virtual Communities,
<PAGE>
Inc. No. W-17, between Virtual Communities and Avi Moskowitz dated
June, 1998, as filed with the Commission as Exhibit 10(21) to
Heuristic Development Group's Registration Statement on Form S-4 on
September 17, 1999 (File No. 333-87373), is incorporated by
reference.
10(25) Warrants to Purchase Shares of Common Stock of Virtual Communities,
Inc. Nos. W-14, W-25 and W-26 between Virtual Communities and David
Morris dated June, 1998, as filed with the Commission as Exhibit
10(22) to Heuristic Development Group's Registration Statement on
Form S-4 on September 17, 1999 (File No. 333-87373), is
incorporated by reference.
10(26) 1997 Stock Option Plan of Virtual Communities, as filed with the
Commission as Exhibit 10(23) to Heuristic Development Group's
Registration Statement on Form S-4 on September 17, 1999 (File No.
333-87373), is incorporated by reference.
10(27) 1998 Stock Option Plan of Virtual Communities, as filed with the
Commission as Exhibit 10(24) to Heuristic Development Group's
Registration Statement on Form S-4 on September 17, 1999 (File No.
333-87373), is incorporated by reference.
10(28) 1999 Stock Option Plan of Virtual Communities, as filed with the
Commission as Exhibit 10(25) to Heuristic Development Group's
Registration Statement on Form S-4 on September 17, 1999 (File No.
333-87373), is incorporated by reference.
10(29) 1996 Stock Option Plan of Heuristic Development Group, as filed
with the Commission as Exhibit 10.1 to Heuristic Development
Group's Registration Statement on Form SB-2 filed on December 11,
1996 (File No. 333-17635), is incorporated by reference.
10(30) Escrow Agreement among Heuristic Development Group, American Stock
Transfer & Trust Company, and shareholders of Heuristic Development
Group, , as filed with the Commission as Exhibit 10.2 to Heuristic
Development Group's Registration Statement on Form SB-2 filed on
December 11, 1996 (File No. 333-17635), is incorporated by
reference.
10(31) Form of Indemnification Agreement, as filed with the Commission as
Exhibit 10.3 to Heuristic Development Group's Registration
Statement on Form SB-2 filed on December 11, 1996 (File No. 333-
17635), is incorporated by reference.
10(32) Assignment dated August 22, 1994 between Nautilus Group Japan, Ltd.
and Heuristic Development Group, as filed with the Commission as
Exhibit 10.4 to Heuristic Development Group's Registration
Statement on Form SB-2 filed on December 11, 1996 (File No. 333-
17635), is incorporated by reference.
10(33) Exclusive Distribution License Agreement dated June 1995 between
Nautilus Group Japan, Ltd. and Heuristic Development Group, as
filed with the Commission as Exhibit 10.5 to Heuristic Development
Group's Registration Statement on Form SB-2 filed on December 11,
1996 (File No. 333-17635), is incorporated by reference.
10(34) Letter Agreement dated November 27, 1996 between Nautilus Group
Japan, Ltd. and Heuristic Development Group, as filed with the
Commission as Exhibit 10.6 to Heuristic Development Group's
Registration Statement on Form SB-2 filed on December 11, 1996
(File No. 333-17635), is incorporated by reference.
10(35) Office Lease dated August 1, 1996 between Paulistic Productions and
Heuristic Development Group, as filed with the Commission as
Exhibit 10.7 to Heuristic Development Group's Registration
Statement on Form SB-2 filed on December 11, 1996 (File No. 333-
17635), is incorporated by reference.
10(36) Retainer Agreement dated August 16, 1994 between TransPac Software
and Heuristic Development Group, as filed with the Commission as
<PAGE>
Exhibit 10.8 to Heuristic Development Group's Registration
Statement on Form SB-2 filed on December 11, 1996 (File No. 333-
17635), is incorporated by reference.
10(37) Employment Agreement dated as of December 1, 1996 between Heuristic
Development and Steven R. Gumins, as filed with the Commission as
Exhibit 10.9 to Heuristic Development Group's Registration
Statement on Form SB-2 filed on December 11, 1996 (File No.
333-17635), is incorporated by reference.
10(38) Employment Agreement dated as of December 1, 1996 between Heuristic
Development Group and Deborah E. Griffin, as filed with the
Commission as Exhibit 10.10 to Heuristic Development Group's
Registration Statement on Form SB-2 filed on December 11, 1996
(File No. 333-17635), is incorporated by reference.
10(39) Conversion Agreement between Heuristic Development Group and
holders of Indebtedness, as filed with the Commission as Exhibits
10.11 and 10.12 to Heuristic Development Group's Registration
Statement on Form SB-2 filed on December 11, 1996 (File No. 333-
17635), is incorporated by reference.
10(40) Share Purchase Agreement between Virtual Communities, Inc., Cortext
Ltd., and Ran Eilam and Noam Ilan dated February 7, 2000.
10(41) Assignment Agreement between Planet Communications Ltd, Cortext
Ltd., and Virtual Communities, Inc., dated February 10, 2000.
10(42) Representation And Technical Support Agreement between VCI
Communities Solutions, Inc and Vanco Consulting Limited, dated
February 21, 2000.
10(43) Form of Callable Warrant to Purchase Shares of Common Stock of
Virtual Communities, Inc., Expires April __, 2001.
10(44) Form of A Warrant to Purchase Shares of Common Stock of Virtual
Communities, Inc., Expires April __, 2003.
10(45) Registration Rights Agreement between Virtual Communities, Inc. and
Intercoastal Financial Services Corp. dated March 31, 2000.
10(46) Registration Rights Agreement between VCI and Magellan
International, Ltd., Aspen International, Ltd., Acqua Wellington
Value Fund Ltd., Cuttyhunk Fund Ltd. dated March 31, 2000.
10(47) Common Stock and Warrants Purchase Agreement dated March 31, 2000,
between VCI and Magellan International, Ltd., Aspen International,
Ltd., Acqua Wellington Value Fund Ltd., and Cuttyhunk Fund Ltd.
10(48) Form of B Warrant to Purchase Shares of Common Stock of Virtual
Communities, Inc.
21(1) List of Subsidiaries, as filed with the Commission as Exhibit 21(1)
to Virtual Communities, Inc.'s Registration Statement on Form SB-2
Amendment No. 1 filed on January 4, 2000, is incorporated by
reference.
23(1) Consent of Arthur Andersen, LLP.
23(2) Consent of Wuersch & Gering, LLP (see Exhibit 5(1)).
24(1) Certified resolutions of the Board of Directors of Virtual
Communities, Inc., taken at a special meeting of the Board held
December 16, 1999, appointing Avi Moskowitz as attorney in fact for
the filing of the company's Registration Statement on Form SB- 2,
as filed with the Commission as Exhibit 24(1) to Virtual
Communities, Inc.'s Registration Statement on Form SB-2 Amendment
No. 1 filed on January 4, 2000, is incorporated by reference.
Item 28. UNDERTAKINGS.
(a) (a) Virtual Communities, Inc., hereby undertakes:
(1) To file, during any period in which it offers or sells
<PAGE>
securities, a post-effective amendment to this registration
statement to:
(i) Include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in
the information in the registration statement.
Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total value of
securities offered would not exceed that which was
registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the
form of prospectus filed with the Securities and Exchange
Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20%
change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective
registration statement; and
(iii) Include any additional or changed material information
on the plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement relating to the
securities offered, and the offering of the securities at that time to be
the initial bona fide offering.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
(e) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
Virtual Communities, Inc. pursuant to the foregoing provisions, or otherwise,
Virtual Communities, Inc. has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act of 1933 and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by Virtual Communities, Inc. of expenses incurred or
paid by a director, officer or controlling person of Virtual Communities, Inc.,
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, Virtual Communities, Inc., 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 Securities Act of 1933 and will be
governed by the final adjudication of such issue.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements of filing on Form SB-2 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of New York, State of New York, on May ___, 2000.
VIRTUAL COMMUNITIES, INC.
By
-----------------------------------------
Avi Moskowitz,
President, Chairman & Chief Financial Officer
- Virtual Communities, Inc.
Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed by the following persons in the capacities and on the
date indicated.
, President, Chairman and ________, 2000
- ------------------------ Chief Financial Officer
Avi Moskowitz
/s/ Robert J. Levenson , Director May 5, 2000
- ------------------------
Robert J. Levenson
/s/ Fred S. Lafer , Director May 5, 2000
- ------------------------
Fred S. Lafer
, Director ________, 2000
- ------------------------
Jonathan W. Seybold
/s/ Allan Dalfen , Director May 5, 2000
- ------------------------
Allan Dalfen
, Director ________, 2000
- ------------------------
Peter A. Jacobs
/s/ David Morris , Director May 5, 2000
- ------------------------
David Morris
89
<PAGE>
Exhibit 5.1
[Wuersch & Gering LLP Letterhead]
11 Hanover Square
N.Y. N.Y. 10005
May 5, 2000
Virtual Communities, Inc.
589 8th Avenue - 7th Floor
New York, NY 10018
Ladies and Gentlemen:
We have acted as counsel to Virtual Communities, Inc. (the "Company"),a Delaware
corporation, in connection with a Registration Statement on Form SB-2 (the
"Registration Statement") filed with the Securities and Exchange Commission
under the Securities Act of 1933, as amended, with respect to 1,911,863 shares
of common stock (the "Offered Shares") and 981,266 shares of common stock
issuable upon exercise of certain warrants (the "Warrant Shares") held by
certain registered security holders as described with particularity in the
Registration Statement.
In our capacity as counsel to the Company, we have examined the Company's (i)
Certificate of Incorporation, (ii) By-laws as amended to date and (iii)
resolutions of the Company's board of directors. We have also reviewed such
other matters of law and examined and relied upon all such corporate records,
agreements, certificates and other documents as we have deemed relevant and
necessary as a basis for the opinion hereinafter expressed. In such examination,
we have assumed the genuineness of all signatures, the authenticity of all
documents submitted to us as originals and the conformity with the original
documents of all documents submitted to us as copies or facsimiles. In making
our examination of documents and instruments executed by any persons or entities
other than the Company, we have assumed, without investigation, the power of any
such person or other entity to enter into and perform all of its obligations
under such documents and instruments, the due execution and delivery by each
such person or other entity of such documents and instruments and the
enforceability of such documents and instruments against such other parties. As
to any facts material to such opinion, we have, to the extent that relevant
facts were not independently established by us, relied on certificates of public
officials and certificates of officers or other representatives of the Company.
Based upon and subject to the foregoing, we are of the following opinion:
1. The Offered Shares have been duly authorized and will be validly issued,
fully-paid and non-assessable.
The Warrant Shares have been duly authorized and will, upon issuance and payment
in accordance with the terms of the warrants governing the issuance of such
Warrant Shares, be validly issued, fully-paid and non-assessable.
Our opinion above is subject to (i) applicable bankruptcy, insolvency,
reorganization, fraudulent transfer, moratorium or similar laws from time to
time in effect affecting creditors' rights generally, and (ii) general
principles of equity (including, without limitation, standards of materiality,
good faith, fair dealing and reasonableness and limits on the availability of
equitable remedies), whether such principles are considered in a proceeding at
law or in equity, subject to the other qualifications contained in this opinion.
We are members of the bar of the State of New York. Our opinion set forth in
this letter is limited to matters governed by the Delaware General Corporation
law and to the laws of the State of New York in force on the date of this
letter, except that our Opinion also extends to the federal laws of the United
States. We express no opinion with regard to any matter which may be (or which
purports to be) governed by the laws of any other state or jurisdiction.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference made to us under the caption "Legal
Matters" in the prospectus constituting part of the Registration Statement.
Very truly yours,
WUERSCH & GERING, LLP
/s/ WUERSCH & GERING, LLP
<PAGE>
Exhibit 10(40)
SHARE PURCHASE AGREEMENT
THIS SHARE PURCHASE AGREEMENT (this "Agreement") is entered into as of this
7th day of February, 2000, by and between VIRTUAL COMMUNITIES, INC., a Delaware
corporation ("VCI"), CORTEXT LTD., an Israeli private company ("Cortext"), and
RAN EILAM and NOAM ILAN (the "Cortext Principals").
RECITALS
A. Cortext and Planet Communications Ltd., an Israeli private company
("Planet") each own 50% of a certain magazine web publishing tool kit software
(the "Magazine Software");
B. Cortext and Planet have licensed the Magazine Software to VCI pursuant
to a license agreement dated July 18, 1999 and annexed hereto as Exhibit A (the
"Software License Agreement");
C. As a condition to this Agreement, Planet is assigning its entire
interest in the Magazine Software to Cortext pursuant to an agreement in the
form annexed hereto as Exhibit B (the "Assignment Agreement"); and
D. Upon the terms and subject to the conditions hereinafter set forth,
Cortext wishes to sell, and VCI wishes to purchase, up to 450 Ordinary Shares of
Cortext, nominal value NIS 1.00 each (the "Shares"), that would result in VCI
owning 60% of the outstanding share capital of Cortext after such issuance, sale
and purchase, on a fully-diluted basis calculated on the date thereof.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual promises set forth in this
Agreement and other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties hereto hereby agree as follows:
1. Issuance and Purchase of the Shares. Cortext shall issue and sell to VCI
and VCI shall purchase from Cortext, the Shares in four installments (each an
"Installment Closing"), subject to the terms and conditions set forth in Exhibit
1 annexed hereto.
2. Agreements of the Cortext Parties.
From and after the execution hereof, the parties hereto agree to do and
cause to be done such acts or things (including, without limitation, voting
their shares in Cortext and/or amending the Articles of Association of Cortext)
as may be required from time to time to ensure the application of the provisions
of Sections 2 and 3 below.
2.1 Appointment of Directors. The provisions of Article 61 of the New
Articles (without regard to subsequent amendment) are hereby incorporated by
reference and each of the parties agrees to be bound by such provisions as if
the same were provided herein.
2.2 Operation of, and Non-Deviation from, Cortext's Business.
From the date hereof up to and including the date of the fourth and final
Installment Closing set forth in Schedule 1 (the "Final Closing"):
<PAGE>
(i) Cortext shall conduct its business in the ordinary course of
business and shall immediately inform VCI of the occurrence of any event
not in the ordinary course of business; and
(ii) Cortext will use its best efforts to preserve (A) Cortext's
business organization intact and (B) Cortext's goodwill. Without limiting
the generality of the foregoing or any other covenant contained herein,
Cortext will perform in all material respects all obligations required of
Cortext under any material contracts to which it is a party.
2.3 Milestones.4 Develop Shrink-Wrapped Version of Software. Until the
completion of the Milestones, and subject to VCI fulfilling its obligations
hereunder, Cortext shall devote substantially all of its resources and use its
best efforts, to meeting the Milestones in accordance with the Milestone
Schedule.
2.4 Litigation. Cortext will promptly notify VCI in writing of any
lawsuits, claims, proceedings or investigations (each, a "Claim") which are
threatened or commenced against or by Cortext or, if known to Cortext, against
any employee, consultant or director of Cortext or against the Cortext
Principals in connection with their ownership interest in Cortext, the Magazine
Software or the transactions contemplated hereby.
2.5 Keeping of Books and Records; Accounts and Reports.
(a) Cortext shall keep and maintain adequate records and books of account,
as directed by the CFO of VCI, and in which adequate entries will be made in
accordance with Israeli GAAP, reflecting, in all material respects, all
financial transactions and in which all proper reserves for depreciation,
depletion, obsolescence, amortization, taxes, bad debts and other purposes in
connection with its business shall be made.
(b) Cortext shall furnish to VCI (or to the VCI Director, when so
specified) copies of the following certificates, filings, reports and
information:
(i) As soon as practicable after the end of each fiscal year, and in
any event within 90 days thereafter, consolidated balance sheets of
Cortext, if any, as of the end of such fiscal year, and consolidated
statements of income and consolidated statements of changes in cash flow of
Cortext, if any, for such fiscal year, prepared in accordance with Israeli
GAAP and setting forth in each case in comparative form the figures for the
previous fiscal year and the budgeted figures for the current fiscal year,
all in reasonable detail and audited (other than budgeted figures) by Kost,
Forrer & Gabbai, or another Israeli affiliate of a "Big Five" accounting
firm.
(ii) As soon as practical after the end of the first, second and third
quarterly accounting periods in each fiscal year of Cortext and in any
event within 45 days thereafter, (A) a consolidated balance sheet of
Cortext, if any, as of the end of each such quarterly period, and
consolidated statements of income and consolidated statements of change in
cash flow of Cortext for such period and for the current fiscal year to
date, subject to changes resulting from normal year-end audit adjustments,
and setting forth in each case in comparative form the figures for the same
periods of the previous fiscal year and the budgeted figures for the
current periods, all in reasonable detail and signed by the principal
financial or accounting officer of Cortext and to the VCI Director: (B) a
quarterly letter from the executive management of Cortext discussing in
reasonable detail (1) the operations of Cortext for the previous quarter
and (2) any deviations in the actual performance for the previous of
Cortext from the projected performance of Cortext set forth in the
Quarterly Budget (defined below).
(iii) As soon as practical prior to the end of each fiscal year, and
in any event at least 30 days prior thereto, provide to all Board members
for their review, a budget (the "Quarterly Budget") for Cortext that
contains, at least with respect to such fiscal year, quarterly and (where
practicable) monthly detail, including, but not limited to, limitations on
capital
<PAGE>
expenditures, operating expenditures and the incurrence of unsecured,
secured and aggregate indebtedness.
(iv) As soon as practical prior to the end of each fiscal year, and in
any event at least 30 days prior thereto, provide to all Directors a
strategic plan (the "Plan") for Cortext that contains, at least with
respect to such upcoming fiscal year, a strategic plan on a product line
and on an overall basis for Cortext, which shall be subject to the approval
of the Board.
(c) Cortext shall promptly make full disclosure to VCI of all material
facts, affecting the financial condition, business operations, properties and
prospects of Cortext that could reasonably be expected to have a material
adverse effect on Cortext.
(d) Without derogating from any of the foregoing, commencing as of the
first Installment Closing Date, the financial controller of VCI shall direct the
financial control of Cortext and Cortext shall promptly institute all financial
controls and provide such financial reports as may be requested by the VCI
financial controller.
2.6 Actions Prior to Final Closing. The provisions of Article 76A of the
New Articles (without regard to subsequent amendment) are hereby incorporated by
reference and each of the parties agrees to be bound by such provisions as if
the same were provided herein.
2.7 Cortext Name. Cortext acknowledges that following the first Installment
Closing, VCI shall have the right to the use of the name "Cortext" in any
materials relating to the Magazine Software, in a manner that shall not be
contrary to the interests of CORTEXT.
2.8 End User Licenses. Provided that VCI shall not have failed to make any
of the payments as required at an Installment Closing, Cortext shall not grant
any license or right in the Magazine Software other than to single site end
users pursuant to a standard end user license, except upon the prior written
consent of VCI.
2.9 Cortext Principals' Guarantees. Following the first Installment
Closing, Cortext shall act to remove the personal guarantees of the Cortext
Principals with respect to the debts and obligations of Cortext set forth in
Schedule 2.9 annexed hereto, if any.
3. Transfer Restrictions; Right of First Refusal; Right of Co-Sale.
3.1. Right of First Refusal. The provisions of Article 13 of the New
Articles (without regard to subsequent amendment) are hereby incorporated by
reference and each of the parties agrees to be bound by such provisions as if
the same were provided herein.
3.2. Restrictions on Transfer by Cortext Principals. Neither of the Cortext
Principals shall sell, transfer or otherwise dispose of any shares of any class
which he may hold in Cortext without the prior written consent of VCI, which
consent shall not be unreasonably withheld, prior to the earlier of (a) July 31,
2001, (b) the initial public offering of Cortext's shares or the closing of an
M&A Transaction involving the majority of CORTEXT's shares or its assets (c) the
date that VCI shall fail to make a payment as required at an Installment Closing
or (d) the date that VCI (or its Permitted Transferee) shall no longer hold
shares in Cortext. Such consent by VCI, or its successor, shall not be deemed a
waiver of any of VCI's rights pursuant to Article 13 of the New Articles or
Section 3.3 hereof unless such rights are expressly waived in writing.
3.3. Right of Co-Sale. (a) Should any of the Cortext Principals or VCI (in
each case, the "Offeree") receive one or more bona fide offers (collectively,
the "Offer"), from any person or entity (the "Offeror") to purchase from the
Offeree any of its shares in Cortext, which Offer the Offeree intends to accept,
such Offeree shall promptly notify the others among them (the "Eligible
Shareholders") in writing of the name and address of the Offeror and the terms
and conditions of such Offer and each of the others shall be entitled to
exercise its right of first refusal under Article 13 of the
<PAGE>
Articles of the Company or to participate in the sale by selling the same
percentage of its holding in Cortext (and on the same terms) as the Offeree. In
the event an Eligible Shareholder wishes to join in the sale, then the Eligible
Shareholder shall give written notice thereof to the Offeree ("Participation
Notice"), which shall be received by the Offeree within thirty (30) days of the
date of notice by Offeree , with a copy to Cortext, specifying the number of
shares the Eligible Shareholder wishes to sell. If the Offeree receives
Participation Notices from one or more Eligible Shareholders, then the Offeree
shall not sell any shares to the Offeror unless the Offeror offers and agrees to
purchase concurrently from the Eligible Shareholder the number of shares
specified in the Eligible Shareholders' Participation Notices provided that the
Offeror shall not be required to purchase from the Eligible Shareholder a larger
percentage of such Eligible Shareholder's shares than that percentage of the
Offeree's shares being purchased concurrently therewith by the Offeror.
(b) Should no Eligible Shareholders provide Participation Notices with
respect to the Offer as set forth in (a) above, the Offeree shall be entitled,
for an additional period of sixty (60) days to sell or transfer such shares to
the Offeror, provided that the terms of such sale or transfer shall be no more
favorable to the Offeree than the Offer. Should the Offeree not dispose of the
shares which are the subject of the Offer during the aforementioned sixty (60)
day period, the shares which are the subject of the Offer shall not be sold or
transferred to the Offeror or to any other party unless and until the Eligible
Shareholders shall again be offered the right to participate in such sale or
transfer as set forth in Subarticle (a) above.
3.4 The provisions of Sections 3.2 and 3.3 hereof shall not apply to any
transfer of shares to an entity controlled by, controlling, or under common
control with the transferring shareholder, and, in the case of a transferring
shareholder which is an individual, to any member of his immediate family or to
a wholly owned company of such individual ("Permitted Transferee"). For purposes
hereof, "control" of an entity shall mean the ownership of: (1) more than 50% of
the equity securities (or similar interests) of the entity; and (2) more than
50% of the right to participate in the entity's profits and assets upon
liquidation or winding up; and (3) the right to appoint more than 50% of the
members of the board of directors (or similar governing body) of such entity. No
transfer under this Sections 3.4 shall be made to any transferee, unless such
transferee agrees in writing to be bound by all agreements relating to rights
and/or obligations binding upon the transferring shareholder as a shareholder
and/or as a founder, as the case may be, immediately prior to such transfer.
4. Representations and Warranties by CORTEXT. Cortext and each of the
Cortext Principals hereby represents and warrants, as of the date hereof and
each Installment Closing Date, subject to such actions taken pursuant to this
Agreement and/or with the prior written consent of a director appointed by VCI,
to VCI, as set forth below. Notwithstanding anything to the contrary contained
herein, the representations of each of the Cortext Principals are made only to
the best of his knowledge, information and belief.
4.1 Corporate OrganizationCorporate Organization. Cortext is a private
Israeli company, duly organized, validly existing under the Laws of Israel, has
full power and authority (corporate and otherwise) to carry on its business as
it is now being conducted and to own, lease or operate its properties and assets
and is duly qualified or licensed to do business as a foreign corporation in
good standing in every jurisdiction in which the character or location of the
properties and assets owned, leased or operated by it or the conduct of its
business requires such licensing or qualification. Cortext has filed all reports
required to be filed with the Israeli Companies Registrar, paid all annual
registration fees and fulfilled all of its other obligations under the Companies
Ordinance, including the regulations promulgated thereunder.
4.2 SubsidiariesSubsidiaries. Cortext does not own, and has never owned,
any interest in any corporation or other business entity and Cortext is not a
participant, and has never been a participant, in any partnership or any joint
venture with any third party.
4.3. CapitalizationCapitalization.
<PAGE>
(a) The authorized share capital of Cortext consists of NIS 29,400 (twenty
nine thousand and four hundred New Israeli Shekels) divided into 29,400 Ordinary
Shares of NIS 1.00 each. As of the date hereof, 300 Ordinary Shares are issued
and outstanding. All issued and outstanding shares of Cortext are duly
authorized, validly issued, fully paid, nonassessable and free of preemptive
rights except as set forth in the Company's Articles of Association.
(b) All issued and outstanding shares of Cortext are owned by the Cortext
Principals, in equal amounts, free and clear of all mortgages, pledges, liens,
security interests, encumbrances, restrictions or charges of any kind.
(c) Except as set forth above in paragraph (a), there are no shares or
other securities of Cortext outstanding; there are no outstanding options,
warrants, conversion or exchange privileges or other rights to purchase or
obtain any shares of Cortext and there are no contracts, commitments,
understandings, arrangements or restrictions relating to the issuance, sale, or
transfer by Cortext of any of its shares.
4.4. .1 AuthorizationCapitalization. Cortext has full corporate power and
authority to enter into this Agreement and to carry out the transactions
contemplated hereby. This Agreement has been duly authorized, executed and
delivered by Cortext and constitutes a valid and binding agreement of Cortext
and each Cortext Principal and is enforceable against Cortext and each Cortext
Principal in accordance with its terms except as enforcement thereof may be
limited by bankruptcy, insolvency, reorganization, moratorium and other laws
relating to or affecting the rights of creditors generally and except as limited
by the application of equitable principles when equitable remedies are sought,
and by the fact that rights to indemnity, contribution and waiver, and the
ability to sever unenforceable terms, may be limited by applicable law.
4.5 Compliance with Laws and Other InstrumentsCompliance with Laws and
Other Instruments. The execution, delivery and performance by Cortext of this
Agreement (a) will not require from the board of directors or shareholders of
Cortext any consent or approval that has not been validly and lawfully obtained,
(b) will not require any authorization, consent, license, exemption or
registration with any court or governmental department, commission, agency or
instrumentality of government, (c) will not cause Cortext or any Cortext
Principal to violate or contravene (i) any provision of law, (ii) any rule or
regulation of any agency or government, domestic or foreign, (iii) any order,
writ, judgment, injunction, decree, determination or award, or (iv) any
provision of the Memorandum of Association or Articles of Association of
Cortext, or (d) subject to the Assignment Agreement, will not result in the
creation or imposition of any lien, charge or encumbrance upon any of the assets
of Cortext pursuant to the terms or provisions of, or conflict with or result in
a breach or violation of any of the terms or provisions of, or constitute a
default under (with or without notice or lapse of time or both), or give any
other party a right to terminate any of its obligations under, or result in the
acceleration of any obligation under any indenture, credit agreement, note
agreement, deed of trust, mortgage, security agreement or other agreement, lease
or instrument to which Cortext or any Cortext Principal is a party or by which
any Cortext Principal or Cortext or any of its properties or assets are bound.
4.6. Issuance of Shares. The Shares to be issued and sold by Cortext at
each Installment Closing Date, upon such issuance, will be duly authorized,
validly issued, fully paid and non-assessable, free and clear of all liens and
will not be subject to any pre-emptive or similar right except as set forth in
the New Articles and in this Agreement.
4.7. Financial Statements. At or prior to the First Installment Closing
Date, Cortext shall deliver to VCI, unaudited consolidated balance sheets and
statements of income, changes in stockholders' equity, and cash flow as of and
for the fiscal year ended December 31, 1999 (the "Fiscal Year End 1999").
Attached hereto as Schedule 2 are the following financial statements (a) audited
consolidated balance sheets and statements of income, changes in stockholders'
equity, and cash flow as of and for the fiscal year ended December 31, 1998 (the
"Most Recent Fiscal Year End") for
<PAGE>
Cortext; and (b) unaudited consolidated balance sheets and statements of income,
changes in stockholders' equity, and cash flow (the "Most Recent Financial
Statements") as of and for the 6 months ended June 30, 1999 for Cortext. (The
Fiscal Year End 1999, Most Recent Fiscal Year End and the Most Recent Financial
Statements are collectively referred to as the "Financial Statements".) The
Financial Statements (including the notes thereto) have been prepared in
accordance with Israeli GAAP applied on a consistent basis throughout the
periods covered thereby and present fairly the financial condition of Cortext as
of such dates and the results of operations of Cortext for such periods.
4.8 Title to Assets; Leases.
(a) Cortext has good and marketable title to, or a valid leasehold interest
in, the real and tangible properties and assets used by it, located on its
premises, or shown on the balance sheet contained in the Most Recent Financial
Statements or acquired after the date thereof, free and clear of all security
interests, except for properties and assets disposed of in the ordinary course
of business since the date of the balance sheet contained in the Most Recent
Financial Statements.
(b) All leases pursuant to which Cortext leases property are valid, binding
and enforceable in accordance with their terms, and are in full force and
effect; and there are no existing defaults by Cortext or the other party
thereunder; and no event of default has occurred which (whether with or without
notice, lapse of time or the happening or occurrence of any other event) would
constitute a default thereunder; and all lessors under such leases have
consented (where such consent is necessary) to the consummation of the
transactions contemplated by this Agreement.
4.9 No Undisclosed Liabilities; Etc. Cortext has no liabilities or
obligations of any nature (absolute, accrued, contingent or otherwise, and
whether due or to become due) ("Liabilities") except (a) Liabilities that are
fully reflected or reserved against in the Most Recent Financial Statements,
which reserves are appropriate and reasonable and (b) Liabilities incurred in
the ordinary course of business since the date of the Most Recent Financial
Statements.
4.10 Events Subsequent to Most Recent Fiscal Year End. Since the Most
Recent Fiscal Year End, there has not been any material adverse change in the
business, financial condition, operations, results of operations, or future
prospects of Cortext. Without limiting the generality of the foregoing, (but not
including those transactions reflected in the Most Recent Financial Statements,
this Agreement, the Assignment Agreement, the Software License Agreement and the
Employment Agreements), since that date:
(a) Cortext has not sold, leased, transferred, or assigned any material
assets, tangible or intangible;
(b) Cortext has not entered into any material agreement, contract, lease,
or license;
(c) no party (including Cortext) has accelerated, terminated, made material
modifications to, or canceled any material agreement, contract, lease, or
license to which Cortext is a party or by which Cortext is bound;
(d) Cortext has not imposed any security interest upon any of its assets,
tangible or intangible;
(e) Cortext has not made any material capital expenditures;
(f) Cortext has not made any material capital investment in, or any
material loan to, any Person;
(g) Cortext not created, incurred, assumed, or guaranteed any indebtedness;
<PAGE>
(h) Cortext has not granted any license or sublicense of any material
rights under or with respect to any Intellectual Property;
(i) there has been no change made or authorized in the Memorandum of
Association or Articles of Association of Cortext;
(j) Cortext has not issued, sold, or otherwise disposed of any of its share
capital, or granted any options, warrants, or other rights to purchase or obtain
(including upon conversion, exchange, or exercise) any of its share capital;
(k) Cortext has not declared, set aside, or paid any dividend or made any
distribution with respect to its share capital (whether in cash or in kind) or
redeemed, purchased, or otherwise acquired any of its share capital;
(l) Cortext has not experienced any material damage, destruction, or loss
(whether or not covered by insurance) to its property;
(m) Cortext has not made any loan to, or entered into any other transaction
with, any of its directors, officers, and employees;
(n) Cortext has not entered into any employment contract or collective
bargaining agreement, written or oral, or modified the terms of any existing
such contract or agreement other than the Cortext Principals' Employment
Agreements;
(o) Cortext has not granted any increase in the base compensation of any of
its directors, officers, and employees;
(p) Cortext has not adopted, amended, modified, or terminated any bonus,
profit-sharing, incentive, severance, or other plan, contract, or commitment for
the benefit of any of its directors, officers, and employees; and
(q) Cortext has not committed to any of the foregoing.
4.11 Intellectual Property.
(a) Cortext has not interfered with, infringed upon, misappropriated or
otherwise come into conflict in any material respect with any rights of third
parties with respect to Cortext Intellectual Property, and Cortext has not
received any charge, complaint, claim, demand or notice alleging any such
interference, infringement, misappropriation or conflict, and no such claim is
impliedly threatened by an offer to license from a third party under a claim of
use;
(b) Subject to the Assignment Agreement, Cortext owns all right, title and
interest in and to all of the Cortext Intellectual Property (other than the
Licensed Intellectual Property);
(c) Subject to the Assignment Agreement, Cortext has the right to use all
Intellectual Property necessary or required for the conduct of its business as
currently conducted or contemplated by this Agreement or the Exhibits hereto or
for use by VCI pursuant to the Software License Agreement;
(d) There are no royalties, honoraria, fees or other payments payable by
Cortext to any Person by reason of the ownership, use, license, sale or
disposition of any Intellectual Property;
(e) No activity, service or procedure currently conducted or contemplated
by this Agreement or the Exhibits hereto violates any agreement governing the
use of Licensed Intellectual Property;
<PAGE>
(f) Neither Planet nor any other third party participated in the
development of any of the Cortext Intellectual Property;
(g) Cortext has taken reasonable and practicable steps (including, without
limitation, entering into confidentiality and nondisclosure agreements and
proprietary rights agreements with all officers, directors and employees of, and
consultants to, Cortext with access to or knowledge of the Cortext Intellectual
Property) designed to safeguard and maintain the secrecy and confidentiality of,
and its proprietary rights in, all Cortext Intellectual Property; and
(h) Cortext has not sent to any third party or otherwise communicated to
another Person any charge, complaint, claim, demand or notice asserting
infringement or misappropriation of, or other conflict with, Cortext
Intellectual Property by such other Person or any acts of unfair competition by
such other Person, nor, to the best knowledge of Cortext, is any such
infringement, misappropriation, conflict or act of unfair competition occurring
or threatened.
4.12 Legal Compliance. To the best of its knowledge Cortext has materially
complied with, and is not in violation of, or in default with respect to, all
applicable Laws. No action, suit, proceeding, hearing, investigation, charge,
complaint, claim, demand, or notice has been filed or commenced alleging any
failure so to comply.
4.13 .1 Legal Action. There are no actions, suits, proceedings or
investigations pending against Cortext, or, to the knowledge of Cortext or the
Cortext Principals, threatened against or affecting, Cortext's shareholders or
its officers in their capacity as such, or any of Cortext's properties (or any
basis therefor known by Cortext or the Cortext Principals) before or by any
Israeli or foreign court, commission, regulatory body, administrative agency or
other governmental body, wherein an unfavorable ruling, decision or finding
could reasonably be expected to materially and adversely affect Cortext, its
business, properties, business prospects, condition (financial or otherwise) or
results of operations.
4.14. Taxes. To the best knowledge of the Cortext Parties, all applicable
Israeli and foreign tax reports and returns required to be filed by Cortext have
been duly filed and all taxes including, without limitation, income, value
added, Israeli National Insurance Institute and Health taxes, and other charges
due or claimed to be due from it by Israeli or foreign taxing authorities have
been duly paid; the reserves for taxes reflected in the Financial Statements are
adequate; and there are no tax liens upon any property or assets of Cortext.
Further, no state of facts exists or has existed which would constitute grounds
for the assessment of any further tax liability with respect to the periods
which have not been audited by the applicable state, local, or foreign tax
authorities. All deficiencies and assessments resulting from examination of such
tax returns and reports of Cortext have been paid. There are no outstanding
agreements or waivers extending the statutory period of limitation applicable to
any Israeli or foreign tax return or report for any period. Notwithstanding the
foregoing, VCI is aware that Cortext does not have a Final Tax Assessment from
the Israeli Tax Authorities and that these authorities are authorized to
re-examine any Tax Assessments for a period of seven years thereafter.
4.15 Insurance. All policies of fire, liability, worker's compensation and
other forms of insurance owned or held by Cortext have been provided to VCI and
are in full force and effect; are valid, outstanding and enforceable policies;
provide full insurance coverage for the assets and operations of Cortext; will
remain in full force and effect through the Final Closing; and will not in any
way be affected by, or terminate or lapse by reason of, the transactions
contemplated by this Agreement.
4.16 Contracts and Commitments. There has been made available to VCI (a) a
true and complete copy of each of the material contracts of Cortext together
with all amendments, waivers or other changes thereto, and (b) a complete
description of all oral contracts to which Cortext is a party or by which any of
its assets may be bound which individually or in the aggregate are material to
the business of Cortext. A list of all such contracts is attached hereto as
Schedule 4.16. Cortext has
<PAGE>
performed in all material respects all obligations required to be performed by
it under all such contracts and is not in default under or in breach of nor in
receipt of any claim of default or breach under any such contract to which it is
a party or by which any of its assets may be bound; and, to Cortext's knowledge,
no event has occurred which with the passage of time or the giving of notice or
both would result in such a default or breach under any such contract, except
where such actual or potential default or breach has not had, and in the future
is not reasonably likely to have, a material adverse effect on Cortext. To
Cortext's knowledge, no other party to any contract to which Cortext is a party
or by which its assets may be bound is in default under or in breach of such
contract and no event has occurred which would result in a default or breach
under any such contract.
4.17 Registration Rights. No Person has any right to cause Cortext to
effect the registration under the Securities Act or under the laws of any other
jurisdiction of any Cortext Securities.
4.18 Year 2000. The Magazine Software and all other software code and
product developed by Cortext (or any Affiliate or predecessor thereof) alone or
together with others and, to the best knowledge of Cortext, any other software
code or product owned by Cortext, are year 2000 compliant.
4.19 Collective Bargaining Agreements. There are no collective bargaining
agreements or extension orders which apply to the business of Cortext and/or to
one or more of its employees.
4.20 Government Funding. Neither Cortext nor either of the Cortext
Principals have ever received or applied for, any form of Israeli government
funding, including without limitation funding from the Office of the Chief
Scientist, MESER, the BIRD Foundation and funding related to Approved Enterprise
status. Cortext has not received or applied for, any special status under any
Israeli law or regulation for purposes of obtaining any financial benefit, tax
benefit or government guarantee.
4.21 Disclosure. The representations and warranties of the Cortext Parties
in this Agreement and the statements contained in the documents listed as
exhibits hereto do not, and will not as of the first Installment Closing Date,
contain any untrue statement of a material fact or omit to state any material
fact necessary to make the statements contained herein or therein not
misleading.
5. Representations and Warranties by VCI. . Representations and Warranties
by VCIVCI hereby represents and warrants as of each Installment Closing Date, to
the Cortext Parties as follows:
5.1 Execution, Delivery and EnforceabilityExecution, Delivery and
Enforceability. All consents, approvals, authorizations and orders necessary for
the execution, delivery and performance by VCI of this Agreement have been duly
and lawfully obtained, and VCI has full right, power, authority and capacity to
execute, deliver and perform this Agreement. This Agreement has been duly
executed and delivered by VCI and constitutes a legal, valid and binding
agreement of VCI enforceable against VCI in accordance with its terms except as
enforcement thereof may be limited by bankruptcy, insolvency, reorganization,
moratorium and other laws relating to or affecting the rights of creditors
generally and except as limited by the application of equitable principles when
equitable remedies are sought, and by the fact that rights to indemnity,
contribution and waiver, and the ability to sever unenforceable terms, may be
limited by applicable law.
5.2 Compliance with Laws and Other InstrumentsCompliance with Laws and
Other Instruments. The execution, delivery and performance by VCI of this
Agreement (a) will not require from the board of directors or stockholders of
VCI any consent or approval that has not been validly and lawfully obtained, (b)
will not require any authorization, consent, license, exemption of or filing or
registration with any court or governmental department, commission, agency or
instrumentality of government, except such as shall have been lawfully and
validly obtained prior to the date hereof, (c)
<PAGE>
will not cause VCI to violate or contravene (i) any provision of law, (ii) any
rule or regulation of any agency or government, domestic or foreign, (iii) any
order, writ, judgment, injunction, decree, determination or award, or (iv) any
provision of the certificate of incorporation or bylaws of VCI, or (d) will not
result in a violation or conflict with, result in a breach of or constitute
(with or without notice or lapse of time or both) a default under, any
indenture, credit agreement, note agreement, deed of trust, mortgage, security
agreement or other agreement, lease or instrument to which VCI is a party or by
which VCI or any of its properties or assets are bound which would have a
material adverse effect on VCI.
5.3 VCI is experienced in evaluating and investing in technologies such as
the Magazine Software, is aware that CORTEXT is a start up company, is aware of
CORTEXT financial condition, and can bear the risk of its investment in Cortext.
VCI hereby represents that it has had sufficient opportunity to discuss
management and financial affairs of Cortext with the Cortext Principals, has
received answers to all questions that it has asked and has received materials
in response to its requests. Cortext has not refused any information which VCI
deemed necessary and appropriate to enable VCI to evaluate the financial risk
inherent in making an investment in the shares of Cortext. Nothing contained in
this Section shall derogate from the liability of the Cortext Parties with
respect to the representations and warranties made by the Cortext Parties.
6. Survival of Representations and Warranties. All representations and
warranties of the parties hereto contained in this Agreement shall survive the
Final Closing Date and the consummation of the transactions contemplated hereby
(and any examination or investigation by or on behalf of any party hereto) until
the earlier of: (a) the lapse of two (2) years as of the first Installment
Closing Date or (2) the closing of an M&A Transaction involving the majority of
CORTEXT's shares or assets.
7. Definitions. Definitions. Unless the context otherwise requires, the
terms defined in this Section 7 shall have the meanings herein specified for all
purposes of this Agreement, applicable to both the singular and plural forms of
any of the terms herein defined.
"Affiliate" shall mean, with respect to any specified Person, any other
Person who, directly or indirectly, through one or more intermediaries controls,
is controlled by, or is under common control with, the specified Person.
"Board" shall mean the board of directors of Cortext, together with any
executive committee thereof (if any), as same shall be constituted from time to
time.
"Companies Ordinance" shall mean the Israel Companies Ordinance (New
Version), 5743 - 1983, as amended from time to time, and any successor thereto.
"Confidential Information" shall mean any information, data, technology,
designs, plans, processes, systems or knowhow, whether or not protected by laws
affording protection for intellectual property rights, regarding Cortext's or
VCI's and their respective Affiliates' technologies, or concerning the
businesses and affairs of Cortext or VCI and their respective Affiliates, that
is not already generally available to the public.
"Cortext Intellectual Property" shall mean the Magazine Software and all
other Intellectual Property used by Cortext or necessary for use in connection
with the business of Cortext.
"Cortext Securities" shall mean shares of Cortext (or any right or interest
therein) or rights or securities convertible into shares of Cortext (or any
right or interest therein) .
"Cortext Parties" shall mean Cortext and the Cortext Principals.
<PAGE>
"Employment Agreements" shall mean the employment agreements entered into
by Cortext and each of Ran Eilam and Noam Ilan, as of the date hereof and
provided to VCI.
"Holder" shall mean any of VCI, Ran Eilam or Noam Ilan.
"Installment Closing" shall refer to each of the four issuance and sales of
the Shares to VCI in exchange for the consideration contemplated by this
Agreement.
"Installment Closing Date" shall mean the date on which an Installment
Closing occurs or is contemplated to occur in this Agreement.
"Intellectual Property" shall mean (a) all inventions (whether patentable
or unpatentable and whether or not reduced to practice), all improvements
thereto, and all patents, patent applications, and patent disclosures, together
with all reissuances, continuations, continuations-in-part, revisions,
extensions, and reexaminations thereof, (b) all trademarks, service marks, trade
dress, logos, trade names, and corporate names, together with all translations,
adaptations, derivations, and combinations thereof and including all goodwill
associated therewith, and all applications, registrations, and renewals in
connection therewith, (c) all copyrightable works, all copyrights, and all
applications, registrations, and renewals in connection therewith, (d) all mask
works and all applications, registrations, and renewals in connection therewith,
(e) all trade secrets and confidential business information (including ideas,
research and development, know-how, formulas, compositions, manufacturing and
production processes and techniques, technical data, designs, drawings,
specifications, customer and supplier lists, pricing and cost information, and
business and marketing plans and proposals), (f) all computer software
(including data and related documentation), (g) all other proprietary rights,
(h) all copies and tangible embodiments thereof (in whatever form or medium) and
(i) moral rights.
"Law" shall mean any constitution, law, statute, treaty, rule, directive,
requirement or regulation or order of any governmental entity.
"Licensed Intellectual Property" shall mean each item of Intellectual
Property that any Person owns and that Cortext uses in connection with its
business pursuant to license, sublicense, agreement or permission.
"Milestones" shall mean the Milestones set forth in Schedule 1 as amended
by mutual consent.
"New Articles" shall mean the articles of association in the form appended
hereto as Exhibit C.
"Person" shall include any natural person, corporation, limited liability
company, trust, association, company, partnership, joint venture and other
entity and any government, governmental agency, instrumentality or political
subdivision.
"Securities Act" shall mean the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder.
<PAGE>
8. Miscellaneous.
8.1 Waivers and Amendments. .1Waivers and AmendmentsNeither this Agreement
nor any provision hereof may be amended, waived, discharged or terminated orally
or by course of dealing, but only by a statement in writing signed by the party
against which enforcement of the change, waiver, discharge or termination is
sought. No waiver by any party of the breach of any term or provision contained
in this Agreement, in any one or more instances, shall be deemed to be or
construed as a further or continuing waiver of any such breach, or a waiver of
the breach of any other term or covenant contained in this Agreement.
8.2 Developments and Notices.2Notices.
(a) Each party will give prompt written notice to the others of any
material adverse development causing a breach or non-fulfillment of any of his
or its own representations and warranties in Sections 4 or 5 hereof, the
Software License Agreement or the Assignment Agreement. No disclosure by any
party pursuant to this Section 8, however, shall be deemed to prevent or cure
any misrepresentation, breach of warranty, or breach of covenant.
(b) All notices and other communications required or permitted under this
Agreement shall be given in writing and shall be delivered to the relevant party
or sent by registered air mail or facsimile to the address of that party or that
party's facsimile number specified in Section 8(c). Unless otherwise specified
herein, each notice or other communication shall be deemed effective nor having
been given (i) on the date received, if personally delivered, (ii) the earlier
of actual receipt or eight (8) business days after being sent, if sent by
registered air mail, or (iii) one (1) business day after being sent, if sent by
telecopier with written confirmation of receipt.
(c) All notices and other communications shall be addressed as follows:
if to Cortext:
Attention: Noam Ilan
Telecopier No.:
With a copy to:
Attention: Advocate Nehama Sneh
Telecopier No. +972-3-547 9241
:
if to VCI:
Virtual Communities, Inc.
589 8th Avenue
New York, New York Attention:
Telecopier No.:
With a copy to:
or such other address or telecopier number of a party, as that party shall have
notified in writing to all other parties pursuant to this Section.
<PAGE>
8.3 Severability.3 Severability. Should any one or more of the provisions
of this Agreement or of any agreement entered into pursuant to this Agreement be
determined to be illegal or unenforceable, all other provisions of this
Agreement and of each other agreement entered into pursuant to this Agreement,
shall be given effect separately from the provision or provisions determined to
be illegal or unenforceable and shall not be affected thereby.
8.4 Parties in Interest. All the terms and provisions of this Agreement
shall be binding upon and inure to the benefit of and be enforceable by the
respective successors and permitted assigns of the parties hereto, whether so
expressed or not. Subject to the immediately preceding sentence, this Agreement
shall not run to the benefit of or be enforceable by any Person other than a
party to this Agreement and its successors and permitted assigns.
8.5 .5 Expenses. All costs and expenses (including, without limitation, all
legal fees and expenses and fees and expenses of any brokers, finders or similar
agents) incurred in connection with this Agreement and the transactions
contemplated hereby shall be paid by the party incurring the same.
8.6 Headings.6 Headings. The headings of the Sections and paragraphs of
this Agreement have been inserted for convenience of reference only and do not
constitute a part of this Agreement.
8.7 Choice of Law. .7Choice of LawIt is the intention of the parties that
the internal substantive laws, and not the laws of conflicts, of Israel should
govern the enforceability and validity of this Agreement, the construction of
its terms and the interpretation of the rights and duties of the parties.
8.8 Cumulative Remedies..8 Cumulative Remedies None of the rights, powers
or remedies conferred upon any party shall be mutually exclusive, and each such
right, power or remedy shall be cumulative and in addition to every other right,
power or remedy, whether conferred hereby or now or hereafter available at law,
in equity, by statute or otherwise.
8.9 Rights of Parties. Subject to the terms and conditions of this
Agreement, each party shall have the absolute right to exercise or refrain from
exercising any right or rights that such party may have by reason of this
Agreement, including without limitation the right to consent to the waiver of
any obligation of the other party under this Agreement and to enter into an
agreement with the other party for the purpose of modifying this Agreement or
any agreement effecting any such modification, and such party shall not incur
any liability to any other party with respect to exercising or refraining from
exercising any such right or rights.
8.10 Counterparts. This Agreement may be executed in any number of
counterparts and by different parties hereto in separate counterparts (including
by facsimile), with the same effect as if all parties had signed the same
document. All such counterparts shall be deemed an original, shall be construed
together and shall constitute one and the same instrument.
8.11 No Publicity. No party, nor any of their respective affiliates, shall
make any public announcement or press release or otherwise make a public
disclosure to any third party any terms or conditions of this Agreement or the
transactions contemplated hereby, except to the extent necessary to comply with,
or as required by, applicable law or pursuant to legal process, proceeding or
order.
8.12 Entire Agreement. This Agreement, including the other documents
referred to herein and the Exhibits hereto, contains the entire understanding of
the parties hereto in respect of the subject matter hereof. This Agreement,
including the other documents referred to herein and the Exhibits hereto,
supersedes all prior agreements and understandings between the parties hereto
with respect to such subject matter.
<PAGE>
8.13 Further Assurances.12 Further Assurances. Subject to the terms and
conditions of this Agreement, each of the parties hereto agrees to use its
reasonable best efforts to take, or cause to be taken, all action, and to do, or
cause to be done, all things necessary, proper or advisable under applicable Law
or otherwise, to consummate and make effective the transactions contemplated by
this Agreement. If at any time after the date hereof any further action is
necessary or desirable to carry out the purposes of this Agreement, the relevant
party shall take or cause to be taken all such necessary or convenient action
and execute, and deliver and file, or cause to be executed, delivered and filed,
all necessary or convenient documentation.
8.14 Confidentiality. Each of the parties hereto will treat and hold as
such all of the Confidential Information, refrain from using any of the
Confidential Information except in connection with this Agreement, and deliver
promptly to the other party or destroy, at the request and option of such party
all tangible embodiments (and all copies) of the Confidential Information which
are in his or its possession. In the event that any of the parties is required
by any legal proceeding to disclose any Confidential Information, such party
will notify the other party promptly of the requirement so that the other party
may seek an appropriate protective order or waive compliance with the provisions
of this Section 8.14. If, in the absence of a protective order or the receipt of
a waiver hereunder, any of parties on the advice of counsel, compelled to
disclose any Confidential Information to any tribunal or else stand liable for
contempt, such party may disclose the Confidential Information to the tribunal;
provided, however, that the disclosing party shall use his or its reasonable
best efforts to obtain, at the reasonable request of the other party , an order
or other assurance that confidential treatment will be accorded to such portion
of the Confidential Information required to be disclosed as the other party
shall designate.
8.15 Assignment. This Agreement and the rights hereunder shall not be
assignable or transferable by Cortext or the Cortext Principals or VCI except to
permitted transferees in accordance with Section 3 and the New Articles and
provided that such transferees undertake and assume all of transferor
obligations under this Agreement. Subject to the preceding sentence, this
Agreement shall be binding upon, inure to the benefit of and be enforceable by
the parties hereto and their respective successors and permitted assigns.
8.16 Specific Performance. Each of the parties hereto acknowledges and
agrees that in the event of any breach of this Agreement, the nonbreaching
parties would be irreparably harmed and could not be made whole by monetary
damages. Each of the parties hereto accordingly agrees to waive the defense in
any action for injunction or specific performance that a remedy at law would be
adequate and that the parties hereto, in addition to any other remedy to which
they may be entitled at law or in equity, shall be entitled to an injunction or
to compel specific performance of this Agreement.
9. Conditions to Obligation to Close.
9.1 Conditions to Obligations of VCI. The obligations of VCI to consummate
the transactions to be performed by it in connection with each Installment
Closing as of each Installment Closing Date is subject to satisfaction of the
following conditions:
(a) the representations and warranties set forth in Section 4 above,
applicable to such Closing Date, shall be true and correct in all material
respects;
(b) the Cortext Parties shall have materially performed and complied with
all of their covenants hereunder;
(c) no action, suit, or proceeding shall be pending before any court or
quasi-judicial or administrative agency of any federal, state, local, or foreign
jurisdiction or before any arbitrator wherein an unfavorable injunction,
judgment, order, decree, ruling, or charge would (1) prevent consummation of any
of the transactions contemplated by this Agreement, (2) cause any of the
transactions contemplated by this Agreement to be rescinded following
consummation, (3) affect
<PAGE>
adversely the right of VCI to own the Shares or (4) affect materially and
adversely the right of Cortext to own its assets and to operate its business
(and no such injunction, judgment, order, decree, ruling, or charge shall be in
effect);
(d) on or prior to the date hereof, the relevant parties shall have entered
into the Assignment Agreement and the Employment Agreements (the "Side
Agreements") which agreements shall be in full force and effect; and any
necessary payments shall have been made under such agreements; and no breach or
violation of any of the terms or provisions of, or default under (with or
without notice or lapse of time or both), or any other right to terminate any of
the obligations under, or right to accelerate any obligations under, any of such
agreements shall exist;
(e) Cortext shall have delivered to VCI: (i) on or prior to the date
hereof, (A) resolutions of the Board and the shareholders, as the case may be,
authorizing the execution, delivery and performance of this Agreement, the Side
Agreements and the transactions contemplated hereby and thereby, including the
adoption of the New Articles, establishing the signature authorities of Cortext,
in the forms annexed hereto as Exhibit _9.1_(the "Resolutions") and (B) the
Fiscal Year End 1999 financial statement consistent with the representations and
warranties set forth in Section 4.10 above; and (ii) a certificate, dated as of
the date of the Installment Closing in question, executed by the appropriate
officers of Cortext, to the effect that each of the conditions specified above
in Section 1 and this Section 9.1 are satisfied in all respects;
(f) VCI shall have received on the date hereof from counsel to Cortext an
opinion in form and substance as set forth in Exhibit D attached hereto,
addressed to VCI and dated as of the date hereof;
(g) VCI shall have received from Cortext on or prior to the date hereof,
the Agreement annexed hereto as Exhibit E, executed by Cortext and Internet
Dapei Zahav;
(h) VCI shall have received from Cortext on or prior to the date hereof,
executed banking instructions with respect to the payments to be made hereunder
to Planet reasonably satisfactory in form and substance to VCI; and
(i) all actions to be taken by the Cortext Parties in connection with
consummation of the transactions contemplated hereby and all certificates,
opinions, instruments, and other documents required to effect the transactions
contemplated hereby, or reasonably requested by VCI, shall be reasonably
satisfactory in form and substance to VCI.
VCI may waive any condition specified in this Section 9 if it executes a
writing so stating at or prior to the relevant Installment Closing.
9.2 Conditions to Obligation of the Cortext Parties. The obligation of the
Cortext Parties to consummate the transactions to be performed by them in
connection with the each Installment Closing is subject to satisfaction of the
following conditions:
(a) the representations and warranties set forth in Section 5 above shall
be true and correct in all material respects at and as of each Installment
Closing Date;
(b) VCI shall have performed and complied with all of its covenants
hereunder in all material respects through the applicable Installment Closing
Date;
(c) no action, suit, or proceeding shall be pending before any court or
quasi-judicial or administrative agency of any federal, state, local, or foreign
jurisdiction or before any arbitrator wherein an unfavorable injunction,
judgment, order, decree, ruling, or charge would (A) prevent consummation of any
of the transactions contemplated by this Agreement or (B) cause any of the
<PAGE>
transactions contemplated by this Agreement to be rescinded following
consummation (and no such injunction, judgment, order, decree, ruling, or charge
shall be in effect);
(d) all actions to be taken by VCI in connection with consummation of the
transactions contemplated hereby and all certificates, opinions, instruments,
and other documents required to effect the transactions contemplated hereby, or
reasonably requested by the Cortext Parties, shall be reasonably satisfactory in
form and substance to the Cortext Parties.
(e) Cortext received from VCI satisfactory written evidence of transfer of
the funds to the Cortext Account and to the Planet Account.
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto have caused this Stock
Purchase Agreement to be executed by its duly authorized representative as of
the date and year first set forth above.
VIRTUAL COMMUNITIES, INC.
By: /s/ Avi Moskowitx
-----------------
Title: President
CORTEXT LTD.
By: /s/ Noam Ilan
-------------
Title: C.E.O.
/s/Noam Ilan
------------
Noam Ilan
/s/ Ran Eilam
-------------
Ran Eilam
<PAGE>
Exhibit 10(41)
Assignment Agreement
This Agreement (the "Agreement") is made as of the 10th day of February,
2000, by and between Planet Communications Ltd., a company incorporated under
the laws of the State of Israel with registered offices at 6 Balfour Street, Tel
Aviv, Israel ("Assignor") and Cortext Ltd., a company incorporated under the
laws of the State of Israel, with registered offices at Hamiktzoa 9, Tel Aviv,
Israel ("Assignee") and Virtual Communities, Inc., a company incorporated under
the laws of Delaware, USA with offices at 589 8th Avenue, New York, NY ("VCI").
WHEREAS, Assignee and Assignor entered into a Partnership Agreement (the
"Partnership Agreement"), dated November 2, 1997, with respect to the "Magazine
Software" (as defined below); and
WHEREAS, Assignee has been the active party in the development, marketing,
sale, licensing and support of the Magazine Software; and
WHEREAS, Assignee has "Rights" (as defined below) in and to the Magazine
Software pursuant to the Partnership Agreement; and
WHEREAS, Assignee desires to acquire all Rights of Assignor in and to the
Magazine Software, and Assignor is willing to assign all such Rights, as
provided herein; and
WHEREAS, VCI intends to purchase shares of Assignee, according to the terms
and conditions set forth in the Share Purchase Agreement by and between Assignee
and VCI (the "SPA") entered into simultaneously herewith ("VCI's Investment");
and
WHEREAS, according to the SPA, VCI's Investment is conditioned on Assignor
assigning all "Rights" in the Magazine Software to Assignee; and
WHEREAS, in connection with the SPA, Assignee is entitled to certain
payments from VCI, in accordance with the SPA;
THEREFORE, it is hereby agreed by the parties as follows:
Effectiveas of the date when VCI (on behalf of Assignee) shall pay to
Assignor the payments set forth in sections 9.1 and 9.2 herein (the "Relevant
Date") and subject to such payments,, Assignor hereby irrevocably assigns to
Assignee, and Assignee accepts, free from any encumbrances or other third party
rights, all of Assignor's rights, title and interest in and to a certain
magazine web publishing tool kit software (the "Magazine Software"), and any
related technology or work of any kind related to the Magazine Software
(including without limitation, interfaces and manuals) owned or developed by
Assignor, alone or together with the Assignee, including, inter alia, all rights
pursuant to, or in connection with, the Partnership Agreement and the Software
License Agreement among the parties hereto, dated July 18, 1999 (the "VCI
License"), and the Work Order among Internet Dapei Zahav; Assignee and Assignor
dated August 13, 1998, including all rights to any work developed pursuant to,
or in connection with such agreements and which relate to the Magazine Software,
all subject to Assignor's right to sell up to 10 licences of the Magazine
Software in form and substance as set forth in Exhibit A attached hereto only to
Domain End Users (all of the above, collectively, the "Rights").
The "Rights" shall include without limitation, any and all industrial and
intellectual property rights relating to the Magazine Software and to any other
related technology or work of any kind owned or developed by Assignor, and which
relate to the Magazine Software, including without limitation, if any, patents,
patent applications, patent rights, trademarks, trademark applications, trade
names, service marks,
<PAGE>
service mark applications, copyrights, moral rights, computer programs,
content and other computer software, source code, object code, technology,
know-how, trade secrets, proprietary processes and formulae information,
data, technology, know-how, inventions, discoveries, designs, models,
technical reports, diagrams, software and hardware, ideas, and trade and
business plans .
The assignment of Rights to Assignee includes, but is not limited to all of
the Rights of Assignor (in partnership with Assignee) as follows:
A. The right to become the sole registered owner of any Rights, whether
or not currently registered.
B. The right to become the sole registered owner of any not yet
registered or non-crystallized (as the case may be) Rights.
C. All rights and powers arising or accrued from the Rights, including
the right to sue for damages and other remedies in respect of any
infringement of the Rights, or in respect of other acts within the
scope of the claims of any published specification of any patent or
accompanying any application therefor or accompanying any applications
prior to the date hereof.
D. The right to apply for, prosecute and obtain patents, trade names,
intellectual property or similar protection throughout the world in
respect to any right accrued, derived or based on the Rights,
including the right to claim patent priority or other legal priority.
2. If any right assigned to Assignee hereunder is not capable of assignment,
then to the extent required to vest such right in Assignee, Assignor hereby
waives and relinquishes such right in favor of Assignee and/or grants to
Assignee a perpetual, exclusive, royalty free, worldwide license to exploit
and use such right, including a license to assign, transfer and sub-license
such right, in any manner that Assignee deems fit, and further hereby
consents to any exercise whatsoever of such right by Assignee. Assignor
shall promptly cooperate with Assignee, sign all documents and otherwise
take all steps, at the request and expense of the Assignee, necessary to
vest in the Assignee the rights assigned to the Assignee under this
Agreement.
3. Assignor declares and warrants that to the best of its knowledge it does
not possess any software designs, lines of code or and any other tangible
property or physical objects which relate to the Rights (and shall promptly
deliver any of the foregoing if discovered). Assignor shall maintain the
confidentiality of all information relating to the Rights and shall ensure
that all persons which it has afforded access to such information shall not
use or disclose such information.
4. The Partnership Agreement is hereby terminated as of the Relevant Date.
Each of Cortext and Planet irrevocably releases the other as of the
Relevant Date from all claims and obligations arising out of the
Partnership Agreement.
5. The Assignor represents and warrants that, (a) it has not granted rights in
the Rights to any third parties in any manner whatsoever; (b) Assignee,
entirely through the efforts of its employees, has been the active party in
the development, marketing, sale, licensing and support of the Magazine
Software and Assignor was only a passive investor (supplying funds,
equipment and premises) with respect to the development, licensing and
support of the Magazine Software; and (c) to the best of its knowledge, (1)
the Rights being assigned are free and clear of all liens, claims,
encumbrances, rights, or equities whatsoever of any third party other than
the Assignee and VCI; (2) the Rights being assigned have not been forfeited
to the public domain and have been maintained in confidence; (3) no person
has the right to assert any claim regarding the use of, or challenging or
questioning the Assignor's right or title in, any of the Rights; and (4)
there are no claims by or against the Assignor relating to the Rights and
no ground exists that may give rise to such a claim. To eliminate any
doubt, Assignor shall have no liability, in any way whatsoever, if any of
its representations and warranties shall be found to be incorrect if they
were effected by the acts of the Assignee or by any act in which Assignee
was an active party with respect to the Magazine Software.
6. Assignor represents and warrants to the best of its knowledge, information
and belief, that (a) the Magazine Software does not infringe any patent,
copyright, or trade secret of, or the intellectual
<PAGE>
property or other rights of, any third party; and (b) upon the effective
date of this Agreement, Assignee will own all of the intellectual property
or other rights relating to the Magazine Software subject to Assignor's
right as set forth in section 1.
In consideration of Assignor's obligations and representations herein,
Assignee hereby authorizes and instructs VCI, on behalf of Assignee and VCI
hereby irrevocably agrres to pay on behalf of Assignee the following
amounts to Assignor
A. Within three (3) business days after the execution of this Agreement,
pay to Assignor an amount of $35,000 plus V.A.T (against Assignor's
duly issued invoice to Assignee) and the V.A.T due on the advanced sum
of $30,000 already paid (against Assignor's duly issued invoice to
Assignee in the amount of $30,000 plus V.A.T.) by wire transfer to
Assignor account number 322100/46 in Bank Leumi Branch Ahad Haam, Tel
Aviv (No. 811) (the "$35,000 Payment").
B. Within ten (10) days after the execution of this Agreement, pay to
Assignor an amount of $285,000 plus V.A.T (against Assignor's duly
issued invoice to Assignee) by wire transfer to the account specified
in section 9.1 above (the "Second Installment").
C. Pay to Assignor an additional aggregate amount of $75,000 plus V.A.T
(against Assignor's duly issued invoice to Assignee) by wire transfer
to the account specified in section 9.1 above in three (3)
installments ($25,000 plus V.A.T [against Assignor's duly issued
invoice to Assignee] each), on April 15, 2000, June 15, 2000 and
August 15, 2000.
D. In any manner whatsoever, unless this Agreement shall be cancelled,
all sums as mentioned in sections 9.1 - 9.3 shall be paid to Assignor
as detailed above. In particular, VCI, on behalf of Assignee shall
have no right to delay or postpone any of such payments and none of
such payments shall be paid in any other method (including, but not
limited to a claim or plea of set-off) than the method detailed above.
E. In the event that any of the sums mentioned in sections 9.1 - 9.3
above or any portion thereof, shall not have been paid on the dates
set forth in such section 9.1 - 9.3, then without derogating from any
of Assignor's rights in such event, such sum(s) shall bear interest at
the rate of one percent (1%) per month (on a daily basis) plus V.A.T ,
which shall be added to such sum and paid by VCI, on behalf of
Assignee to Assignor.
F. In the event that VCI, on behalf of Assignee fails to meet any of its
obligations under sections 9.1 through 9.5 herein, or any portion
thereof, such breach shall be deemed to be a fundamental breach of
this Agreement. In such event, and without derogating from any of
Assignor's rights in the event of such breach, including, but not
limited to, the enforcement of this Agreement, VCI, on behalf of
Assignee, shall pay Assignoras agreed compensation, and without the
need of proof of damages, the sum of $35,000. Without derogating from
Assignor's rights, if in such event, Assignor shall choose its right
to cancel this Agreement after the payment of $35,000 pursuant to
section 9.1 above is paid, than, in such event, Assignor shall be
entitled to retain, this sum. Assignor acknowledges the prior receipt
of $30,000 as an advance payment hereunder. In the event of a
cancellation of this Agreement, Assignor shall not have to return this
advance payment of $30,000 and such sum shall be applied toward VCI's
purchase of additional licenses for Magazine Software pursuant to the
VCI License.
G. To clear all doubts. No matter that VCI's payments and/or obligations,
mentioned in sec 9.1 - 9.6 are on behalf of Assignee, Assignor's
rights to these payments and/or to such rights shall be directly
toward VCI (as well as, jointly and severally toward Assignee) and
nothing in connection with the relationship between VCI and Assignee
and/or the SPA, in any manner whatsoever, shall have any effect nor
shall derogate from VCI direct liabilities toward Assignor.
Nevertheles but without derogating from Assignor's rights, as
mentioned above, all such payments, when paid by VCI, shall be on
behalf of Assignee, shall be considered as paid by
<PAGE>
Assignee and consiquently, Assignor shall issue the duly invoices for
such payment to Assignee.
7. Each Party represents that the execution, delivery, and performance by such
Party of this Agreement and all transactions contemplated hereby have been
duly and validly authorized by all necessary actions on the part of such
Party and that neither the execution of this Agreement nor the performance
hereunder by such Party is in violation of such Party's obligations,
contractual or otherwise, to any government, agency or any other party or
parties.
8. This Agreement merges and supersedes all prior and contemporaneous
agreements, assurances, representations, and communications between the
parties hereto regarding the subject matter hereof.
9. This Agreement shall be governed by and construed under the laws of the
State of Israel. Sole jurisdiction is given to the court in Tel Aviv,
Israel.
10. Any notice required or permitted under this Agreement shall be given in
writing and shall be deemed effectively given upon personal delivery to the
party to be notified or upon deposit with the Israeli Post Office, by
registered or certified mail, postage prepaid and addressed to the party to
be notified at the address indicated for such party below, or at such other
address as such party may designate by ten (10) day's advance written
notice to the other parties.
If to Assignor: Planet Communications Ltd.
57 Igal Allon Street, Tel Aviv Israel
Attn: Shimon Ohaion
Fax: 972 3 636 6463
With a copy (which shall not constitute notice) to:
Ami Sadan & Co. - Law Offices
315 Haryarkon St. Tel Aviv, Israel
Attn:Ami Sadan, Adv.
Fax 972 3 602 2503
If to Assignee: Cortext Ltd.
Hamikztoa 9
Tel Aviv, Israel
Attn: Noam Ilan
Fax: 972 3
If to VCI: Virtual Communities Israel Ltd.
Jerusalem Technology Park, Malcha
Jerusalem, Israel
Attn: David Kahn
Fax: 972 2 568 9171
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed.
Cortext Ltd. Planet Communications Ltd.
By: /s/ Noam Ilan By: /s/ Shimon Ohaoin
------------- -----------------
Virtual Communities, Inc.
By: /s/ Avi Moskowitz
-----------------
<PAGE>
Exhibit 10(42)
REPRESENTATION AND TECHNICAL SUPPORT AGREEMENT
THIS AGREEMENT entered into as of the 21st day of February, 2000 by and between
VCI Communities Solutions, Inc. a company incorporated under the laws of the
State of Delaware, with offices at 589 Eighth Avenue, New York, New York 10018,
(hereinafter, "VCI"), and Vanco Consulting Limited., a company incorporated
under the company laws of the United Kingdom with offices at John Busch House,
277 London Road, Isleworth, Middlesex, TW7 5AX (hereinafter, "Vanco").
W I T N E S S E T H
WHEREAS, VCI has developed and/or has been licensed the proprietary rights
to a suite of products designed to create a complete solution for the creation,
management and maintenance of community web sites (hereinafter, "Community
Management Solution" or "CMS"); and
WHEREAS, VCI desires to authorize Vanco to market and provide technical
development and support services for CMS and/or other content management systems
to be developed by VCI, (hereinafter collectively, "VCI Systems") as defined
below and in Exhibit A hereto, and Vanco wishes to market and provide technical
development and support services for VCI Systems in accordance with the terms
and conditions set forth in this Agreement;
NOW, THEREFORE, in consideration of the foregoing, the parties, by their
duly authorized representatives, hereby covenant and agree as follows:
1. Preamble
1.1 The Preamble and all Exhibits attached hereto, form an integral part
of this Agreement.
2. Engagement and Services
2.1 Subject to the terms and conditions set forth in this Agreement and
Exhibit A hereto, VCI hereby appoints Vanco as its exclusive
representative in the countries comprising the European Union
(hereinafter, the "EU" or "Territory") to market VCI Systems in the
Territory, locate and introduce potential customers (hereinafter
"Introduced Parties") to VCI for the purpose of encouraging their
acquisition of VCI Systems and to assist VCI in negotiating sales
agreements with Introduced Parties, if so requested by VCI. For
purposes of this Section 2.1, the term "introduce" shall include,
without limitation, identifying potential clients, making the initial
contact and conducting preliminary meetings with such party.
2.2 To eliminate any doubt, any final Web Design and Development Agreement
entered into with the Introduced Party shall be solely between VCI and
such Introduced Party.
2.3 Commencing upon the effectiveness of this Agreement and no later than
every three (3) months thereafter (hereinafter, the "Reporting
Period"), Vanco shall furnish to VCI a written report (hereinafter,
the "Report") relating to Vanco's planned marketing activities for the
forthcoming
<PAGE>
Reporting Period, prior Reporting Period activities for the previous
Reporting Period, including without limitation, its quarterly
marketing plan and budget for marketing VCI Systems to its existing
customer base and other potential customers in the Territory.
2.4 During the term of this Agreement, Vanco shall, in addition to its
duties set out in Section 2.1, 2.2 and 2.3 above, provide the services
that are more particularly set forth in Exhibit A for those Introduced
Parties with whom VCI enters into agreements and shall maintain the
technical infrastructure, facilities and staff required to provide
such services for the Introduced Parties.
2.5 Notwithstanding anything contained herein, for a period of two (2)
years after the termination of this Agreement, Vanco shall continue to
provide to the Introduced Parties those technical support services
which are numbered #5 through #8 in Exhibit A. At all times during the
Agreement and for so long as Vanco provides the technical support
services described herein, VCI shall provide Vanco with secondary
support services and information as are reasonably required for Vanco
to perform its technical support services hereunder. In consideration
thereof, Vanco shall receive the maintenance fee (hereinafter, the
"Maintenance Fee") set forth in Exhibit B attached hereto. To
eliminate any doubt, the provisions of technical support services by
Vanco for a period of two years following termination of this
Agreement shall be dependant upon VCI's provision to Vanco of the
secondary support services and information required by Vanco to
perform its duties hereunder.
3. CMS License Fee and Compensation
3.1 The current suggested price for CMS is the amount set forth in Exhibit
B attached hereto (hereinafter, the "Fee"). The Fee is payable in cash
and securities of the Introduced Party. VCI may, at its sole
discretion, change the suggested Fee from time to time. In the event
of same, VCI shall provide Vanco fourteen (14) days notice of its
decision to do so. VCI shall also have the absolute right to determine
the Fee for each agreement entered into with an Introduced Party
taking into consideration the scope and nature of the agreement with
such Introduced Party.
3.2 In consideration of Vanco fulfilling its duties and obligations
herein, in addition to the Maintenance Fee set forth in Section 2.5
above, VCI shall pay to Vanco the commission set forth in Exhibit B,
(hereinafter, the "Commission"). The Commission shall be payable net
of taxes, for each VCI System that VCI sells to an Introduced Party.
VCI shall not be obligated to sell a CMS system for less than the Fee.
VCI shall not receive less than fifty percent of the Fee in cash. All
equity received by VCI from an Introduced Party shall be placed in
escrow on behalf of VCI and Vanco (pursuant to an escrow agreement to
be entered into by the parties within a period of thirty (30) days
from the date hereof on mutually satisfactory terms) pending a
decision by them whether to establish a joint venture entity ("JV")
within a period of one year from the date hereof for the purpose of
marketing and providing technical services to Introduced Parties. In
the event the parties do not establish a JV within a period of one
year from the date hereof, or, alternatively, mutually determine
earlier that a JV is not in each parties' best interest, the equity
shall be divided between the parties on a sixty percent (60%)/forty
percent (40%) basis with the higher amount going to VCI. In the event
the JV is established by the parties, then such equity shall be
transferred to it in the manner to be set forth in a JV agreement to
be entered into by the parties.
<PAGE>
3.3 Notwithstanding anything contained herein, VCI shall not be obligated
to enter into agreements with more than six (6) Introduced Parties for
VCI Systems in any fiscal quarter of 2000 and eight (8) Introduced
Parties in any fiscal quarter of 2001.
3.4 All Commissions shall be payable to Vanco by VCI within ten (10)
business days from VCI's receipts of proceeds from a sale to an
Introduced Party with the exception of commissions on the Maintenance
Fees which shall be paid by VCI to Vanco on a quarterly basis.
Notwithstanding the same, in the event that VCI materially changes the
current manner in which it receives payment for its products and or
services either on an ongoing basis or for a particular client, VCI
and Vanco shall determine in a mutually agreeable manner a different
method of payment to Vanco for the services that it shall be providing
going forward or for the particular client.
3.5 VCI shall remit the Commission with a written statement reflecting in
reasonable detail the basis of its determination of the amount of
Commission due to Vanco. If no Commission is due, VCI shall so
indicate to Vanco. The payment of Commissions to Vanco for sales to
Introduced Parties shall survive the termination of this Agreement.
3.6 No commission will be due for sales to a customer in the Territory
directly contacted by VCI prior to or after the termination or
expiration of this Agreement unless the customer was introduced to VCI
by Vanco during the Term as that term is defined herein and VCI
commenced negotiations, as evidence in writing, for the sale of a VCI
System
4. Term & Termination
4.1 This Agreement shall become effective upon its execution by both
parties and shall continue in force for a period of two (2) years
(hereinafter, the "Term") provided that VCI sells at least two (2) CMS
systems during the first 180 days of the Term to Introduced Parties
and eight (8) CMS systems during the first year of the Term to
Introduced Parties. This Agreement shall be extended automatically for
additional one-year periods unless terminated earlier by one of the
parties hereto on sixty (60) days notice to the other party prior to
the expiration of the then current term. If VCI does not sell the
number of systems as described herein, this Agreement may be canceled
by VCI after the first year of the Term. Notwithstanding the same,
Vanco's obligation to provide ongoing technical support to Introduced
Parties as set forth in Section 2.4, shall remain in effect for a
period of two (2) years after the termination of this Agreement. The
sale of a CMS system to Skills Communities Ltd. shall be included as a
sale of a CMS system to an Introduced Party notwithstanding that Vanco
is not entitled to receipt of the Commission or Maintenance Fee in
conjunction with such sale.
4.2 Either Party shall be entitled to terminate this Agreement forthwith,
by written notice, should the other party fail to comply with its
material obligations in this Agreement and does not remedy such
non-compliance within thirty (30) days after receipt of notice from
the other party that it intends to terminate this Agreement if such
failure is not corrected.
4.3 Either party may terminate this Agreement forthwith, by notice, if the
other party is declared insolvent or bankrupt, or makes an assignment
for the benefit of creditors, or shall
<PAGE>
have a receiver or trustee appointed for its business or property or
is dissolved or liquidated or otherwise ceases business, and such
declaration or execution, or appointment is not canceled within forty
five (45) days.
4.4 Unless expressly stated otherwise, upon the termination, cancellation
or expiration of this Agreement, neither party shall be responsible or
liable to the other for consequential or incidental damages of any
kind, regardless of whether such party had advance notice of the
possibility of such damages.
4.5 Upon the termination of this Agreement for any reason whatsoever:
(i) VCI shall continue to pay all amounts due to Vanco under the terms
of this Agreement for sales previously made to Introduced Parties
and/or any amounts due to Vanco in accordance with Section 3.6 above.
(ii) Vanco shall refer all inquiries to VCI in a timely manner;
(iii) Vanco shall continue to provide technical support to the
Introduced Parties for such period as agreed by the parties in
accordance with Section 2.5 above;
1. (iv) Vanco shall promptly return to VCI, erase and/or destroy all
copies of CMS documentation and all information and literature
relating thereto which shall have been provided by VCI to Vanco or
reproduced by Vanco; provided, however, that Vanco may retain a
sufficient and reasonable number of copies of the documentation to
enable Vanco to continue to provide technical support services to
Introduced Parties. Upon such return, erasure and/or destruction,
Vanco shall confirm in writing to VCI that it has complied with its
obligations under this section.
2. (v) Each party shall promptly return to the disclosing party,
and/or erase or destroy all copies of any Proprietary Information in
the possession of such party or its subsidiaries and/or its holding
companies and subsidiaries of its holding companies. Upon such return,
erasure and/or destruction, such party shall confirm in writing to the
disclosing party that it has complied with its obligations under this
paragraph.
3. (vi) Sections 2.5 (for a period of 2 years), 4.5, 5, 7, 8, 9 of
this Agreement shall survive the termination and/or expiration of this
Agreement for any reason whatsoever.
5. Confidentiality; Employment of Other Party's Employees
5.1 (a) Each party shall: (i) hold in confidence, and not disclose or
reveal to any person or entity, any Confidential Information, as
defined herein, of the other party without the clear and express prior
written consent of a duly authorized representative of such other
party, except that a party receiving Confidential Information from the
other party may reveal such information solely to its employees or
contractors, consultants or advisors who require such disclosure to
allow such receiving party to perform its obligations or exercise its
rights under this Agreement and who agree in writing to refrain from
making any unauthorized use or disclosure thereof; and (ii) not use
any Confidential Information of the other party for any purpose at any
time, other than for the purpose(s) of performing its obligations or
<PAGE>
exercising its rights under this Agreement. Each party shall protect
the Confidential Information of the other party using at least the
same degree of care it uses to protect its own proprietary and
confidential information and materials of like importance, but in no
event less care than a reasonably prudent business person would take
in a like or similar situation. Each party shall return any
Confidential Information of the other upon written request, except to
the extent that doing so would undermine or interfere with the
exercise by the receiving party of its rights under this Agreement.
(b) Confidential Information shall include but not be limited to, all
trade secrets, technical information, technology, information,
computer source and object codes, other computer codes, computer
interfaces, products, demonstration products, work in progress, data
concerning products, client lists, sales and marketing information,
client account records, training and operations material and
memoranda, personnel records, pricing information, and financial
information concerning or relating to the accounts, clients,
employees, profits, finances and business affairs, obtained by or
furnished, disclosed or disseminated to either party.
(c) Confidential Information shall not include information that the
receiving party can demonstrate (a) is, as of the time of its
disclosure, or thereafter becomes, part of the public domain through a
source other than the receiving party, (b) was known to the receiving
party as of the time of its disclosure, (c) is independently developed
by the receiving party, or (d) is subsequently learned from a third
party not under a confidentiality obligation to the providing party.
5.2 Each party shall treat the terms of this Agreement as confidential and
shall not disclose such terms, except that disclosure of such terms
shall be permitted to accountants, attorneys and other professionals
providing services to the disclosing party to the extent that such
professionals are notified of the confidential nature of such terms.
5.3 Each party agrees that during the continuance of this Agreement and
for a period of one year after its termination, in whole or in part,
it will not hire or otherwise contract the services of, whether
directly or indirectly (i) an employee of the other party (ii) a
former employee of the other party whose employment with the other
party ended less than six (6) months prior to the date of such hiring,
or (iii) any corporation or entity in which such employee or former
employee is an officer, director or shareholder holding 25% of the
equity or employed providing service to that corporation or entity,
provided, however, that this provision shall not apply if the employer
or former employer of such individual consents in writing to such
hiring. The obligation contained herein shall extend to the employees
and former employees of subsidiaries, holding companies and
subsidiaries of holding companies of both parties.
6. Non Competition
6.1 So long as this Agreement is in effect, Vanco shall not market, sell
or distribute CMS outside the Territory nor shall Vanco be concerned
or interested, either directly or indirectly, in the production,
importation, marketing, sale or distribution of products manufactured
by third parties that compete with or are similar to the VCI Systems
in any manner. Vanco shall promptly refer to VCI all inquiries or
orders for CMS from customers located outside the Territory unless
Vanco has obtained VCI's written consent to deal with such inquiries
or orders. In order to avoid any dispute, should the parties fail to
<PAGE>
agree if a product competes with or is similar to the VCI Systems, the
parties shall jointly nominate an independent consultant who shall
make such determination.
7. Intellectual Property
7.1 Vanco acknowledges the ownership of VCI's right, title and interest in
and to the VCI Systems and trade names, trademarks and service marks
associated with CMS and other VCI services and products and further
acknowledges that all the right, title and interest in the goodwill
accruing as a result of the use of the VCI Systems by Vanco enures to
VCI. Vanco agrees that it shall not hold itself out as having acquired
any proprietary right to any trade name, trademark or service mark of
VCI by virtue of its use thereof or anything herein, except as
specifically set forth in this Agreement, and any such right shall
immediately cease upon the termination or cancellation of this
Agreement.
7.2 Except with respect to its development and technical support
obligations hereunder, Vanco is prohibited from changing, developing,
enhancing or otherwise modifying CMS or other VCI System (or any
component thereof) in any way whatsoever, nor shall Vanco disassemble,
decompile, reverse-engineer or revise CMS (or any component thereof)
or attempt to discover the source code of CMS.
7.3 Any modifications, improvements or changes to CMS and or any other VCI
Systems which may be permitted in accordance with this Agreement must
be fully documented by Vanco and made available to VCI for its review
and use. Vanco shall be entitled to co-title, together with VCI and
the client for whom Vanco provides services, to any applications to
CMS developed by Vanco for such client on behalf of VCI in the process
of fulfilling its duties as set forth in Exhibit A herein.
7.4 During the term of this Agreement, VCI shall grant to Vanco a
non-exclusive, nontransferable, worldwide license to reproduce VCI's
trade names, trademarks and service marks associated with CMS and
other VCI services on all advertising and promotional materials,
display materials or other materials which utilize such trade names,
trademarks and service marks for the sole purpose of allowing Vanco to
fully promote and market the VCI Systems.
7.5 VCI represents and warrants solely for the benefit of Vanco as of the
effective date, that it is the owner of or otherwise has the right to
use and distribute the various software components of the VCI Systems.
<PAGE>
8. Indemnity
The parties shall defend, indemnify and save the other party harmless from
and against injury, loss or damage to the other from any third party
arising out of or resulting from the acts or omissions of each party in
connection with their respective duties, representations and obligations
contained in this Agreement up to an amount of U.S.$250,000.
9. Miscellaneous
9.1 Severability: Any term or provision of this Agreement which is found
by a court, tribunal or arbitration panel to be invalid or
unenforceable shall be ineffective to the extent of such invalidity or
unenforceability without rendering invalid or unenforceable the
remaining terms or provisions of this Agreement or affecting the
validity or enforceability of any of the other terms or provisions of
this Agreement. In the event that any term or provision of this
Agreement is found to be unenforceable or ineffective, then the
reviewing court, tribunal or arbitration panel may modify such term or
provision to the extent necessary to render it enforceable and the
parties agree to be bound by and perform this Agreement as modified.
9.2 Entire Agreement: This Agreement contains the full and complete
understanding between the parties and supersedes all prior
understandings, whether written or oral, pertaining to the subject
matter hereof. The parties expressly acknowledge that any
representation, promise or inducement by any party to any other party
that is not embodied in this Agreement is not part of this Agreement;
and they agree that no party shall be bound or liable for any such
alleged representation, promise, or inducement not set forth herein
9.3 Assignment: Except as otherwise provided in this Agreement, the rights
and obligations of the Vanco shall not be assignable without the prior
written consent of VCI which consent shall not be unreasonably
withheld, save and except for an assignment of this Agreement to a
related company .
9.4 Amendments and Waivers: This Agreement may not be amended, modified or
altered except by written instrument signed by the parties hereto. In
the event that any party seeks a waiver of any part or portion of this
Agreement, such waiver must be by written instrument signed by the
party waiving compliance. The failure of any party at any time to
require performance of any provision in this Agreement shall in no
manner affect its right at a later time to enforce the same. And, no
waiver by either party of the breach of any term or covenant contained
in this Agreement, whether by conduct or otherwise in any or more
instances, shall be deemed to be, or construed as, a further or
continuing waiver of any such breach or a waiver of the breach of any
other term or covenant contained in this Agreement.
9.5 Notices: Unless otherwise provided, any notice required or permitted
hereunder shall be given in writing and shall be deemed effectively
given (i) if by hand delivery, upon receipt thereof, (ii) if mailed,
seven (7) days after deposit in the mail by postage prepaid, certified
<PAGE>
mail return receipt requested; (iii) by facsimile transmission (with
dispatch and receipt confirmed) and (iv) if by next day delivery
service, upon such delivery; all addressed to the party to be notified
at the address set forth in Preamble above or at such other address as
such party may designate by written notice to the other party from
time to time.
9.6 No Joint Venture: Vanco is an independent contractor and is not an
employee, agent, joint venturer or partner of VCI and shall not hold
itself out as such to any person or entity. Vanco shall have no
authority to act for, bind or execute agreements on behalf of VCI, or
to represent that VCI is responsible for Vanco in any way. Vanco may
not engage any person or entity to carry out any of its undertakings
under this Agreement unless such engagement is agreed to by VCI, with
the exception of subsidiaries of Vanco and/or entities controlled in
the majority by Vanco.
9.7 Headings: The headings herein are for reference only and shall not
affect the construction of this Agreement.
9.8 Successors & Assigns: The terms and conditions of this Agreement shall
inure to the benefit of and be binding upon the respective successors
and assigns of the parties.
9.9 Counterparts & Execution: This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, but all
of which together shall constitute one and the same instrument.
Execution of this Agreement shall be valid if served on the other
party by facsimile and such other party confirms in writing receipt
and acceptance of service.
B. 9.10 Governing Law: This Agreement, its validity, construction and
effect shall be governed by and construed under the laws of the State
of New York without regard to its conflict of laws provisions.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly signed on
the date stated above.
VIRTUAL COMMUNITIES, INC. VANCO CONSULTING LIMITED.
By: /s/ Avi Moskowitz By: s/ Alan Timpany
----------------- ---------------
Title: President and C.E.O Title: Managing Director
<PAGE>
EXHIBIT A
At its sole cost and expense, Vanco shall be responsible to undertake certain
actions in accordance with its obligations under the Agreement. It is understood
by VCI that Vanco may outsource certain elements of the services to be provided
by it to VCI and in such instance, VCI shall have the right to approve the party
to whom such services are outsourced and agree to the technical terms of such
outsourcing to assure that such services comply with VCI's usual standard of
service. The following are the actions to be undertaken by Vanco:
1. coordinate development of the Introduced Party's online community project,
including, but not limited to creating specifications for and modeling a
proposed site, designing the same and training the Introduced Party's staff in
the operation of the same;
2. retain adequate staff of systems administrators, support engineers,
templater/designers and account managers who shall be responsible for providing
design and programming services, technical support and back-up services for
Introduced Parties. Such staff shall have the requisite knowledge or skill set
required to implement various modules, (by way of example, Intershop software
required to implement the CMS Ecommerce module). Within 60 days from the date
hereof, Vanco shall have retained at least one employee from each of the above
areas and shall continue to retain additional staff as required to support sales
to Introduced Parties;
3. assume responsibility for the maintenance of the content management
templates;
4. provide training to Introduced Parties' staff related to modules included in
CMS such as templating, use of the Cortext content management system and
Ecommerce systems. The parties shall jointly determine how to best provide
semi-annual consulting services/day long seminars to Introduced Parties who
acquire CMS or a VCI System;
5. acquire all components of the network structure required to host, operate and
back-up the Introduced Parties' online communities with the exception of
servers, which shall be provided by VCI. Such servers shall be accessible to VCI
at all times;
6. provide full back-up system and firewall security protection;
7. provide ongoing support and 24/7 emergency support line for CMS and other VCI
systems sold to Introduced Parties; and
8. provide 24/7 system administration for VCI hardware hosting the Introduced
Party's community.
VCI shall support Vanco's obligations above in the following manner:
1. acquire web server(s) which shall reside at either a U.K. server farm or at a
Vanco facility, at Vanco's option. The server machine(s) shall be capable of
hosting the various components comprising CMS, such as ecommerce, database and
streaming media modules;
2. provide training to Vanco staff as required to enable them to perform their
duties hereunder;
3. provide marketing consultations and promotional literature related to CMS and
other potential VCI Systems as required by Vanco to market the same; and
4. provide to Vanco technical support documentation and any additional
information reasonably required by Vanco to fulfill its programming, design and
technical support obligations under the terms of this Agreement.
<PAGE>
Exhibit 10(43)
FORM OF CALLABLE WARRANT
THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE HEREOF HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT") OR ANY STATE SECURITIES LAWS AND MAY NOT BE EXERCISED BY OR ON
BEHALF OF ANY U.S. PERSON, OR SOLD, TRANSFERRED, ASSIGNED, PLEDGED OR
HYPOTHECATED OR OTHERWISE DISPOSED OF UNLESS IN ACCORDANCE WITH REGULATION S OF
THE ACT, REGISTERED UNDER THAT ACT AND UNDER APPLICABLE STATE SECURITIES LAWS OR
VIRTUAL COMMUNITIES, INC. (THE "COMPANY") SHALL HAVE RECEIVED AN OPINION, IN
FORM, SCOPE AND SUBSTANCE REASONABLY ACCEPTABLE TO THE COMPANY, OF COUNSEL WHO
IS REASONABLY ACCEPTABLE TO THE COMPANY THAT REGISTRATION OF SUCH SECURITIES
UNDER THE SECURITIES ACT AND UNDER THE PROVISIONS OF APPLICABLE FEDERAL AND
STATE SECURITIES LAWS IS NOT REQUIRED.
<PAGE>
CALLABLE WARRANT TO PURCHASE
SHARES OF COMMON STOCK
OF
VIRTUAL COMMUNITIES, INC.
Expires April __, 2001
No.: W-__ Number of Shares: _____
Date of Issuance: April __, 2000
FOR VALUE RECEIVED, subject to the provisions hereinafter set forth, the
undersigned, Virtual Communities, Inc., a Delaware corporation (together with
its successors and assigns, the "Issuer"), hereby certifies that
___________________ or its registered assigns is entitled to subscribe for and
purchase, during the period specified in this Warrant, up to _____ shares
(subject to adjustment as hereinafter provided) of the duly authorized, validly
issued, fully paid and non-assessable Common Stock of the Issuer, at an exercise
price per share equal to the Warrant Price then in effect, subject, however, to
the provisions and upon the terms and conditions hereinafter set forth.
Capitalized terms used in this Warrant and not otherwise defined herein shall
have the respective meanings specified in Section 8 hereof.
Term. The right to subscribe for and purchase shares of Warrant Stock
represented hereby shall commence on the Original Issue Date and shall
the expire at 5:00 p.m., eastern time, on April __, 2001 (such period
being "Term"). Method of Exercise Payment; Issuance of New Warrant;
Transfer and Exchange.
C. Time of Exercise. The purchase rights represented by this Warrant may
be exercised in whole or in part at any time and from time to time
during the Term.
D. Method of Exercise. The Holder hereof may exercise this Warrant, in
whole or in part, by the surrender of this Warrant (with the exercise
form attached hereto duly executed) at the principal office of the
Issuer, and by the payment to the Issuer of an amount of consideration
therefor equal to the Warrant Price in effect on the date of such
exercise multiplied by the number of shares of Warrant Stock with
respect to which this Warrant is then being exercised, payable at such
Holder's election by certified or official bank check
E. Issuance of Stock Certificates. In the event of any exercise of the
rights represented by this Warrant in accordance with and subject to
the terms and conditions hereof, 1. certificates for the shares of
Warrant Stock so purchased shall be dated the date of such exercise
and delivered to the Holder hereof within a reasonable time, not
exceeding three (3) Trading Days after such exercise, and the Holder
hereof shall be deemed for all purposes to be the Holder of the shares
of Warrant Stock so purchased as of the date of such exercise, and 2.
unless this Warrant has expired, a new Warrant representing the number
of shares of Warrant Stock, if any, with respect to which this Warrant
shall not then have been exercised (less any amount thereof which
shall have been canceled in payment or partial payment of the Warrant
Price as hereinabove provided) shall also be issued to the Holder
hereof at the Issuer's expense within such time.
<PAGE>
F. Transferability of Warrant. Subject to Section 2(e), this Warrant may
be transferred by a Holder without the consent of the Issuer. If
transferred pursuant to this subsection and subject to the provisions
of subsection (e) of this Section 2, this Warrant may be transferred
on the books of the Issuer by the Holder hereof in person or by duly
authorized attorney, upon surrender of this Warrant at the principal
office of the Issuer, properly endorsed (by the Holder executing an
assignment in the form attached hereto) and upon payment of any
necessary transfer tax imposed upon such transfer. This Warrant is
exchangeable at the principal office of the Issuer for Warrants for
the purchase of the same aggregate number of shares of Warrant Stock,
each new Warrant to represent the right to purchase such number of
shares of Warrant Stock as the Holder hereof shall designate at the
time of such exchange. All Warrants issued on transfers or exchanges
shall be dated the Original Issue Date and shall be identical with
this Warrant except as to the number of shares of Warrant Stock
issuable pursuant hereto.
G. Compliance with Securities Laws.
1. The Holder of this Warrant, by acceptance hereof, acknowledges
that this Warrant or the shares of Warrant Stock to be issued
upon exercise hereof are being acquired solely for the Holder's
own account and not as a nominee for any other party, and for
investment, and that the Holder will not offer, sell or otherwise
dispose of this Warrant or any shares of Warrant Stock to be
issued upon exercise hereof except pursuant to an effective
registration statement, or an exemption from registration, under
the Securities Act and any applicable state securities laws.
2. Except as provided in paragraph (iii) below, this Warrant and all
certificates representing shares of Warrant Stock issued upon
exercise hereof shall be stamped or imprinted with a legend in
substantially the following form:
THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE HEREOF
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT") OR STATE SECURITIES LAWS AND MAY NOT BE EXERCISED BY OR
ON BEHALF OF ANY U.S. PERSON, OR SOLD, TRANSFERRED, ASSIGNED, PLEDGED OR
HYPOTHECATED OR OTHERWISE DISPOSED OF UNLESS IN ACCORDANCE WITH REGULATION
S OF THE ACT, REGISTERED UNDER THAT ACT AND UNDER APPLICABLE STATE
SECURITIES LAWS OR VIRTUAL COMMUNITIES, INC. (THE "COMPANY") SHALL HAVE
RECEIVED AN OPINION, IN FORM, SCOPE AND SUBSTANCE REASONABLY ACCEPTABLE TO
THE COMPANY, OF COUNSEL WHO IS REASONABLY ACCEPTABLE TO THE COMPANY THAT
REGISTRATION OF SUCH SECURITIES UNDER THE SECURITIES ACT AND UNDER THE
PROVISIONS OF APPLICABLE FEDERAL AND STATE SECURITIES LAWS IS NOT REQUIRED.
<PAGE>
3. The restrictions imposed by this subsection (e) upon the transfer
of this Warrant or the shares of Warrant Stock to be purchased
upon exercise hereof shall terminate (A) when such securities
shall have been resold pursuant to being effectively registered
under the Securities Act, (B) upon the Issuer's receipt of an
opinion of counsel, in form and substance reasonably satisfactory
to the Issuer, addressed to the Issuer to the effect that such
restrictions are no longer required to ensure compliance with the
Securities Act and state securities laws or (C) upon the Issuer's
receipt of other evidence reasonably satisfactory to the Issuer
that such registration and qualification under state securities
laws is not required. Whenever such restrictions shall cease and
terminate as to any such securities, the Holder thereof shall be
entitled to receive from the Issuer (or its transfer agent and
registrar), without expense (other than applicable transfer
taxes, if any), new Warrants (or, in the case of shares of
Warrant Stock, new stock certificates) of like tenor not bearing
the applicable legend required by paragraph (ii) above relating
to the Securities Act and applicable state securities laws.
H. Continuing Rights of Holder. The Issuer will, at the time of or at any
time after each exercise of this Warrant, upon the request of the
Holder hereof, acknowledge in writing the extent, if any, of its
continuing obligation to afford to such Holder all rights to which
such Holder shall continue to be entitled after such exercise in
accordance with the terms of this Warrant; provided that if any such
Holder shall fail to make any such request, the failure shall not
affect the continuing obligation of the Issuer to afford such rights
to such Holder.
Stock Fully Paid: Reservation and Listing of Shares: Covenants.
I. Stock Fully Paid. The Issuer represents, warrants, covenants and
agrees that all shares of Warrant Stock which may be issued upon the
exercise of this Warrant or otherwise hereunder will, upon issuance,
be duly authorized, validly issued, fully paid and non-assessable and
free from all taxes and liens, security interest, charges and
encumbrances of any nature whatsoever created by or through the
Issuer. The Issuer further represents, warrants, covenants and agrees
that during the period within which this Warrant may be exercised, the
Issuer will at all times have authorized and reserved for the purpose
of the issue upon exercise of this Warrant a sufficient number of
shares of Common Stock to provide for the exercise of this Warrant.
(a) Reservation. If any shares of Common Stock required to be reserved for
issuance upon exercise of this Warrant or as otherwise provided hereunder
require registration or qualification with any governmental authority under any
federal or state law before such shares may be so issued, the Issuer will in
good faith use its best efforts as expeditiously as possible at its expense to
cause such shares to be duly registered or qualified. If the Issuer shall list
any shares of Common Stock on any securities exchange or market it will, at its
expense, list thereon, maintain and increase when necessary such listing, of,
all shares of Warrant Stock from time to time issued upon exercise of this
Warrant or as otherwise provided hereunder, and, to the extent permissible under
the applicable securities exchange rules, all unissued shares of Warrant Stock
which are at any time issuable hereunder, so long as any shares of Common Stock
shall be so listed. The Issuer will also so list on each securities exchange or
market, and will maintain such listing of, any other securities which the Holder
of this Warrant shall be entitled to receive upon the exercise of this Warrant
if at the time any securities of the same class shall be listed on such
securities exchange or market by the Issuer.
<PAGE>
(b) Covenants. The Issuer shall not by any action including, without
limitation, amending the Certificate of Incorporation or the by-laws of the
Issuer, or through any reorganization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities or any other action, avoid or
seek to avoid the observance or performance of any of the terms or provisions of
this Warrant, but will at all times in good faith carry out all such terms or
provisions and take all such actions as may be necessary or appropriate to
protect the rights of the Holder hereof against dilution (to the extent
specifically provided herein) or impairment. Without limiting the generality of
the foregoing, the Issuer will (i) not permit the par value, if any, of its
Common Stock to exceed the then effective Warrant Price, (ii) not amend or
modify any provision of the Certificate of Incorporation or by-laws of the
Issuer in any manner that would adversely affect in any way the powers,
preferences or relative participating, optional or other special rights of the
Common Stock or which would adversely affect the rights of the Holders of the
Warrants, (iii) take all such action as may be reasonably necessary in order
that the Issuer may validly and legally issue fully paid and nonassessable
shares of Common Stock, free and clear of any liens, security interests,
charges, claims, encumbrances and restrictions (other than as provided herein)
upon the exercise of this Warrant, and (iv) obtain all such authorizations,
exemptions or consents from any public regulatory body having jurisdiction
thereof as may be necessary to enable the Issuer to perform its obligations
under this Warrant.
(c) Loss, Theft, Destruction of Warrants. Upon receipt of evidence
satisfactory to the Issuer of the ownership of and the loss, theft, destruction
or mutilation of any Warrant and, in the case of any such loss, theft or
destruction, upon receipt of indemnity or security satisfactory to the Issuer
or, in the case of any such mutilation, upon surrender and cancellation of such
Warrant, the Issuer will make and deliver, in lieu of such lost, stolen,
destroyed or mutilated Warrant, a new Warrant of like tenor and representing the
right to purchase the same number of shares of Common Stock.
(d) Rights and Obligations under the Registration Rights Agreement. The
shares of Warrant Stock are entitled to the benefits and subject to the terms of
the Registration Rights Agreement dated as of even date herewith between the
Issuer and the Holders listed on the signature pages thereof (as amended from
time to time, the "Registration Rights Agreement"). The Issuer shall keep or
cause to be kept a copy of the Registration Rights Agreement, and any amendments
thereto, at its chief executive office and shall furnish, without charge, copies
thereof to the Holder upon request.
Adjustment of Warrant Price and Warrant Share Number. The number and kind of
Securities purchasable upon the exercise of this Warrant and the Warrant
Price shall be subject to adjustment from time to time upon the
happening of certain events as follows:
(e) Recapitalization, Reorganization, Reclassification, Consolidation,
Merger or Sale.
1. In case the Issuer after the Original Issue Date shall do any of
the following (each, a "Triggering Event"): (a) consolidate with
or merge into any other Person and the Issuer shall not be the
continuing or surviving Person of such consolidation or merger,
or (b) permit any other Person to consolidate with or merge into
the Issuer and the Issuer shall be the continuing or surviving
Person but, in connection with such consolidation or merger, any
Capital Stock of the Issuer shall be changed into or exchanged
for Securities of any other Person or cash or any other property,
or (c) transfer all or substantially all of its properties or
assets to any other Person, or (d) effect a capital
reorganization or reclassification of its Capital Stock, then,
and in the case of each such Triggering Event, proper provision
shall be made so that, upon the basis and the terms and in the
manner provided in
<PAGE>
this Warrant, the Holder of this Warrant shall be entitled, at
the option of such Holder, (x) upon the exercise hereof at any
time after the consummation of such Triggering Event, to the
extent this Warrant is not exercised prior to such Triggering
Event, to receive at the Warrant Price in effect at the time
immediately prior to the consummation of such Triggering Event in
lieu of the Common Stock issuable upon such exercise of this
Warrant prior to such Triggering Event, the Securities, cash and
property to which such Holder would have been entitled upon the
consummation of such Triggering Event if such Holder had
exercised the rights represented by this Warrant immediately
prior thereto, subject to adjustments (subsequent to such
corporate action) as nearly equivalent as possible to the
adjustments provided for in Section 4 hereof or (y) to sell this
Warrant (or, at such Holder's election, a portion hereof)
concurrently with the Triggering Event to the Person continuing
after or surviving such Triggering Event, or to the Issuer (if
Issuer is the continuing or surviving Person) at a sales price
equal to the amount of cash, property and/or Securities to which
a holder of the number of shares of Common Stock which would
otherwise have been delivered upon the exercise of this Warrant
would have been entitled upon the effective date or closing of
any such Triggering Event (the "Event Consideration"), less the
amount or portion of such Event Consideration having a fair value
equal to the aggregate Warrant Price applicable to this Warrant
or the portion hereof so sold.
2. Notwithstanding anything contained in this Warrant to the
contrary, the Issuer will not effect any Triggering Event unless,
prior to the consummation thereof, each Person (other than the
Issuer) which may be required to deliver any Securities, cash or
property upon the exercise of this Warrant as provided herein
shall assume, by written instrument delivered to, and reasonably
satisfactory to, the Holder of this Warrant, (A) the obligations
of the Issuer under this Warrant (and if the Issuer shall survive
the consummation of such Triggering Event, such assumption shall
be in addition to, and shall not release the Issuer from, any
continuing obligations of the Issuer under this Warrant) and (B)
the obligation to deliver to such Holder such shares of
Securities, cash or property as, in accordance with the foregoing
provisions of this subsection (a), such Holder shall be entitled
to receive, and such Person shall have similarly delivered to
such Holder an opinion of counsel for such Person, which counsel
shall be reasonably satisfactory to such Holder, stating that
this Warrant shall thereafter continue in full force and effect
and the terms hereof (including, without limitation, all of the
provisions of this subsection (a)) shall be applicable to the
Securities, cash or property which such Person may be required to
deliver upon any exercise of this Warrant or the exercise of any
rights pursuant hereto.
3. If with respect to any Triggering Event, the Holder of this
Warrant has exercised its right as provided in clause (y) of
subparagraph (i) of this subsection (a) to sell this Warrant or a
portion thereof, the Issuer agrees that as a condition to the
consummation of any such Triggering Event the
<PAGE>
Issuer shall secure such right of Holder to sell this Warrant to
the Person continuing after or surviving such Triggering Event
and the Issuer shall not effect any such Triggering Event unless
upon or prior to the consummation thereof the amounts of cash,
property and/or Securities required under such clause (y) are
delivered to the Holder of this Warrant. The obligation of the
Issuer to secure such right of the Holder to sell this Warrant
shall be subject to such Holder's cooperation with the Issuer,
including, without limitation, the giving of reasonable and
customary representations and warranties to the purchaser in
connection with any such sale. Prior notice of any Triggering
Event shall be given to the Holder of this Warrant in accordance
with Section 13 hereof.
(f) Subdivision or Combination of Shares. If the Issuer, at any time while
this Warrant is outstanding, shall subdivide or combine any shares of Common
Stock, (i) in case of subdivision of shares, the Warrant Price shall be
proportionately reduced (as at the effective date of such subdivision or, if the
Issuer shall take a record of holders of its Common Stock for the purpose of so
subdividing, as at the applicable record date, whichever is earlier) to reflect
the increase in the total number of shares of Common Stock outstanding as a
result of such subdivision, or (ii) in the case of a combination of shares, the
Warrant Price shall be proportionately increased (as at the effective date of
such combination or, if the Issuer shall take a record of holders of its Common
Stock for the purpose of so combining, as at the applicable record date,
whichever is earlier) to reflect the reduction in the total number of shares of
Common Stock outstanding as a result of such combination.
(g) Certain Dividends and Distributions. If the Issuer, at any time while
this Warrant is outstanding, shall:
4. Stock Dividends. Pay a dividend in, or make any other
distribution to its stockholders (without consideration therefor)
of, shares of Common Stock, the Warrant Price shall be adjusted,
as at the date the Issuer shall take a record of the holders of
the Issuer's Capital Stock for the purpose of receiving such
dividend or other distribution (or if no such record is taken, as
at the date of such payment or other distribution), to that price
determined by multiplying the Warrant Price in effect immediately
prior to such record date (or if no such record is taken, then
immediately prior to such payment or other distribution), by a
fraction (1) the numerator of which shall be the total number of
shares of Common Stock outstanding immediately prior to such
dividend or distribution, and (2) the denominator of which shall
be the total number of shares of Common Stock outstanding
immediately after such dividend or distribution (plus in the
event that the Issuer paid cash for fractional shares, the number
of additional shares which would have been outstanding had the
Issuer issued fractional shares in connection with said
dividends); or
5. Other Dividends. Pay a dividend on, or make any distribution of
its assets upon or with respect to (including, but not limited
to, a distribution of its property as a dividend in liquidation
or partial liquidation or by way of return of capital), the
Common Stock (other than as described in clause (i) of this
subsection (c)), or in the event that the Company shall offer
options or rights to subscribe for shares of Common Stock, or
issue any Common
<PAGE>
Stock Equivalents, to all of its holders of Common Stock, then on
the record date for such payment, distribution or offer or, in
the absence of a record date, on the date of such payment,
distribution or offer, the Holder shall receive what the Holder
would have received had it exercised this Warrant in full
immediately prior to the record date of such payment,
distribution or offer or, in the absence of a record date,
immediately prior to the date of such payment, distribution or
offer.
J. Intentionally Omitted.
K. Intentionally Omitted.
L. Intentionally Omitted.
M. Intentionally Omitted.
(h) Other Action Affecting Common Stock. In case after the Original Issue
Date the Issuer shall take any action affecting its Common Stock, other than an
action described in any of the foregoing subsections (a) through (c) of this
Section 4, inclusive, and the failure to make any adjustment would not fairly
protect the purchase rights represented by this Warrant in accordance with the
essential intent and principle of this Section 4, then the Warrant Price shall
be adjusted in such manner and at such time as the Board may in good faith
determine to be equitable in the circumstances.
(i) Other Adjustments of Warrant Price. If this Warrant is outstanding on
or after the initial sixty (60) day period following the Original Issue Date,
the Warrant Price then in effect shall be adjusted to equal the sum of (A) the
Warrant Price then in effect plus (B) the product of the Warrant Price
multiplied by 10% for each sixty (60) day period after the Original Issue Date
this Warrant is outstanding; provided, that if the Issuer issues at any time a
Call Notice (as defined in Section 7 hereof) and the Holder exercises this
Warrant after receipt of such Call Notice, the foregoing adjustment will not
apply and the Warrant Price then in effect shall be adjusted in accordance with
Section 7 hereof.
(j) Adjustment of Warrant Share Number. Upon each adjustment in the Warrant
Price pursuant to any of the foregoing provisions of this Section 4 (other than
pursuant to subsection (i) of this Section 4), the Warrant Share Number shall be
adjusted, to the nearest one hundredth of a whole share, to the product obtained
by multiplying the Warrant Share Number immediately prior to such adjustment in
the Warrant Price by a fraction, the numerator of which shall be the Warrant
Price immediately before giving effect to such adjustment and the denominator of
which shall be the Warrant Price immediately after giving effect to such
adjustment. If the Issuer shall be in default under any provision contained in
Section 3 of this Warrant so that shares issued at the Warrant Price adjusted in
accordance with this Section 4 would not be validly issued, the adjustment of
the Warrant Share Number provided for in the foregoing sentence shall
nonetheless be made and the Holder of this Warrant shall be entitled to purchase
such greater number of shares at the lowest price at which such shares may then
be validly issued under applicable law. Such exercise shall not constitute a
waiver of any claim arising against the Issuer by reason of its default under
Section 3 of this Warrant.
(k) Form of Warrant after Adjustments. The form of this Warrant need not be
changed because of any adjustments in the Warrant Price or the number and kind
of Securities purchasable upon the exercise of this Warrant.
<PAGE>
Notice of Adjustments. Whenever the Warrant Price or Warrant Share Number shall
be adjusted pursuant to Section 4 hereof (for purposes of this Section 5,
each an "adjustment"), the Issuer shall cause its Chief Financial Officer
to prepare and execute a certificate setting forth, in reasonable detail,
the event requiring the adjustment, the amount of the adjustment, the
method by which such adjustment was calculated (including a description of
the basis on which the Board made any determination hereunder), and the
Warrant Price and Warrant Share Number after giving effect to such
adjustment, and shall cause copies of such certificate to be delivered to
the Holder of this Warrant promptly after each adjustment. Any dispute
between the Issuer and the Holder of this Warrant with respect to the
matters set forth in such certificate may at the option of the Holder of
this Warrant be submitted to one of the national accounting firms currently
known as the "big five" selected by the Holder, provided that the Issuer
shall have ten (10) days after receipt of notice from such Holder of its
selection of such firm to object thereto, in which case such Holder shall
select another such firm and the Issuer shall have no such right of
objection. The firm selected by the Holder of this Warrant as provided in
the preceding sentence shall be instructed to deliver a written opinion as
to such matters to the Issuer and such Holder within thirty (30) days after
submission to it of such dispute. Such opinion shall be final and binding
on the parties hereto. The fees and expenses of such accounting firm shall
be paid by the Issuer.
Fractional Shares. No fractional shares of Warrant Stock will be issued in
connection with and exercise hereof, but in lieu of such fractional shares,
the Issuer shall make a cash payment therefor equal in amount to the
product of the applicable fraction multiplied by the Per Share Market Value
then in effect.
Warrant Call. At any time after the Registration Statement is declared
effective, the Issuer, at its option, may call all or a portion of this
Warrant by providing the Holder of this Warrant ten (10) days prior written
notice pursuant to Section 13 (the "Call Notice"); provided, however, that
prior to the ninetieth (90th) day after the Effectiveness Date the Issuer
may not provide Call Notices to holders of any Warrants for more than in
the aggregate 1,000,000 shares of Warrant Stock. The Call Notice shall set
forth a minimum Warrant Price (the "Minimum Warrant Price") below which the
Holder may not purchase the shares of Warrant Stock subject to the Call
Notice (the "Minimum Warrant Price Restriction"). The Holder shall have the
option to exercise this Warrant within ten (10) days after receipt of the
Call Notice at a Warrant Price per share equal to 93% of the VWAP for the
five (5) Trading Days following the date of issuance of the Call Notice,
provided, such Warrant Price as adjusted herein is equal to or greater than
the Minimum Warrant Price. The rights and privileges granted pursuant to
this Warrant with respect to such shares of Warrant Stock subject to the
Call Notice shall terminate ten (10) days after the Call Notice is received
by the Holder if this Warrant is not exercised (other than due to the
Minimum Warrant Price Restriction) with respect to such shares of Warrant
Stock by the Holder during such ten (10) day period. In the event this
Warrant is not exercised with respect to such shares of Warrant Stock
subject to the Call Notice, the Holder will surrender to the Issuer the
unexercised Warrant certificate and the Issuer will remit to the Holder (i)
$.01 for each share of Warrant Stock subject to the Call Notice and (ii) a
new Warrant representing the number of shares of Warrant Stock, if any,
which shall not have been subject to the Call Notice.
Redemption. On or after the Original Issue Date, the Issuer may redeem all or a
portion of this Warrant which is outstanding upon five (5) days prior
written notice (the "Redemption Notice") at a price per share of Warrant
Stock equal to $0.75 (the "Redemption Price"); provided; however, that
beginning on the three (3) month anniversary date of the Effectiveness
Date, the Redemption Price shall be reduced by $0.25 for the first month
and by $.05 for each month thereafter. Notwithstanding anything to the
contrary contained herein, the minimum Redemption Price shall be equal to
$0.25 per share. The Redemption Notice shall state the date of redemption
which date shall be the sixth (6th) day after the Issuer has delivered the
Redemption Notice (the "Redemption Date"), the Redemption Price and the
number of shares of Warrant Stock to be redeemed by the Company. The Issuer
shall not send a Redemption Notice unless it has good and clear funds for a
minimum of the amount it intends to redeem in a bank account controlled by
the Issuer. The Issuer shall deliver the Redemption Price to each Holder
within three (3) business days after the Issuer has delivered the
Redemption Notice against receipt. If the Issuer fails to pay the
Redemption Price by the sixth (6th) business day after the Issuer has
delivered the Redemption Notice, the redemption will be declared null and
void and the Issuer shall lose its right to serve a Redemption Notice in
the future.
Definitions. For the purposes of this Warrant, the following terms have the
following meanings:
"Additional Shares of Common Stock" means all shares of Common Stock issued by
the Issuer after the Original Issue Date, and all shares of Other Common, if
any, issued by the Issuer after the Original Issue Date, except the Warrant
Stock and shares of Common Stock issuable upon exercise of the Non-Callable
Warrants.
"Board" shall mean the Board of Directors of the Issuer.
<PAGE>
"Capital Stock" means and includes (i) any and all shares, interests,
participations or other equivalents of or interests in (however designated)
corporate stock, including, without limitation, shares of preferred or
preference stock, (ii) all partnership interests (whether general or limited) in
any Person which is a partnership, (iii) all membership interests or limited
liability company interests in any limited liability company, and (iv) all
equity or ownership interests in any Person of any other type.
"Certificate of Incorporation" means the Certificate of Incorporation, as
amended, of the Issuer as in effect on the Original Issue Date, and as hereafter
from time to time amended, modified, supplemented or restated in accordance with
the terms hereof and thereof and pursuant to applicable law.
"Common Stock" means the Common Stock, $.01 par value, of the Issuer and any
other Capital Stock into which such stock may hereafter be changed.
"Common Stock Equivalent" means any Convertible Security or warrant, option or
other right to subscribe for or purchase any Additional Shares of Common Stock
or any Convertible Security.
"Convertible Securities" means evidences of Indebtedness, shares of Capital
Stock or other Securities which are or may be at any time convertible into or
exchangeable for Additional Shares of Common Stock. The term "Convertible
Security" means one of the Convertible Securities.
"Effectiveness Date" means the date of effectiveness of the Registration
Statement (as defined in the Registration Rights Agreement) filed pursuant to
the Registration Rights Agreement.
"Governmental Authority" means any governmental, regulatory or self-regulatory
entity, department, body, official, authority, commission, board, agency or
instrumentality, whether federal, state or local, and whether domestic or
foreign.
"Holders" mean the Persons who shall from time to time own any Warrant. The term
"Holder" means one of the Holders.
"Independent Appraiser" means a nationally recognized or major regional
investment banking firm or firm of independent certified public accountants of
recognized standing (which may be the firm that regularly examines the financial
statements of the Issuer) that is regularly engaged in the business of
appraising the Capital Stock or assets of corporations or other entities as
going concerns, and which is not affiliated with either the Issuer or the Holder
of any Warrant.
"Issuer" means Virtual Communities, Inc., a Delaware corporation, and its
successors.
"Majority Holders" means at any time the Holders of Warrants exercisable for a
majority of the shares of Warrant Stock issuable under the Warrants at the time
outstanding.
"Minimum Warrant Price" has the meaning specified in Section 7 hereof.
"Minimum Warrant Price Restriction" has the meaning specified in Section 7
hereof.
<PAGE>
"Non-Callable Warrants" means the non-callable A Warrants and B Warrants issued
in connection with the sale and issuance of Common Stock pursuant to the
Purchase Agreement.
"Original Issue Date" means April __, 2000.
"Other Common" means any other Capital Stock of the Issuer of any class which
shall be authorized at any time after the date of this Warrant (other than
Common Stock) and which shall have the right to participate in the distribution
of earnings and assets of the Issuer without limitation as to amount.
"OTC Bulletin Board" means the over-the-counter electronic bulletin board.
"Person" means an individual, corporation, limited liability company,
partnership, joint stock company, trust, unincorporated organization, joint
venture, Governmental Authority or other entity of whatever nature.
"Per Share Market Value" means on any particular date (a) the closing bid price
per share of the Common Stock on such date the Nasdaq SmallCap Market, Nasdaq
National Market or other registered national stock exchange on which the Common
Stock is then listed or if there is no such price on such date, then the closing
bid price on such exchange or quotation system on the date nearest preceding
such date, or (b) if the Common Stock is not listed then on the Nasdaq SmallCap
Market, Nasdaq National Market or any registered national stock exchange, the
closing bid price for a share of Common Stock in the over-the-counter market, as
reported by NASDAQ or in the National Quotation Bureau Incorporated or similar
organization or agency succeeding to its functions of reporting prices) at the
close of business on such date, or (c) if the Common Stock is not then reported
by NASDAQ the National Quotation Bureau Incorporated (or similar organization or
agency succeeding to its functions of reporting prices), then the average of the
"Pink Sheet" quotes for the relevant conversion period, as determined in good
faith by the holder, or (d) if the Common Stock is not then publicly traded the
fair market value of a share of Common Stock as determined by an Independent
Appraiser selected in good faith by the Majority Holders; provided, however,
that the Issuer, after receipt of the determination by such Independent
Appraiser, shall have the right to select an additional Independent Appraiser,
in which case, the fair market value shall be equal to the average of the
determinations by each such Independent Appraiser; and provided, further that
all determinations of the Per Share Market Value shall be appropriately adjusted
for any stock dividends, stock splits or other similar transactions during such
period. The determination of fair market value by an Independent Appraiser shall
be based upon the fair market value of the Issuer determined on a going concern
basis as between a willing buyer and a willing seller and taking into account
all relevant factors determinative of value, and shall be final and binding on
all parties. In determining the fair market value of any shares of Common Stock,
no consideration shall be given to any restrictions on transfer of the Common
Stock imposed by agreement or by federal or state securities laws, or to the
existence or absence of, or any limitations on, voting rights.
"Purchase Agreement" means the Common Stock and Warrants Purchase Agreement
dated as of March 31, 2000 among the Issuer and the investors a party thereto.
"Purchase Price" means 5.79375 per share.
"Purchased Shares" means the total number of shares of Common Stock purchased by
the initial Holder of this Warrant pursuant to the Purchase Agreement.
"Redemption Date" has the meaning specified in Section 8 hereof.
<PAGE>
"Redemption Notice" has the meaning specified in Section 8 hereof.
"Redemption Price" has the meaning specified in Section 8 hereof.
"Registration Rights Agreement" has the meaning specified in Section 3(e)
hereof.
"Securities" means any debt or equity securities of the Issuer, whether now or
hereafter authorized, any instrument convertible into or exchangeable for
Securities or a Security, and any option, warrant or other right to purchase or
acquire any Security. "Security" means one of the Securities.
"Securities Act" means the Securities Act of 1933, as amended, or any similar
federal statute then in effect.
"Subsidiary" means any corporation at least 50% of whose outstanding Voting
Stock shall at the time be owned directly or indirectly by the Issuer or by one
or more of its Subsidiaries, or by the Issuer and one or more of its
Subsidiaries.
"Term" has the meaning specified in Section 1 hereof.
"Trading Day" means (a) a day on which the Common Stock is traded on the Nasdaq
SmallCap Market, Nasdaq National Market or other registered national stock
exchange on which the Common Stock has been listed, or (b) if the Common Stock
is not listed on the Nasdaq SmallCap Market, Nasdaq National Market or other
registered national stock exchange on which the Common Stock has been listed, a
day on which the Common Stock is quoted in the over-the-counter market, as
reported by the OTC Bulletin Board, or (c) if the Common Stock is not quoted on
the OTC Bulletin Board, a day on which the Common Stock is quoted in the
over-the-counter market as reported by the National Quotation Bureau
Incorporated (or any similar organization or agency succeeding its functions of
reporting prices); provided, however, that in the event that the Common Stock is
not listed or quoted as set forth in (a), (b) and (c) hereof, then Trading Day
shall mean any day except Saturday, Sunday and any day which shall be a legal
holiday or a day on which banking institutions in the State of New York are
authorized or required by law or other government action to close.
"Voting Stock", as applied to the Capital Stock of any corporation, means
Capital Stock of any class or classes (however designated) having ordinary
voting power for the election of a majority of the members of the Board of
Directors (or other governing body) of such corporation, other than Capital
Stock having such power only by reason of the happening of a contingency.
"VWAP" shall mean the daily volume weighted average price (based on a Trading
Day from 9:30 a.m. to 4:00 p.m., E.S.T.) of the Company on the Nasdaq SmallCap
Market (or any successor thereto) as reported by Bloomberg Financial LP using
the AQR function.
"Warrants" means the callable Warrants issued in connection with the sale and
issuance of Common Stock pursuant to the Purchase Agreement, including, without
limitation, this Warrant, and any other warrants of like tenor issued in
substitution or exchange for any thereof pursuant to the provisions of Section
2(c), 2(d) or 2(e) hereof or of any of such other Warrants.
"Warrant Price" means $18.00 per share of Warrant Stock, as such price may be
adjusted from time to time as shall result from the adjustments specified in
Section 4 hereof.
<PAGE>
"Warrant Share Number" means at any time the aggregate number of shares of
Warrant Stock which may at such time be purchased upon exercise of this Warrant,
after giving effect to all prior adjustments and increases to such number made
or required to be made under the terms hereof.
"Warrant Stock" means Common Stock issuable upon exercise of any Warrant or
Warrants or otherwise issuable pursuant to any Warrant or Warrants.
Other Notices. In case at any time:
a) the Issuer shall make any distributions to the holders of
Common Stock; or
b) the Issuer shall authorize the granting to all holders of
its Common Stock of rights to subscribe for or purchase any
shares of Capital Stock of any class or of any Common Stock
Equivalents or Convertible Securities or other rights; or
c) there shall be any reclassification of the Capital Stock of
the Issuer; or
d) there shall be any capital reorganization by the Issuer; or
e) there shall be any (i) consolidation or merger involving the
Issuer or (ii) sale, transfer or other disposition of all or
substantially all of the Issuer's property, assets or
business (except a merger or other reorganization in which
the Issuer shall be the surviving corporation and its shares
of Capital Stock shall continue to be outstanding and
unchanged and except a consolidation, merger, sale, transfer
or other disposition involving a wholly-owned Subsidiary);
or
f) there shall be a voluntary or involuntary dissolution,
liquidation or winding-up of the Issuer or any partial
liquidation of the Issuer or distribution to holders of
Common Stock;
then, in each of such cases, the Issuer shall give written notice to the Holder
of the date on which (i) the books of the Issuer shall close or a record shall
be taken for such dividend, distribution or subscription rights or (ii) such
reorganization, reclassification, consolidation, merger, disposition,
dissolution, liquidation or winding-up, as the case may be, shall take place.
Such notice also shall specify the date as of which the holders of Common Stock
of record shall participate in such dividend, distribution or subscription
rights, or shall be entitled to exchange their certificates for Common Stock for
securities or other property deliverable upon such reorganization,
reclassification, consolidation, merger, disposition, dissolution, liquidation
or winding-up, as the case may be. Such notice shall be given at least twenty
(20) days prior to the action in question and not less than twenty (20) days
prior to the record date or the date on which the Issuer's transfer books are
closed in respect thereto. The Issuer shall give to the Holder notice of all
meetings and actions by written consent of its stockholders, at the same time in
the same manner as notice of any meetings of stockholders is required to be
given to stockholders who do not waive such notice (or, if such actions require
no notice, then two (2) Trading Days written notice thereof describing the
matters upon which action is to be taken). The Holder shall have the right to
send two representatives selected by it to each meeting, who shall be permitted
to attend, but not vote at, such meeting and any
<PAGE>
adjournments thereof. This Warrant entitles the Holder to receive copies of all
financial and other information distributed or required to be distributed to the
holders of the Common Stock.
Amendment and Waiver. Any term, covenant, agreement or condition in this Warrant
may be amended, or compliance therewith may be waived (either generally or
in a particular instance and either retroactively or prospectively), by a
written instrument or written instruments executed by the Issuer and the
Majority Holders; provided, however, that no such amendment or waiver shall
reduce the Warrant Share Number, increase the Warrant Price, shorten the
period during which this Warrant may be exercised or modify any provision
of this Section 10 without the consent of the Holder of this Warrant.
Governing Law. THIS WARRANT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO PRINCIPLES
OF CONFLICTS OF LAW. THIS WARRANT SHALL NOT BE INTERPRETED OR CONSTRUED
WITH ANY PRESUMPTION AGAINST THE PARTY CAUSING THIS WARRANT TO BE DRAFTED.
Notices. Any and all notices or other communications or deliveries required or
permitted to be provided hereunder shall be in writing and shall be deemed
given and effective on the earlier of (i) the date of transmission, if such
notice or communication is delivered via facsimile at the facsimile
telephone number specified for notice prior to 5:00 p.m., eastern standard
time, on a Trading Day, (ii) the Trading Day after the date of
transmission, if such notice or communication is delivered via facsimile at
the facsimile telephone number specified for notice later than 5:00 p.m.,
eastern standard time, on any date and earlier than 11:59 p.m., eastern
standard time, on such date, (iii) the Trading Day following the date of
mailing, if sent by nationally recognized overnight courier service or (iv)
actual receipt by the party to whom such notice is required to be given.
The addresses for such communications shall be with respect to the Holder
of this Warrant or of Warrant Stock issued pursuant hereto, addressed to
such Holder at its last known address or facsimile number appearing on the
books of the Issuer maintained for such purposes, or with respect to the
Issuer, addressed to:
Virtual Communities, Inc.
589 Eighth Avenue, 7th Floor
New York, New York 10018
Facsimile Number: (212) 214-0550
Attention: Avi Moskowitz
or to such other address or addresses or facsimile number or numbers as any such
party may most recently have designated in writing to the other parties hereto
by such notice. Copies of notices to the Issuer shall be sent to Wuersch &
Gering LLP, 11 Hanover Square, 21st Floor, New York, New York, Attention: Travis
Gering, Esq., Facsimile no.(212) 509-9559. Copies of notices to the Holder shall
be sent to (a) Parker Chapin LLP, 405 Lexington Avenue, New York, New York
10174, Attention: Christopher S. Auguste, Esq., Facsimile no.: (212) 704-6288.
<PAGE>
Warrant Agent. The Issuer may, by written notice to each Holder of this Warrant,
appoint an agent having an office in New York, New York for the purpose of
issuing shares of Warrant Stock on the exercise of this Warrant pursuant to
subsection (b) of Section 2 hereof, exchanging this Warrant pursuant to
subsection (d) of Section 2 hereof or replacing this Warrant pursuant to
subsection (d) of Section 3 hereof, or any of the foregoing, and thereafter
any such issuance, exchange or replacement, as the case may be, shall be
made at such office by such agent.
Remedies. The Issuer stipulates that the remedies at law of the Holder of this
Warrant in the event of any default or threatened default by the Issuer in
the performance of or compliance with any of the terms of this Warrant are
not and will not be adequate and that, to the fullest extent permitted by
law, such terms may be specifically enforced by a decree for the specific
performance of any agreement contained herein or by an injunction against a
violation of any of the terms hereof or otherwise.
Successors and Assigns. This Warrant and the rights evidenced hereby shall inure
to the benefit of and be binding upon the successors and assigns of the
Issuer, the Holder hereof and (to the extent provided herein) the Holders
of Warrant Stock issued pursuant hereto, and shall be enforceable by any
such party.
Modification and Severability. If, in any action before any court or agency
legally empowered to enforce any provision contained herein, any provision
hereof is found to be unenforceable, then such provision shall be deemed
modified to the extent necessary to make it enforceable by such court or
agency. If any such provision is not enforceable as set forth in the
preceding sentence, the unenforceability of such provision shall not affect
the other provisions of this Warrant, but this Warrant shall be construed
as if such unenforceable provision had never been contained herein.
Headings. The headings of the Sections of this Warrant are for convenience of
reference only and shall not, for any purpose, be deemed a part of this
Warrant.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
IN WITNESS WHEREOF, the Issuer has executed this Warrant as of the day and year
first above written.
VIRTUAL COMMUNITIES, INC.
By:
-------------------------------------
Name:
Title:
<PAGE>
EXERCISE FORM
[NAME OF ISSUER]
The undersigned _______________, pursuant to the provisions of the within
Warrant, hereby elects to purchase _____ shares of Common Stock of
___________________ covered by the within Warrant.
Dated: _________________ Signature __________________________________
Address ____________________________
____________________________
ASSIGNMENT
FOR VALUE RECEIVED, _________________ hereby sells, assigns and transfers unto
__________________ the within Warrant and all rights evidenced thereby and does
irrevocably constitute and appoint _____________, attorney, to transfer the said
Warrant on the books of the within named corporation.
Dated: _________________ Signature __________________________________
Address ____________________________
____________________________
PARTIAL ASSIGNMENT
FOR VALUE RECEIVED, _________________ hereby sells, assigns and transfers unto
__________________ the right to purchase _________ shares of Warrant Stock
evidenced by the within Warrant together with all rights therein, and does
irrevocably constitute and appoint ___________________, attorney, to transfer
that part of the said Warrant on the books of the within named corporation.
Dated: _________________ Signature __________________________________
Address ____________________________
____________________________
FOR USE BY THE ISSUER ONLY:
This Warrant No. W-___ cancelled (or transferred or exchanged) this _____ day of
___________, _____, shares of Common Stock issued therefor in the name of
_______________, Warrant No. W-___ issued for ____ shares of Common Stock in the
name of _______________.
<PAGE>
Exhibit 10(44)
FORM OF A WARRANT
THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE HEREOF HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT") OR ANY STATE SECURITIES LAWS AND MAY NOT BE EXERCISED BY OR ON
BEHALF OF ANY U.S. PERSON, OR SOLD, TRANSFERRED, ASSIGNED, PLEDGED OR
HYPOTHECATED OR OTHERWISE DISPOSED OF UNLESS IN ACCORDANCE WITH REGULATION S OF
THE ACT, REGISTERED UNDER THAT ACT AND UNDER APPLICABLE STATE SECURITIES LAWS OR
VIRTUAL COMMUNITIES, INC. (THE "COMPANY") SHALL HAVE RECEIVED AN OPINION, IN
FORM, SCOPE AND SUBSTANCE REASONABLY ACCEPTABLE TO THE COMPANY, OF COUNSEL WHO
IS REASONABLY ACCEPTABLE TO THE COMPANY THAT REGISTRATION OF SUCH SECURITIES
UNDER THE SECURITIES ACT AND UNDER THE PROVISIONS OF APPLICABLE FEDERAL AND
STATE SECURITIES LAWS IS NOT REQUIRED.
A WARRANT TO PURCHASE
SHARES OF COMMON STOCK
OF
VIRTUAL COMMUNITIES, INC.
Expires April __, 2003
No.: W-__ Number of Shares: _____
Date of Issuance: April __, 2000
FOR VALUE RECEIVED, subject to the provisions hereinafter set forth, the
undersigned, Virtual Communities, Inc., a Delaware corporation (together with
its successors and assigns, the "Issuer"), hereby certifies that
___________________ or its registered assigns is entitled to subscribe for and
purchase, during the period specified in this Warrant, up to _____ shares
(subject to adjustment as hereinafter provided) of the duly authorized, validly
issued, fully paid and non-assessable Common Stock of the Issuer, at an exercise
price per share equal to the Warrant Price then in effect, subject, however, to
the provisions and upon the terms and conditions hereinafter set forth.
Capitalized terms used in this Warrant and not otherwise defined herein shall
have the respective meanings specified in Section 7 hereof.
<PAGE>
Term. The right to subscribe for and purchase shares of Warrant Stock
represented hereby shall commence on the date of issuance of this Warrant
and shall expire at 5:00 p.m., eastern time, on April __, 2003 (such period
being the "Term").
Method of Exercise Payment; Issuance of New Warrant; Transfer and Exchange.
N. Time of Exercise. The purchase rights represented by this Warrant may
be exercised in whole or in part at any time and from time to time
during the Term.
O. Method of Exercise. The Holder hereof may exercise this Warrant, in
whole or in part, by the surrender of this Warrant (with the exercise
form attached hereto duly executed) at the principal office of the
Issuer, and by the payment to the Issuer of an amount of consideration
therefor equal to the Warrant Price in effect on the date of such
exercise multiplied by the number of shares of Warrant Stock with
respect to which this Warrant is then being exercised, payable at such
Holder's election (i) by certified or official bank check or (ii) by
surrender to the Issuer for cancellation of a portion of this Warrant
representing that number of unissued shares of Warrant Stock which is
equal to the quotient obtained by dividing (A) the product obtained by
multiplying the Warrant Price by the number of shares of Warrant Stock
being purchased upon such exercise by (B) the difference obtained by
subtracting the Warrant Price from the Per Share Market Value as of
the date of such exercise, or (iii) by a combination of the foregoing
methods of payment selected by the Holder of this Warrant. In any case
where the consideration payable upon such exercise is being paid in
whole or in part pursuant to the provisions of clause (ii) of this
subsection (b), such exercise shall be accompanied by written notice
from the Holder of this Warrant specifying the manner of payment
thereof and containing a calculation showing the number of shares of
Warrant Stock with respect to which rights are being surrendered
thereunder and the net number of shares of Common Stock to be issued
after giving effect to such surrender.
P. Issuance of Stock Certificates. In the event of any exercise of the
rights represented by this Warrant in accordance with and subject to
the terms and conditions hereof, (i) certificates for the shares of
Warrant Stock so purchased shall be dated the date of such exercise
and delivered to the Holder hereof within a reasonable time, not
exceeding three (3) Trading Days after such exercise, and the Holder
hereof shall be deemed for all purposes to be the Holder of the shares
of Warrant Stock so purchased as of the date of such exercise, and
(ii) unless this Warrant has expired, a new Warrant representing the
number of shares of Warrant Stock, if any, with respect to which this
Warrant shall not then have been exercised (less any amount thereof
which shall have been canceled in payment or partial payment of the
Warrant Price as hereinabove provided) shall also be issued to the
Holder hereof at the Issuer's expense within such time.
Q. Transferability of Warrant. Subject to Section 2(e), this Warrant may
be transferred by a Holder without the consent of the Issuer. If
transferred pursuant to this subsection and subject to the provisions
of subsection (e) of this Section 2, this Warrant may be transferred
on the books of the Issuer by the Holder hereof in person or by duly
authorized attorney, upon surrender of this Warrant at the principal
office of the Issuer, properly endorsed (by the Holder executing an
assignment in the form attached hereto) and upon payment of any
necessary transfer tax imposed upon such transfer. This Warrant is
exchangeable at the principal office of the Issuer for Warrants for
the purchase of the same aggregate number of shares of Warrant Stock,
each new Warrant to represent the right to purchase such number of
shares of Warrant Stock as the Holder
<PAGE>
hereof shall designate at the time of such exchange. All Warrants
issued on transfers or exchanges shall be dated the Original Issue
Date and shall be identical with this Warrant except as to the number
of shares of Warrant Stock issuable pursuant hereto.
R. Compliance with Securities Laws.
1. The Holder of this Warrant, by acceptance hereof, acknowledges
that this Warrant or the shares of Warrant Stock to be issued
upon exercise hereof are being acquired solely for the Holder's
own account and not as a nominee for any other party, and for
investment, and that the Holder will not offer, sell or otherwise
dispose of this Warrant or any shares of Warrant Stock to be
issued upon exercise hereof except pursuant to an effective
registration statement, or an exemption from registration, under
the Securities Act and any applicable state securities laws.
2. Except as provided in paragraph (iii) below, this Warrant and all
certificates representing shares of Warrant Stock issued upon
exercise hereof shall be stamped or imprinted with a legend in
substantially the following form:
THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE
HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "SECURITIES ACT") OR ANY STATE SECURITIES LAWS AND MAY NOT BE EXERCISED BY
OR ON BEHALF OF ANY U.S. PERSON, OR SOLD, TRANSFERRED, ASSIGNED, PLEDGED OR
HYPOTHECATED OR OTHERWISE DISPOSED OF UNLESS IN ACCORDANCE WITH REGULATION S OF
THE ACT, REGISTERED UNDER THAT ACT AND UNDER APPLICABLE STATE SECURITIES LAWS OR
VIRTUAL COMMUNITIES, INC. (THE "COMPANY") SHALL HAVE RECEIVED AN OPINION, IN
FORM, SCOPE AND SUBSTANCE REASONABLY ACCEPTABLE TO THE COMPANY, OF COUNSEL WHO
IS REASONABLY ACCEPTABLE TO THE COMPANY THAT REGISTRATION OF SUCH SECURITIES
UNDER THE SECURITIES ACT AND UNDER THE PROVISIONS OF APPLICABLE FEDERAL AND
STATE SECURITIES LAWS IS NOT REQUIRED.
<PAGE>
3. The restrictions imposed by this subsection (e) upon the transfer
of this Warrant or the shares of Warrant Stock to be purchased
upon exercise hereof shall terminate (A) when such securities
shall have been resold pursuant to being effectively registered
under the Securities Act, (B) upon the Issuer's receipt of an
opinion of counsel, in form and substance reasonably satisfactory
to the Issuer, addressed to the Issuer to the effect that such
restrictions are no longer required to ensure compliance with the
Securities Act and state securities laws or (C) upon the Issuer's
receipt of other evidence reasonably satisfactory to the Issuer
that such registration and qualification under state securities
laws is not required. Whenever such restrictions shall cease and
terminate as to any such securities, the Holder thereof shall be
entitled to receive from the Issuer (or its transfer agent and
registrar), without expense (other than applicable transfer
taxes, if any), new Warrants (or, in the case of shares of
Warrant Stock, new stock certificates) of like tenor not bearing
the applicable legend required by paragraph (ii) above relating
to the Securities Act and applicable state securities laws.
S. Continuing Rights of Holder. The Issuer will, at the time of or at any
time after each exercise of this Warrant, upon the request of the
Holder hereof, acknowledge in writing the extent, if any, of its
continuing obligation to afford to such Holder all rights to which
such Holder shall continue to be entitled after such exercise in
accordance with the terms of this Warrant; provided that if any such
Holder shall fail to make any such request, the failure shall not
affect the continuing obligation of the Issuer to afford such rights
to such Holder.
Stock Fully Paid: Reservation and Listing of Shares: Covenants.
T. Stock Fully Paid. The Issuer represents, warrants, covenants and
agrees that all shares of Warrant Stock which may be issued upon the
exercise of this Warrant or otherwise hereunder will, upon issuance,
be duly authorized, validly issued, fully paid and non-assessable and
free from all taxes and liens, security interest, charges and
encumbrances of any nature whatsoever created by or through the
Issuer. The Issuer further represents, warrants, covenants and agrees
that during the period within which this Warrant may be exercised, the
Issuer will at all times have authorized and reserved for the purpose
of the issue upon exercise of this Warrant a sufficient number of
shares of Common Stock to provide for the exercise of this Warrant.
(l) Reservation. If any shares of Common Stock required to be reserved for
issuance upon exercise of this Warrant or as otherwise provided hereunder
require registration or qualification with any governmental authority under any
federal or state law before such shares may be so issued, the Issuer will in
good faith use its best efforts as expeditiously as possible at its expense to
cause such shares to be duly registered or qualified. If the Issuer shall list
any shares of Common Stock on any securities exchange or market it will, at its
expense, list thereon, maintain and increase when necessary such listing, of,
all shares of Warrant Stock from time to time issued upon exercise of this
Warrant or as otherwise provided hereunder, and, to the extent permissible under
the applicable securities exchange rules, all unissued shares of Warrant Stock
which are at any time issuable hereunder, so long as any shares of Common Stock
shall be so listed. The Issuer will also so list on each securities exchange or
market, and will maintain such listing of, any other securities which the Holder
of this
<PAGE>
Warrant shall be entitled to receive upon the exercise of this Warrant if at the
time any securities of the same class shall be listed on such securities
exchange or market by the Issuer.
(m) Covenants. The Issuer shall not by any action including, without
limitation, amending the Certificate of Incorporation or the by-laws of the
Issuer, or through any reorganization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities or any other action, avoid or
seek to avoid the observance or performance of any of the terms or provisions of
this Warrant, but will at all times in good faith carry out all such terms or
provisions and take all such actions as may be necessary or appropriate to
protect the rights of the Holder hereof against dilution (to the extent
specifically provided herein) or impairment. Without limiting the generality of
the foregoing, the Issuer will (i) not permit the par value, if any, of its
Common Stock to exceed the then effective Warrant Price, (ii) not amend or
modify any provision of the Certificate of Incorporation or by-laws of the
Issuer in any manner that would adversely affect in any way the powers,
preferences or relative participating, optional or other special rights of the
Common Stock or which would adversely affect the rights of the Holders of the
Warrants, (iii) take all such action as may be reasonably necessary in order
that the Issuer may validly and legally issue fully paid and nonassessable
shares of Common Stock, free and clear of any liens, security interests,
charges, claims, encumbrances and restrictions (other than as provided herein)
upon the exercise of this Warrant, and (iv) obtain all such authorizations,
exemptions or consents from any public regulatory body having jurisdiction
thereof as may be necessary to enable the Issuer to perform its obligations
under this Warrant.
(n) Loss, Theft, Destruction of Warrants. Upon receipt of evidence
satisfactory to the Issuer of the ownership of and the loss, theft, destruction
or mutilation of any Warrant and, in the case of any such loss, theft or
destruction, upon receipt of indemnity or security satisfactory to the Issuer
or, in the case of any such mutilation, upon surrender and cancellation of such
Warrant, the Issuer will make and deliver, in lieu of such lost, stolen,
destroyed or mutilated Warrant, a new Warrant of like tenor and representing the
right to purchase the same number of shares of Common Stock.
(o) Rights and Obligations under the Registration Rights Agreement. The
shares of Warrant Stock are entitled to the benefits and subject to the terms of
the Registration Rights Agreement dated as of even date herewith between the
Issuer and the Holders listed on the signature pages thereof (as amended from
time to time, the "Registration Rights Agreement"). The Issuer shall keep or
cause to be kept a copy of the Registration Rights Agreement, and any amendments
thereto, at its chief executive office and shall furnish, without charge, copies
thereof to the Holder upon request.
Adjustment of Warrant Price and Warrant Share Number. The number and kind of
Securities purchasable upon the exercise of this Warrant and the Warrant
Price shall be subject to adjustment from time to time upon the happening
of certain events as follows:
(p) Recapitalization, Reorganization, Reclassification, Consolidation,
Merger or Sale.
1. In case the Issuer after the Original Issue Date shall do any of
the following (each, a "Triggering Event"): (a) consolidate with
or merge into any other Person and the Issuer shall not be the
continuing or surviving Person of such consolidation or merger,
or (b) permit any other Person to consolidate with or merge into
the Issuer and the Issuer shall be the continuing or surviving
Person but, in connection with such consolidation or merger, any
Capital Stock of the Issuer shall be changed into or exchanged
for Securities of any other Person or cash or any other property,
or (c) transfer
<PAGE>
all or substantially all of its properties or assets to any other
Person, or (d) effect a capital reorganization or
reclassification of its Capital Stock, then, and in the case of
each such Triggering Event, proper provision shall be made so
that, upon the basis and the terms and in the manner provided in
this Warrant, the Holder of this Warrant shall be entitled, at
the option of such Holder, (x) upon the exercise hereof at any
time after the consummation of such Triggering Event, to the
extent this Warrant is not exercised prior to such Triggering
Event, to receive at the Warrant Price in effect at the time
immediately prior to the consummation of such Triggering Event in
lieu of the Common Stock issuable upon such exercise of this
Warrant prior to such Triggering Event, the Securities, cash and
property to which such Holder would have been entitled upon the
consummation of such Triggering Event if such Holder had
exercised the rights represented by this Warrant immediately
prior thereto, subject to adjustments (subsequent to such
corporate action) as nearly equivalent as possible to the
adjustments provided for in Section 4 hereof or (y) to sell this
Warrant (or, at such Holder's election, a portion hereof)
concurrently with the Triggering Event to the Person continuing
after or surviving such Triggering Event, or to the Issuer (if
Issuer is the continuing or surviving Person) at a sales price
equal to the amount of cash, property and/or Securities to which
a holder of the number of shares of Common Stock which would
otherwise have been delivered upon the exercise of this Warrant
would have been entitled upon the effective date or closing of
any such Triggering Event (the "Event Consideration"), less the
amount or portion of such Event Consideration having a fair value
equal to the aggregate Warrant Price applicable to this Warrant
or the portion hereof so sold.
2. Notwithstanding anything contained in this Warrant to the
contrary, the Issuer will not effect any Triggering Event unless,
prior to the consummation thereof, each Person (other than the
Issuer) which may be required to deliver any Securities, cash or
property upon the exercise of this Warrant as provided herein
shall assume, by written instrument delivered to, and reasonably
satisfactory to, the Holder of this Warrant, (A) the obligations
of the Issuer under this Warrant (and if the Issuer shall survive
the consummation of such Triggering Event, such assumption shall
be in addition to, and shall not release the Issuer from, any
continuing obligations of the Issuer under this Warrant) and (B)
the obligation to deliver to such Holder such shares of
Securities, cash or property as, in accordance with the foregoing
provisions of this subsection (a), such Holder shall be entitled
to receive, and such Person shall have similarly delivered to
such Holder an opinion of counsel for such Person, which counsel
shall be reasonably satisfactory to such Holder, stating that
this Warrant shall thereafter continue in full force and effect
and the terms hereof (including, without limitation, all of the
provisions of this subsection (a)) shall be applicable to the
Securities, cash or property which such Person may be required to
deliver upon any exercise of this Warrant or the exercise of any
rights pursuant hereto.
<PAGE>
3. If with respect to any Triggering Event, the Holder of this
Warrant has exercised its right as provided in clause (y) of
subparagraph (i) of this subsection (a) to sell this Warrant or a
portion thereof, the Issuer agrees that as a condition to the
consummation of any such Triggering Event the Issuer shall secure
such right of Holder to sell this Warrant to the Person
continuing after or surviving such Triggering Event and the
Issuer shall not effect any such Triggering Event unless upon or
prior to the consummation thereof the amounts of cash, property
and/or Securities required under such clause (y) are delivered to
the Holder of this Warrant. The obligation of the Issuer to
secure such right of the Holder to sell this Warrant shall be
subject to such Holder's cooperation with the Issuer, including,
without limitation, the giving of reasonable and customary
representations and warranties to the purchaser in connection
with any such sale. Prior notice of any Triggering Event shall be
given to the Holder of this Warrant in accordance with Section 11
hereof.
(q) Subdivision or Combination of Shares. If the Issuer, at any time while
this Warrant is outstanding, shall subdivide or combine any shares of Common
Stock, (i) in case of subdivision of shares, the Warrant Price shall be
proportionately reduced (as at the effective date of such subdivision or, if the
Issuer shall take a record of holders of its Common Stock for the purpose of so
subdividing, as at the applicable record date, whichever is earlier) to reflect
the increase in the total number of shares of Common Stock outstanding as a
result of such subdivision, or (ii) in the case of a combination of shares, the
Warrant Price shall be proportionately increased (as at the effective date of
such combination or, if the Issuer shall take a record of holders of its Common
Stock for the purpose of so combining, as at the applicable record date,
whichever is earlier) to reflect the reduction in the total number of shares of
Common Stock outstanding as a result of such combination.
(r) Certain Dividends and Distributions. If the Issuer, at any time while
this Warrant is outstanding, shall:
<PAGE>
4. Stock Dividends. Pay a dividend in, or make any other
distribution to its stockholders (without consideration therefor)
of, shares of Common Stock, the Warrant Price shall be adjusted,
as at the date the Issuer shall take a record of the holders of
the Issuer's Capital Stock for the purpose of receiving such
dividend or other distribution (or if no such record is taken, as
at the date of such payment or other distribution), to that price
determined by multiplying the Warrant Price in effect immediately
prior to such record date (or if no such record is taken, then
immediately prior to such payment or other distribution), by a
fraction (1) the numerator of which shall be the total number of
shares of Common Stock outstanding immediately prior to such
dividend or distribution, and (2) the denominator of which shall
be the total number of shares of Common Stock outstanding
immediately after such dividend or distribution (plus in the
event that the Issuer paid cash for fractional shares, the number
of additional shares which would have been outstanding had the
Issuer issued fractional shares in connection with said
dividends); or
5. Other Dividends. Pay a dividend on, or make any distribution of
its assets upon or with respect to (including, but not limited
to, a distribution of its property as a dividend in liquidation
or partial liquidation or by way of return of capital), the
Common Stock (other than as described in clause (i) of this
subsection (c)), or in the event that the Company shall offer
options or rights to subscribe for shares of Common Stock, or
issue any Common Stock Equivalents, to all of its holders of
Common Stock, then on the record date for such payment,
distribution or offer or, in the absence of a record date, on the
date of such payment, distribution or offer, the Holder shall
receive what the Holder would have received had it exercised this
Warrant in full immediately prior to the record date of such
payment, distribution or offer or, in the absence of a record
date, immediately prior to the date of such payment, distribution
or offer
U. Intentionally Omitted.
V. Intentionally Omitted.
W. Intentionally Omitted.
X. Intentionally Omitted.
(s) Other Action Affecting Common Stock. In case after the Original Issue
Date the Issuer shall take any action affecting its Common Stock, other than an
action described in any of the foregoing subsections (a) through (g) of this
Section 4, inclusive, and the failure to make any adjustment would not fairly
protect the purchase rights represented by this Warrant in accordance with the
essential intent and principle of this Section 4, then the Warrant Price shall
be adjusted in such manner and at such time as the Board may in good faith
determine to be equitable in the circumstances.
(t) Adjustment of Warrant Share Number. Upon each adjustment in the Warrant
Price pursuant to any of the foregoing provisions of this Section 4, the Warrant
Share Number shall be
<PAGE>
adjusted, to the nearest one hundredth of a whole share, to the product obtained
by multiplying the Warrant Share Number immediately prior to such adjustment in
the Warrant Price by a fraction, the numerator of which shall be the Warrant
Price immediately before giving effect to such adjustment and the denominator of
which shall be the Warrant Price immediately after giving effect to such
adjustment. If the Issuer shall be in default under any provision contained in
Section 3 of this Warrant so that shares issued at the Warrant Price adjusted in
accordance with this Section 4 would not be validly issued, the adjustment of
the Warrant Share Number provided for in the foregoing sentence shall
nonetheless be made and the Holder of this Warrant shall be entitled to purchase
such greater number of shares at the lowest price at which such shares may then
be validly issued under applicable law. Such exercise shall not constitute a
waiver of any claim arising against the Issuer by reason of its default under
Section 3 of this Warrant.
(u) Form of Warrant after Adjustments. The form of this Warrant need not be
changed because of any adjustments in the Warrant Price or the number and kind
of Securities purchasable upon the exercise of this Warrant.
Notice of Adjustments. Whenever the Warrant Price or Warrant Share Number shall
be adjusted pursuant to Section 4 hereof (for purposes of this Section 5,
each an "adjustment"), the Issuer shall cause its Chief Financial Officer
to prepare and execute a certificate setting forth, in reasonable detail,
the event requiring the adjustment, the amount of the adjustment, the
method by which such adjustment was calculated (including a description of
the basis on which the Board made any determination hereunder), and the
Warrant Price and Warrant Share Number after giving effect to such
adjustment, and shall cause copies of such certificate to be delivered to
the Holder of this Warrant promptly after each adjustment. Any dispute
between the Issuer and the Holder of this Warrant with respect to the
matters set forth in such certificate may at the option of the Holder of
this Warrant be submitted to one of the national accounting firms currently
known as the "big five" selected by the Holder, provided that the Issuer
shall have ten (10) days after receipt of notice from such Holder of its
selection of such firm to object thereto, in which case such Holder shall
select another such firm and the Issuer shall have no such right of
objection. The firm selected by the Holder of this Warrant as provided in
the preceding sentence shall be instructed to deliver a written opinion as
to such matters to the Issuer and such Holder within thirty (30) days after
submission to it of such dispute. Such opinion shall be final and binding
on the parties hereto. The fees and expenses of such accounting firm shall
be paid by the Issuer.
Fractional Shares. No fractional shares of Warrant Stock will be issued in
connection with and exercise hereof, but in lieu of such fractional shares,
the Issuer shall make a cash payment therefor equal in amount to the
product of the applicable fraction multiplied by the Per Share Market Value
then in effect.
Definitions. For the purposes of this Warrant, the following terms have the
following meanings:
"Additional Shares of Common Stock" means all shares of Common Stock issued by
the Issuer after the Original Issue Date, and all shares of Other Common, if
any, issued by the Issuer after the Original Issue Date, except the Warrant
Stock and the shares of Common Stock issued upon exercise of the B Warrants and
the Callable Warrants.
"B Warrants" means the non-callable B Warrants issued in connection with the
sale and issuance of Common Stock pursuant to the Purchase Agreement.
"Board" shall mean the Board of Directors of the Issuer.
"Callable Warrants" means the callable Warrants issued in connection with the
sale and issuance of Common Stock pursuant to Purchase Agreement.
"Capital Stock" means and includes (i) any and all shares, interests,
participations or other equivalents of or interests in (however designated)
corporate stock, including, without limitation, shares of preferred or
preference stock, (ii) all partnership interests (whether general or limited) in
any Person which is a partnership, (iii) all membership interests or limited
<PAGE>
liability company interests in any limited liability company, and (iv) all
equity or ownership interests in any Person of any other type.
"Certificate of Incorporation" means the Certificate of Incorporation, as
amended, of the Issuer as in effect on the Original Issue Date, and as hereafter
from time to time amended, modified, supplemented or restated in accordance with
the terms hereof and thereof and pursuant to applicable law.
"Common Stock" means the Common Stock, $.01 par value, of the Issuer and any
other Capital Stock into which such stock may hereafter be changed.
"Common Stock Equivalent" means any Convertible Security or warrant, option or
other right to subscribe for or purchase any Additional Shares of Common Stock
or any Convertible Security.
"Convertible Securities" means evidences of Indebtedness, shares of Capital
Stock or other Securities which are or may be at any time convertible into or
exchangeable for Additional Shares of Common Stock. The term "Convertible
Security" means one of the Convertible Securities.
"Governmental Authority" means any governmental, regulatory or self-regulatory
entity, department, body, official, authority, commission, board, agency or
instrumentality, whether federal, state or local, and whether domestic or
foreign.
"Holders" mean the Persons who shall from time to time own any Warrant. The term
"Holder" means one of the Holders.
"Independent Appraiser" means a nationally recognized or major regional
investment banking firm or firm of independent certified public accountants of
recognized standing (which may be the firm that regularly examines the financial
statements of the Issuer) that is regularly engaged in the business of
appraising the Capital Stock or assets of corporations or other entities as
going concerns, and which is not affiliated with either the Issuer or the Holder
of any Warrant.
"Issuer" means Virtual Communities, Inc., a Delaware corporation, and its
successors.
"Majority Holders" means at any time the Holders of Warrants exercisable for a
majority of the shares of Warrant Stock issuable under the Warrants at the time
outstanding.
"Original Issue Date" means April __, 2000.
"Other Common" means any other Capital Stock of the Issuer of any class which
shall be authorized at any time after the date of this Warrant (other than
Common Stock) and which shall have the right to participate in the distribution
of earnings and assets of the Issuer without limitation as to amount.
"OTC Bulletin Board" means the over-the-counter electronic bulletin board.
"Person" means an individual, corporation, limited liability company,
partnership, joint stock company, trust, unincorporated organization, joint
venture, Governmental Authority or other entity of whatever nature.
"Per Share Market Value" means on any particular date (a) the closing bid price
per share of the Common Stock on such date the Nasdaq SmallCap Market, Nasdaq
<PAGE>
National Market or other registered national stock exchange on which the Common
Stock is then listed or if there is no such price on such date, then the closing
bid price on such exchange or quotation system on the date nearest preceding
such date, or (b) if the Common Stock is not listed then on the Nasdaq SmallCap
Market, Nasdaq National Market or any registered national stock exchange, the
closing bid price for a share of Common Stock in the over-the-counter market, as
reported by NASDAQ or in the National Quotation Bureau Incorporated or similar
organization or agency succeeding to its functions of reporting prices) at the
close of business on such date, or (c) if the Common Stock is not then reported
by NASDAQ the National Quotation Bureau Incorporated (or similar organization or
agency succeeding to its functions of reporting prices), then the average of the
"Pink Sheet" quotes for the relevant conversion period, as determined in good
faith by the holder, or (d) if the Common Stock is not then publicly traded the
fair market value of a share of Common Stock as determined by an Independent
Appraiser selected in good faith by the Majority Holders; provided, however,
that the Issuer, after receipt of the determination by such Independent
Appraiser, shall have the right to select an additional Independent Appraiser,
in which case, the fair market value shall be equal to the average of the
determinations by each such Independent Appraiser; and provided, further that
all determinations of the Per Share Market Value shall be appropriately adjusted
for any stock dividends, stock splits or other similar transactions during such
period. The determination of fair market value by an Independent Appraiser shall
be based upon the fair market value of the Issuer determined on a going concern
basis as between a willing buyer and a willing seller and taking into account
all relevant factors determinative of value, and shall be final and binding on
all parties. In determining the fair market value of any shares of Common Stock,
no consideration shall be given to any restrictions on transfer of the Common
Stock imposed by agreement or by federal or state securities laws, or to the
existence or absence of, or any limitations on, voting rights.
"Purchase Agreement" means the Common Stock and Warrants Purchase Agreement
dated as of March 31, 2000 among the Issuer and the investors a party thereto.
"Registration Rights Agreement" has the meaning specified in Section 3(e)
hereof.
"Securities" means any debt or equity securities of the Issuer, whether now or
hereafter authorized, any instrument convertible into or exchangeable for
Securities or a Security, and any option, warrant or other right to purchase or
acquire any Security. "Security" means one of the Securities.
"Securities Act" means the Securities Act of 1933, as amended, or any similar
federal statute then in effect.
"Subsidiary" means any corporation at least 50% of whose outstanding Voting
Stock shall at the time be owned directly or indirectly by the Issuer or by one
or more of its Subsidiaries, or by the Issuer and one or more of its
Subsidiaries.
"Term" has the meaning specified in Section 1 hereof.
"Trading Day" means (a) a day on which the Common Stock is traded on the Nasdaq
SmallCap Market, Nasdaq National Market or other registered national stock
exchange on which the Common Stock has been listed, or (b) if the Common Stock
is not listed on the Nasdaq SmallCap Market, Nasdaq National Market or other
registered national stock exchange on which the Common Stock has been listed, a
day on which the Common Stock is quoted in the over-the-counter market, as
<PAGE>
reported by the OTC Bulletin Board, or (c) if the Common Stock is not quoted on
the OTC Bulletin Board, a day on which the Common Stock is quoted in the
over-the-counter market as reported by the National Quotation Bureau
Incorporated (or any similar organization or agency succeeding its functions of
reporting prices); provided, however, that in the event that the Common Stock is
not listed or quoted as set forth in (a), (b) and (c) hereof, then Trading Day
shall mean any day except Saturday, Sunday and any day which shall be a legal
holiday or a day on which banking institutions in the State of New York are
authorized or required by law or other government action to close.
"Voting Stock", as applied to the Capital Stock of any corporation, means
Capital Stock of any class or classes (however designated) having ordinary
voting power for the election of a majority of the members of the Board of
Directors (or other governing body) of such corporation, other than Capital
Stock having such power only by reason of the happening of a contingency.
"Warrants" means the non-callable A Warrants issued in connection with the sale
and issuance of Common Stock pursuant to Purchase Agreement, including, without
limitation, this Warrant, and any other warrants of like tenor issued in
substitution or exchange for any thereof pursuant to the provisions of Section
2(c), 2(d) or 2(e) hereof or of any of such other Warrants.
"Warrant Price" means $7.4375 per share, as such price may be adjusted from time
to time as shall result from the adjustments specified in Section 4 hereof.
"Warrant Share Number" means at any time the aggregate number of shares of
Warrant Stock which may at such time be purchased upon exercise of this Warrant,
after giving effect to all prior adjustments and increases to such number made
or required to be made under the terms hereof.
"Warrant Stock" means Common Stock issuable upon exercise of any Warrant or
Warrants or otherwise issuable pursuant to any Warrant or Warrants.
Other Notices. In case at any time:
a) the Issuer shall make any distributions to the holders of
Common Stock; or
b) the Issuer shall authorize the granting to all holders of
its Common Stock of rights to subscribe for or purchase any
shares of Capital Stock of any class or of any Common Stock
Equivalents or Convertible Securities or other rights; or
c) there shall be any reclassification of the Capital Stock of
the Issuer; or
d) there shall be any capital reorganization by the Issuer; or
e) there shall be any (i) consolidation or merger involving the
Issuer or (ii) sale, transfer or other disposition of all or
substantially all of the Issuer's property, assets or
business (except a merger or other reorganization in which
the Issuer shall be the surviving corporation and its shares
of Capital Stock shall continue to be outstanding and
<PAGE>
unchanged and except a consolidation, merger, sale,
transfer or other disposition involving a wholly-owned
Subsidiary); or
f) there shall be a voluntary or involuntary dissolution,
liquidation or winding-up of the Issuer or any partial
liquidation of the Issuer or distribution to holders of
Common Stock;
then, in each of such cases, the Issuer shall give written notice to the Holder
of the date on which (i) the books of the Issuer shall close or a record shall
be taken for such dividend, distribution or subscription rights or (ii) such
reorganization, reclassification, consolidation, merger, disposition,
dissolution, liquidation or winding-up, as the case may be, shall take place.
Such notice also shall specify the date as of which the holders of Common Stock
of record shall participate in such dividend, distribution or subscription
rights, or shall be entitled to exchange their certificates for Common Stock for
securities or other property deliverable upon such reorganization,
reclassification, consolidation, merger, disposition, dissolution, liquidation
or winding-up, as the case may be. Such notice shall be given at least twenty
(20) days prior to the action in question and not less than twenty (20) days
prior to the record date or the date on which the Issuer's transfer books are
closed in respect thereto. The Issuer shall give to the Holder notice of all
meetings and actions by written consent of its stockholders, at the same time in
the same manner as notice of any meetings of stockholders is required to be
given to stockholders who do not waive such notice (or, if such actions require
no notice, then two (2) Trading Days written notice thereof describing the
matters upon which action is to be taken). The Holder shall have the right to
send two representatives selected by it to each meeting, who shall be permitted
to attend, but not vote at, such meeting and any adjournments thereof. This
Warrant entitles the Holder to receive copies of all financial and other
information distributed or required to be distributed to the holders of the
Common Stock.
Amendment and Waiver. Any term, covenant, agreement or condition in this Warrant
may be amended, or compliance therewith may be waived (either generally or
in a particular instance and either retroactively or prospectively), by a
written instrument or written instruments executed by the Issuer and the
Majority Holders; provided, however, that no such amendment or waiver shall
reduce the Warrant Share Number, increase the Warrant Price, shorten the
period during which this Warrant may be exercised or modify any provision
of this Section 9 without the consent of the Holder of this Warrant.
Governing Law. THIS WARRANT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO PRINCIPLES
OF CONFLICTS OF LAW. THIS WARRANT SHALL NOT BE INTERPRETED OR CONSTRUED
WITH ANY PRESUMPTION AGAINST THE PARTY CAUSING THIS WARRANT TO BE DRAFTED.
Notices. Any and all notices or other communications or deliveries required or
permitted to be provided hereunder shall be in writing and shall be deemed
given and effective on the earlier of (i) the date of transmission, if such
notice or communication is delivered via facsimile at the facsimile
telephone number specified for notice prior to 5:00 p.m., eastern standard
time, on a Trading Day, (ii) the Trading Day after the date of
transmission, if such notice or communication is delivered via facsimile at
the facsimile telephone number specified for notice later than 5:00 p.m.,
eastern standard time, on any date and earlier than 11:59 p.m., eastern
standard time, on such date, (iii) the Trading Day following the date of
mailing, if sent by nationally recognized overnight courier service or (iv)
actual receipt by the party to whom such notice is required to be given.
The addresses for such communications shall be with respect to the Holder
of this Warrant or of Warrant Stock issued pursuant hereto, addressed to
such Holder at its last known address or facsimile number appearing on the
books of the Issuer maintained for such purposes, or with respect to the
Issuer, addressed to:
Virtual Communities, Inc.
589 Eighth Avenue, 7th Floor
New York, New York 10018
Facsimile Number: (212) 214-0550
Attention: Avi Moskowitz
<PAGE>
or to such other address or addresses or facsimile number or numbers as any such
party may most recently have designated in writing to the other parties hereto
by such notice. Copies of notices to the Issuer shall be sent to Wuersch &
Gering LLP, 11 Hanover Square, 21st Floor, New York, New York 10005, Attention:
Travis Gering, Esq., Facsimile no.: (212) 509-9559. Copies of notices to the
Holder shall be sent to (a) Parker Chapin LLP, 405 Lexington Avenue, New York,
New York 10174, Attention: Martin Eric Weisberg and Christopher S. Auguste,
Esq., Facsimile no.: (212) 704-6288.
Warrant Agent. The Issuer may, by written notice to each Holder of this Warrant,
appoint an agent having an office in New York, New York for the purpose of
issuing shares of Warrant Stock on the exercise of this Warrant pursuant to
subsection (b) of Section 2 hereof, exchanging this Warrant pursuant to
subsection (d) of Section 2 hereof or replacing this Warrant pursuant to
subsection (d) of Section 3 hereof, or any of the foregoing, and thereafter
any such issuance, exchange or replacement, as the case may be, shall be
made at such office by such agent.
Remedies.The Issuer stipulates that the remedies at law of the Holder of this
Warrant in the event of any default or threatened default by the Issuer in
the performance of or compliance with any of the terms of this Warrant are
not and will not be adequate and that, to the fullest extent permitted by
law, such terms may be specifically enforced by a decree for the specific
performance of any agreement contained herein or by an injunction against a
violation of any of the terms hereof or otherwise.
Successors and Assigns. This Warrant and the rights evidenced hereby shall inure
to the benefit of and be binding upon the successors and assigns of the
Issuer, the Holder hereof and (to the extent provided herein) the Holders
of Warrant Stock issued pursuant hereto, and shall be enforceable by any
such party.
Modification and Severability. If, in any action before any court or agency
legally empowered to enforce any provision contained herein, any provision
hereof is found to be unenforceable, then such provision shall be deemed
modified to the extent necessary to make it enforceable by such court or
agency. If any such provision is not enforceable as set forth in the
preceding sentence, the unenforceability of such provision shall not affect
the other provisions of this Warrant, but this Warrant shall be construed
as if such unenforceable provision had never been contained herein.
Headings. The headings of the Sections of this Warrant are for convenience of
reference only and shall not, for any purpose, be deemed a part of this
Warrant.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
IN WITNESS WHEREOF, the Issuer has executed this Warrant as of the day and year
first above written.
VIRTUAL COMMUNITIES, INC.
By:
--------------------------------------
Name:
Title:
<PAGE>
EXERCISE FORM
[NAME OF ISSUER]
The undersigned _______________, pursuant to the provisions of the within
Warrant, hereby elects to purchase _____ shares of Common Stock of
___________________ covered by the within Warrant.
Dated: _________________ Signature __________________________________
Address ____________________________
____________________________
ASSIGNMENT
FOR VALUE RECEIVED, _________________ hereby sells, assigns and transfers unto
__________________ the within Warrant and all rights evidenced thereby and does
irrevocably constitute and appoint _____________, attorney, to transfer the said
Warrant on the books of the within named corporation.
Dated: _________________ Signature __________________________________
Address ____________________________
____________________________
PARTIAL ASSIGNMENT
FOR VALUE RECEIVED, _________________ hereby sells, assigns and transfers unto
__________________ the right to purchase _________ shares of Warrant Stock
evidenced by the within Warrant together with all rights therein, and does
irrevocably constitute and appoint ___________________, attorney, to transfer
that part of the said Warrant on the books of the within named corporation.
Dated: _________________ Signature __________________________________
Address ____________________________
____________________________
FOR USE BY THE ISSUER ONLY:
This Warrant No. W-A- cancelled (or transferred or exchanged) this _____ day of
___________, _____, shares of Common Stock issued therefor in the name of
_______________, Warrant No. W-A- issued for ____ shares of Common Stock in the
name of _______________.
<PAGE>
Exhibit 10(45)
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement is made and entered into as of March 31, 2000
(this "Agreement"), by and among Virtual Communities, Inc., a Delaware
corporation (the "Company"), and Intercoastal Financial Services, Corp., a
Florida corporation (the "Placement Advisor").
The Company and the Placement Advisor hereby agree as follows:
Definitions.
As used in this Agreement, the following terms shall have the following
meanings:
"Advice" shall have the meaning set forth in Section 3(m).
"Affiliate" means, with respect to any Person, any other Person that directly or
indirectly controls or is controlled by or under common control with such
Person. For the purposes of this definition, "control," when used with respect
to any Person, means the possession, direct or indirect, of the power to direct
or cause the direction of the management and policies of such Person, whether
through the ownership of voting securities, by contract or otherwise; and the
terms of "affiliated," "controlling" and "controlled" have meanings correlative
to the foregoing.
"Blackout Period" shall have the meaning set forth in Section 3(n).
"Board" shall have the meaning set forth in Section 3(n).
"Business Day" means any day except Saturday, Sunday and any day which shall be
a legal holiday or a day on which banking institutions in the state of New York
generally are authorized or required by law or other government actions to
close.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means the Company's Common Stock, par value $.01 per share.
"Effectiveness Date" means with respect to the Registration Statement the
earlier of the 90th day following the Closing Date and the date which is within
five (5) days of the date on which the Commission informs the Company that the
Commission (i) will not review the Registration Statement or (ii) that the
Company may request the acceleration of the effectiveness of the Registration
Statement.
"Effectiveness Period" shall have the meaning set forth in Section 2.
"Event" shall have the meaning set forth in Section 7(e).
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Filing Date" means the date the Registration Statement is filed which date
shall be the 30th day following the date of filing of the registration statement
covering all of the registrable securities of the Purchasers.
"Holder" or "Holders" means the holder or holders, as the case may be, from time
to time of Registrable Securities including, including without limitation, the
Placement Advisor and its assignees.
"Indemnified Party" shall have the meaning set forth in Section 5(c).
"Indemnifying Party" shall have the meaning set forth in Section 5(c).
"Losses" shall have the meaning set forth in Section 5(a).
"Nasdaq" shall mean the Nasdaq SmallCap Market.
"Person" means an individual or a corporation, partnership, trust, incorporated
or unincorporated association, joint venture, limited liability company, joint
stock company, government (or an agency or political subdivision thereof) or
other entity of any kind.
"Proceeding" means an action, claim, suit, investigation or proceeding
(including, without limitation, an investigation or partial proceeding, such as
a deposition), whether commenced or threatened.
"Prospectus" means the prospectus included in the Registration Statement
(including, without limitation, a prospectus that includes any information
previously omitted from a prospectus filed as part of an effective registration
statement in reliance upon Rule 430A promulgated under the Securities Act), as
amended or supplemented by any prospectus supplement, with respect to the terms
of the offering of any portion of the Registrable Securities covered by the
<PAGE>
Registration Statement, and all other amendments and supplements to the
Prospectus, including post-effective amendments, and all material incorporated
by reference in such Prospectus.
"Registrable Securities" means (i) the shares of Common Stock issuable upon
exercise of the Warrants (the "Warrant Shares") and upon any stock split, stock
dividend, recapitalization or similar event with respect to such or Warrant
Shares, and (ii) any other dividend or other distribution with respect to,
conversion or exchange of, or in replacement of, Registrable Securities;
provided, however, that Registrable Securities shall include (but not be limited
to) a number of shares of Common Stock equal to no less than 100% of the maximum
number of shares of Common Stock which would be issuable upon exercise of the
Warrants, assuming such exercise occurred on the Closing Date or the Filing
Date, whichever date would result in the greater number of Registrable
Securities. Notwithstanding anything herein contained to the contrary, such
registered shares of Common Stock shall be allocated among the Holders pro rata
based on the total number of Registrable Securities issued or issuable as of
each date that a Registration Statement, as amended, relating to the resale of
the Registrable Securities is declared effective by the Commission.
Notwithstanding anything contained herein to the contrary, if the actual number
of shares of Common Stock issuable upon exercise of the Warrants exceeds 100% of
the number of shares of Common Stock issuable upon exercise of the Warrants
based upon a computation as at the Closing Date or the Filing Date, the term
"Registrable Securities" shall be deemed to include such additional shares of
Common Stock.
"Registration Statement" means the registration statement and any additional
registration statements contemplated by Section 2, including (in each case) the
Prospectus, amendments and supplements to such registration statement or
Prospectus, including pre- and post-effective amendments, all exhibits thereto,
and all material incorporated by reference in such registration statement.
"Rule 144" means Rule 144 promulgated by the Commission pursuant to the
Securities Act, as such Rule may be amended from time to time, or any similar
rule or regulation hereafter adopted by the Commission having substantially the
same effect as such Rule.
"Rule 158" means Rule 158 promulgated by the Commission pursuant to the
Securities Act, as such Rule may be amended from time to time, or any similar
rule or regulation hereafter adopted by the Commission having substantially the
same effect as such Rule.
"Rule 415" means Rule 415 promulgated by the Commission pursuant to the
Securities Act, as such Rule may be amended from time to time, or any similar
rule or regulation hereafter adopted by the Commission having substantially the
same effect as such Rule.
"Securities Act" means the Securities Act of 1933, as amended.
"Special Counsel" means any special counsel to the Holders, for which the
Holders will be reimbursed by the Company pursuant to Section 4 hereof.
"Warrants" means the callable warrants to purchase shares of Common Stock issued
to the Placement Advisor in connection with the Purchase Agreement, and any
other warrants of like tenor issued in substitution or exchange thereof.
Capitalized terms used and not otherwise defined herein shall have the meanings
given such terms in the Common Stock and Warrants Purchase Agreement, dated as
of the date hereof (the "Purchase Agreement"), by and among the Company and the
investors a party thereto (the "Purchasers").
Registration. On or prior to the Filing Date the Company shall prepare and file
with the Commission a "shelf" Registration Statement covering all
Registrable Securities for an offering to be made on a continuous basis
pursuant to Rule 415. The Registration Statement shall be on Form SB-2
(except if the Company is not then eligible to register for resale the
Registrable Securities on Form SB-2, in which case such registration shall
be on another appropriate form in accordance herewith). The Company shall
(i) not permit any securities other than the Registrable Securities to be
included in the Registration Statement and those securities on Schedule
7(c) hereto, (ii) use its best efforts to cause the Registration Statement
to be declared effective under the Securities Act (including filing with
the Commission a request for acceleration of effectiveness in accordance
with Rule 12dl-2 promulgated under the Exchange Act within five (5)
Business Days of the date that the Company is notified (orally or in
writing,
<PAGE>
whichever is earlier) by the Commission that a Registration Statement will
not be "reviewed," or not be subject to further review) as soon as possible
after the filing thereof, but in any event prior to the Effectiveness Date,
and to keep such Registration Statement continuously effective under the
Securities Act until such date as is the earlier of (x) the date when all
Registrable Securities covered by such Registration Statement have been
sold or (y) the date on which the Registrable Securities may be sold
without any restriction pursuant to Rule 144(k) as determined by the
counsel to the Company pursuant to a written opinion letter, addressed to
the Company's transfer agent to such effect (the "Effectiveness Period").
If an additional Registration Statement is required, for any reason, to be
filed because the actual number of shares of Warrant Shares exceeds the
number of shares of Common Stock initially registered in respect of the
Warrant Shares based upon the computation on the Closing Date, the Company
shall have twenty (20) Business Days to file such additional Registration
Statement, and the Company shall use its best efforts to cause such
additional Registration Statement to be declared effective by the
Commission as soon as possible, but in no event later than thirty (30) days
after filing.
Registration Procedures.
In connection with the Company's registration obligations hereunder, the Company
shall:
Y. Prepare and file with the Commission on or prior to the Filing Date, a
Registration Statement on Form SB-2 (or if the Company is not then
eligible to register for resale the Registrable Securities on Form
SB-2 such registration shall be on another appropriate form in
accordance herewith) in accordance with the method or methods of
distribution thereof as specified by the Holders (except if otherwise
directed by the Holders), and cause the Registration Statement to
become effective and remain effective as provided herein; provided,
however, that not less than five (5) Business Days prior to the filing
of the Registration Statement or any related Prospectus or any
amendment or supplement thereto (including any document that would be
incorporated therein by reference), the Company shall (i) furnish to
the Holders and any Special Counsel, copies of all such documents
proposed to be filed, which documents (other than those incorporated
by reference) will be subject to the review of such Holders and such
Special Counsel, and (ii) at the request of any Holder cause its
officers and directors, counsel and independent certified public
accountants to respond to such inquiries as shall be necessary, in the
reasonable opinion of counsel to such Holders, to conduct a reasonable
investigation within the meaning of the Securities Act. The Company
shall not file the Registration Statement or any such Prospectus or
any amendments or supplements thereto to which the Holders of a
majority of the Registrable Securities or any Special Counsel shall
reasonably object in writing within three (3) Business Days of their
receipt thereof.
Z. 1. Prepare and file with the Commission such amendments, including
post-effective amendments, to the Registration Statement as may be
necessary to keep the Registration Statement continuously effective as
to the applicable Registrable Securities for the Effectiveness Period
and prepare and file with the Commission such additional Registration
Statements in order to register for resale under the Securities Act
all of the Registrable Securities; (ii) cause the related Prospectus
to be amended or supplemented by any required Prospectus supplement,
and as so supplemented or amended to be filed pursuant to Rule 424 (or
any similar provisions then in force) promulgated under the Securities
Act; (iii) respond as promptly as possible to any comments received
from the Commission with respect to the Registration Statement or any
amendment thereto and as promptly as possible provide the Holders true
and complete copies of all correspondence from and to the Commission
relating to the Registration Statement; and (iv) comply in all
material respects with the provisions of the Securities Act and the
Exchange Act with respect to the disposition of all Registrable
Securities covered by the Registration Statement during the applicable
period in accordance with the intended
<PAGE>
methods of disposition by the Holders thereof set forth in the
Registration Statement as so amended or in such Prospectus as so
supplemented.
AA. Notify the Holders of Registrable Securities to be sold and any
Special Counsel as promptly as possible (and, in the case of (i)(A)
below, not less than five (5) Business Days prior to such filing) and
(if requested by any such Person) confirm such notice in writing no
later than one (1) Business Day following the day (i)(A) when a
Prospectus or any Prospectus supplement or post-effective amendment to
the Registration Statement is proposed to be filed; (B) when the
Commission notifies the Company whether there will be a "review" of
such Registration Statement and whenever the Commission comments in
writing on such Registration Statement and (C) with respect to the
Registration Statement or any post-effective amendment, when the same
has become effective; (ii) of any request by the Commission or any
other Federal or state governmental authority for amendments or
supplements to the Registration Statement or Prospectus or for
additional information; (iii) of the issuance by the Commission of any
stop order suspending the effectiveness of the Registration Statement
covering any or all of the Registrable Securities or the initiation of
any Proceedings for that purpose; (iv) if at any time any of the
representations and warranties of the Company contained in any
agreement contemplated hereby ceases to be true and correct in all
material respects; (v) of the receipt by the Company of any
notification with respect to the suspension of the qualification or
exemption from qualification of any of the Registrable Securities for
sale in any jurisdiction, or the initiation or threatening of any
Proceeding for such purpose; and (vi) of the occurrence of any event
that makes any statement made in the Registration Statement or
Prospectus or any document incorporated or deemed to be incorporated
therein by reference untrue in any material respect or that requires
any revisions to the Registration Statement, Prospectus or other
documents so that, in the case of the Registration Statement or the
Prospectus, as the case may be, it will not contain any untrue
statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made,
not misleading.
The Company shall promptly furnish to Special Counsel, without charge, (i) any
correspondence from the Commission or the Commission's staff to the Company or
its representatives relating to any Registration Statement and (ii) promptly
after the same is prepared and filed with the Commission, a copy of any written
response to the correspondence received from the Commission.
BB. Use its best efforts to avoid the issuance of, or, if issued, obtain
the withdrawal of, (i) any order suspending the effectiveness of the
Registration Statement or (ii) any suspension of the qualification (or
exemption from qualification) of any of the Registrable Securities for
sale in any jurisdiction, at the earliest practicable moment.
CC. If requested by the Holders of a majority in interest of the
Registrable Securities, (i) promptly incorporate in a Prospectus
supplement or post-effective amendment to the Registration Statement
such information as the Company reasonably agrees should be included
therein and (ii) make all required filings of such Prospectus
supplement or such post-effective amendment as soon as practicable
after the Company has received notification of the matters to be
incorporated in such Prospectus supplement or post-effective
amendment.
<PAGE>
DD. Furnish to each Holder and any Special Counsel, without charge, at
least one conformed copy of each Registration Statement and each
amendment thereto, including financial statements and schedules, all
documents incorporated or deemed to be incorporated therein by
reference, and all exhibits to the extent requested by such Person
(including those previously furnished or incorporated by reference)
promptly after the filing of such documents with the Commission.
EE. Promptly deliver to each Holder and any Special Counsel, without
charge, as many copies of the Registration Statement, Prospectus or
Prospectuses (including each form of prospectus) and each amendment or
supplement thereto as such Persons may reasonably request; and the
Company hereby consents to the use of such Prospectus and each
amendment or supplement thereto by each of the selling Holders in
connection with the offering and sale of the Registrable Securities
covered by such Prospectus and any amendment or supplement thereto.
FF. Prior to any public offering of Registrable Securities, use its best
efforts to register or qualify or cooperate with the selling Holders
and any Special Counsel in connection with the registration or
qualification (or exemption from such registration or qualification)
of such Registrable Securities for offer and sale under the securities
or Blue Sky laws of such jurisdictions within the United States as any
Holder requests in writing, to keep each such registration or
qualification (or exemption therefrom) effective during the
Effectiveness Period and to do any and all other acts or things
necessary or advisable to enable the disposition in such jurisdictions
of the Registrable Securities covered by a Registration Statement;
provided, however, that the Company shall not be required to qualify
generally to do business in any jurisdiction where it is not then so
qualified or to take any action that would subject it to general
service of process in any such jurisdiction where it is not then so
subject or subject the Company to any material tax in any such
jurisdiction where it is not then so subject.
GG. Cooperate with the Holders to facilitate the timely preparation and
delivery of certificates representing Registrable Securities to be
sold pursuant to a Registration Statement, which certificates shall be
free of all restrictive legends, and to enable such Registrable
Securities to be in such denominations and registered in such names as
any Holder may request at least two (2) Business Days prior to any
sale of Registrable Securities.
HH. Upon the occurrence of any event contemplated by Section 3(c)(vi), as
promptly as possible, prepare a supplement or amendment, including a
post-effective amendment, to the Registration Statement or a
supplement to the related Prospectus or any document incorporated or
deemed to be incorporated therein by reference, and file any other
required document so that, as thereafter delivered, neither the
Registration Statement nor such Prospectus will contain an untrue
statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not
misleading.
II. Use its best efforts to cause all Registrable Securities relating to
such Registration Statement to be listed on Nasdaq and any other
securities exchange, quotation system, market or over-the-counter
bulletin board, if any, on which similar securities issued by the
Company are then listed as and when required pursuant to the Purchase
Agreement.
<PAGE>
JJ. Comply in all material respects with all applicable rules and
regulations of the Commission and make generally available to its
security holders earning statements satisfying the provisions of
Section 11(a) of the Securities Act and Rule 158 not later than
forty-five (45) days after the end of any twelve (12)-month period (or
ninety (90) days after the end of any twelve (12)-month period if such
period is a fiscal year) commencing on the first day of the first
fiscal quarter of the Company after the effective date of the
Registration Statement, which statement shall conform to the
requirements of Rule 158.
KK. Require each selling Holder to furnish to the Company information
regarding such Holder and the distribution of such Registrable
Securities as is required by law to be disclosed in the Registration
Statement, and the Company may exclude from such registration the
Registrable Securities of any such Holder who fails to furnish such
information within a reasonable time prior to the filing of each
Registration Statement, supplemented Prospectus and/or amended
Registration Statement.
If the Registration Statement refers to any Holder by name or otherwise as the
holder of any securities of the Company, then such Holder shall have the right
to require (if such reference to such Holder by name or otherwise is not
required by the Securities Act or any similar federal statute then in force) the
deletion of the reference to such Holder in any amendment or supplement to the
Registration Statement filed or prepared subsequent to the time that such
reference ceases to be required.
Each Holder covenants and agrees that (i) it will not sell any Registrable
Securities under the Registration Statement until it has received copies of the
Prospectus as then amended or supplemented as contemplated in Section 3(g) and
notice from the Company that such Registration Statement and any post-effective
amendments thereto have become effective as contemplated by Section 3(c) and
(ii) it and its officers, directors or Affiliates, if any, will comply with the
prospectus delivery requirements of the Securities Act as applicable to them in
connection with sales of Registrable Securities pursuant to the Registration
Statement.
Each Holder agrees by its acquisition of such Registrable Securities that, upon
receipt of a notice from the Company of the occurrence of any event of the kind
described in Section 3(c)(ii), 3(c)(iii), 3(c)(iv), 3(c)(v) or 3(c)(vi), such
Holder will forthwith discontinue disposition of such Registrable Securities
under the Registration Statement until such Holder's receipt of the copies of
the supplemented Prospectus and/or amended Registration Statement contemplated
by Section 3(j), or until it is advised in writing (the "Advice") by the Company
that the use of the applicable Prospectus may be resumed, and, in either case,
has received copies of any additional or supplemental filings that are
incorporated or deemed to be incorporated by reference in such Prospectus or
Registration Statement.
LL. If (i) there is material non-public information regarding the Company
which the Company's Board of Directors (the "Board") ----- reasonably
determines not to be in the Company's best interest to disclose and
which the Company is not otherwise required to disclose, or (ii) there
is a significant business opportunity (including, but not limited to,
the acquisition or disposition of assets (other than in the ordinary
course of business) or any merger, consolidation, tender offer or
other similar transaction) available to the Company which the Board
reasonably determines not to be in the Company's best interest to
disclose and which the Company would be required to disclose under the
Registration Statement, then the Company may suspend effectiveness of
a registration statement and suspend the sale of Registrable
Securities under a Registration Statement for a period not to exceed
twenty (20) consecutive days, provided that the Company
<PAGE>
may not suspend its obligation under this Section 3(n) for more than
forty-five (45) days in the aggregate during any twelve (12) month
period (each, a "Blackout Period"); provided, however, that no such
suspension shall be permitted for consecutive twenty (20) day periods,
arising out of the same set of facts, circumstances or transactions.
MM. Within two (2) business days after the Registration Statement which
includes the Registrable Securities is ordered effective by the
Commission, the Company shall deliver, and shall cause legal counsel
for the Company to deliver, to the transfer agent for such Registrable
Securities (with copies to the Holders whose Registrable Securities
are included in such Registration Statement) confirmation that the
Registration Statement has been declared effective by the Commission
in the form attached hereto as Exhibit A.
Registration Expenses
All fees and expenses incident to the performance of or compliance with this
Agreement by the Company shall be borne by the Company whether or not the
Registration Statement is filed or becomes effective and whether or not any
Registrable Securities are sold pursuant to the Registration Statement. The fees
and expenses referred to in the foregoing sentence shall include, without
limitation the following: (i) all registration and filing fees (including,
without limitation, fees and expenses (A) with respect to filings required to be
made with the Nasdaq and each other securities exchange or market on which
Registrable Securities are required hereunder to be listed, (B) with respect to
filings required to be made with the Commission, and (C) in compliance with
state securities or Blue Sky laws (including, without limitation, fees and
disbursements of counsel for the Holders in connection with Blue Sky
qualifications of the Registrable Securities and determination of the
eligibility of the Registrable Securities for investment under the laws of such
jurisdictions as the Holders of a majority of Registrable Securities may
designate)), (ii) printing expenses (including, without limitation, expenses of
printing certificates for Registrable Securities and of printing prospectuses if
the printing of prospectuses is requested by the holders of a majority of the
Registrable Securities included in the Registration Statement), (iii) messenger,
telephone and delivery expenses, (iv) fees and disbursements of counsel for the
Company and Special Counsel for the Holders, in the case of the Special Counsel,
to a maximum amount of $25,000 (v) Securities Act liability insurance, if the
Company so desires such insurance, and (vi) fees and expenses of all other
Persons retained by the Company in connection with the consummation of the
transactions contemplated by this Agreement, including, without limitation, the
Company's independent public accountants (including the expenses of any comfort
letters or costs associated with the delivery by independent public accountants
of a comfort letter or comfort letters). In addition, the Company shall be
responsible for all of its internal expenses incurred in connection with the
consummation of the transactions contemplated by this Agreement (including,
without limitation, all salaries and expenses of its officers and employees
performing legal or accounting duties), the expense of any annual audit, the
fees and expenses incurred in connection with the listing of the Registrable
Securities on any securities exchange as required hereunder.
Indemnification
NN. Indemnification by the Company. The Company shall, notwithstanding any
termination of this Agreement, indemnify and hold harmless each
Holder, the officers, directors, agents, brokers (including brokers
who offer and sell Registrable Securities as principal as a result of
a pledge or any failure to perform under a margin call of Common
Stock), investment advisors and employees of each of them, each Person
who controls any such Holder (within the meaning of Section 15 of the
Securities Act or Section 20 of the
<PAGE>
Exchange Act) and the officers, directors, agents and employees of
each such controlling Person, and the respective successors, assigns,
estate and personal representatives of each of the foregoing, to the
fullest extent permitted by applicable law, from and against any and
all claims, losses, damages, liabilities, penalties, judgments, costs
(including, without limitation, costs of investigation) and expenses
(including, without limitation, attorneys' fees and expenses)
(collectively, "Losses"), as incurred, arising out of or relating to
any untrue or alleged untrue statement of a material fact contained in
the Registration Statement, any Prospectus or any form of prospectus
or in any amendment or supplement thereto or in any preliminary
prospectus, or arising out of or relating to any omission or alleged
omission of a material fact required to be stated therein or necessary
to make the statements therein (in the case of any Prospectus or form
of prospectus or supplement thereto, in the light of the circumstances
under which they were made) not misleading, except to the extent, but
only to the extent, that such untrue statements or omissions are based
solely upon information regarding such Holder furnished in writing to
the Company by such Holder expressly for use therein, which
information was reasonably relied on by the Company for use therein or
to the extent that such information relates to such Holder or such
Holder's proposed method of distribution of Registrable Securities and
was reviewed and expressly approved in writing by such Holder
expressly for use in the Registration Statement, such Prospectus or
such form of Prospectus or in any amendment or supplement thereto. The
Company shall notify the Holders promptly of the institution, threat
or assertion of any Proceeding of which the Company is aware in
connection with the transactions contemplated by this Agreement. Such
indemnity shall remain in full force and effect regardless of any
investigation made by or on behalf of an Indemnified Party (as defined
in Section 5(c) hereof) and shall survive the transfer of the
Registrable Securities by the Holders.
OO. Indemnification by Holders. Each Holder shall, severally and not
jointly, indemnify and hold harmless the Company, the directors,
officers, agents and employees, each Person who controls the Company
(within the meaning of Section 15 of the Securities Act and Section 20
of the Exchange Act), and the directors, officers, agents or employees
of such controlling Persons, and the respective successors, assigns,
estate and personal representatives of each of the foregoing, to the
fullest extent permitted by applicable law, from and against all
Losses, as incurred, arising solely out of or based solely upon any
untrue statement of a material fact contained in the Registration
Statement, any Prospectus, or any form of prospectus, or arising
solely out of or based solely upon any omission of a material fact
required to be stated therein or necessary to make the statements
therein (in the case of any Prospectus or form of prospectus or
supplement thereto, in the light of the circumstances under which they
were made) not misleading, to the extent, but only to the extent, that
such untrue statement or omission is contained in or omitted from any
information so furnished in writing by such Holder to the Company
specifically for inclusion in the Registration Statement or such
Prospectus and that such information was reasonably relied upon by the
Company for use in the Registration Statement, such Prospectus or such
form of prospectus or to the extent that such information relates to
such Holder or such Holder's proposed method of distribution of
Registrable Securities and was reviewed and expressly approved in
writing by such Holder expressly for use in the Registration
Statement, such Prospectus or such form of Prospectus Supplement.
Notwithstanding anything to the contrary contained herein, the Holder
shall be liable under this Section 5(b) for only that amount
<PAGE>
as does not exceed the net proceeds to such Holder as a result of the
sale of Registrable Securities pursuant to such Registration
Statement.
PP. Conduct of Indemnification Proceedings. If any Proceeding shall be
brought or asserted against any Person entitled to indemnity hereunder
(an "Indemnified Party"), such Indemnified Party promptly shall notify
the Person from whom indemnity is sought (the "Indemnifying Party) in
writing, and the Indemnifying Party shall assume the defense thereof,
including the employment of counsel reasonably satisfactory to the
Indemnified Party and the payment of all fees and expenses incurred in
connection with defense thereof; provided, that the failure of any
Indemnified Party to give such notice shall not relieve the
Indemnifying Party of its obligations or liabilities pursuant to this
Agreement, except (and only) to the extent that it shall be finally
determined by a court of competent jurisdiction (which determination
is not subject to appeal or further review) that such failure shall
have proximately and materially adversely prejudiced the Indemnifying
Party.
An Indemnified Party shall have the right to employ separate counsel in any such
Proceeding and to participate in the defense thereof, but the fees and expenses
of such counsel shall be at the expense of such Indemnified Party or Parties
unless: (1) the Indemnifying Party has agreed in writing to pay such fees and
expenses; or (2) the Indemnifying Party shall have failed promptly to assume the
defense of such Proceeding and to employ counsel reasonably satisfactory to such
Indemnified Party in any such Proceeding; or (3) the named parties to any such
Proceeding (including any impleaded parties) include both such Indemnified Party
and the Indemnifying Party, and such Indemnified Party shall have been advised
by counsel that a conflict of interest is likely to exist if the same counsel
were to represent such Indemnified Party and the Indemnifying Party (in which
case, if such Indemnified Party notifies the Indemnifying Party in writing that
it elects to employ separate counsel at the expense of the Indemnifying Party,
the Indemnifying Party shall not have the right to assume the defense thereof
and such counsel shall be at the expense of the Indemnifying Party). The
Indemnifying Party shall not be liable for any settlement of any such Proceeding
effected without its written consent, which consent shall not be unreasonably
withheld. No Indemnifying Party shall, without the prior written consent of the
Indemnified Party, effect any settlement of any pending Proceeding in respect of
which any Indemnified Party is a party, unless such settlement includes an
unconditional release of such Indemnified Party from all liability on claims
that are the subject matter of such Proceeding. All fees and expenses of the
Indemnified Party (including reasonable fees and expenses to the extent incurred
in connection with investigating or preparing to defend such Proceeding in a
manner not inconsistent with this Section) shall be paid to the Indemnified
Party, as incurred, within ten (10) Business Days of written notice thereof to
the Indemnifying Party (regardless of whether it is ultimately determined that
an Indemnified Party is not entitled to indemnification hereunder; provided,
that the Indemnifying Party may require such Indemnified Party to undertake to
reimburse all such fees and expenses to the extent it is finally judicially
determined that such Indemnified Party is not entitled to indemnification
hereunder).
QQ. Contribution. If a claim for indemnification under Section 5(a) or
5(b) is unavailable to an Indemnified Party because of a failure or
refusal of a governmental authority to enforce such indemnification in
accordance with its terms (by reason of public policy or otherwise),
then each Indemnifying Party, in lieu of indemnifying such Indemnified
Party, shall contribute to the amount paid or payable by such
Indemnified Party as a result of such Losses, in such proportion as is
appropriate to reflect the relative fault of the Indemnifying Party
and Indemnified Party in connection with the actions,
<PAGE>
statements or omissions that resulted in such Losses as well as any
other relevant equitable considerations. The relative fault of such
Indemnifying Party and Indemnified Party shall be determined by
reference to, among other things, whether any action in question,
including any untrue or alleged untrue statement of a material fact or
omission or alleged omission of a material fact, has been taken or
made by, or relates to information supplied by, such Indemnifying,
Party or Indemnified Party, and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent
such action, statement or omission. The amount paid or payable by a
party as a result of any Losses shall be deemed to include, subject to
the limitations set forth in Section 5(c), any reasonable attorneys'
or other reasonable fees or expenses incurred by such party in
connection with any Proceeding to the extent such party would have
been indemnified for such fees or expenses if the indemnification
provided for in this Section was available to such party in accordance
with its terms. Notwithstanding anything to the contrary contained
herein, the Holder shall be liable or required to contribute under
this Section 5(c) for only that amount as does not exceed the net
proceeds to such Holder as a result of the sale of Registrable
Securities pursuant to such Registration Statement.
The parties hereto agree that it would not be just and equitable if contribution
pursuant to this Section 5(d) were determined by pro rata allocation or by any
other method of allocation that does not take into account the equitable
considerations referred to in the immediately preceding paragraph. No Person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) shall be entitled to contribution from any Person who was
not guilty of such fraudulent misrepresentation.
The indemnity and contribution agreements contained in this Section are in
addition to any liability that the Indemnifying Parties may have to the
Indemnified Parties
Rule 144.
As long as any Holder owns Warrants or Warrant Shares, the Company covenants to
timely file (or obtain extensions in respect thereof and file within the
applicable grace period) all reports required to be filed by the Company after
the date hereof pursuant to Section 13(a) or 15(d) of the Exchange Act and to
promptly furnish the Holders with true and complete copies of all such filings.
As long as any Holder owns Warrants or Warrant Shares, if the Company is not
required to file reports pursuant to Section 13(a) or 15(d) of the Exchange Act,
it will prepare and furnish to the Holders and make publicly available in
accordance with Rule 144(c) promulgated under the Securities Act annual and
quarterly financial statements, together with a discussion and analysis of such
financial statements in form and substance substantially similar to those that
would otherwise be required to be included in reports required by Section 13(a)
or 15(d) of the Exchange Act, as well as any other information required thereby,
in the time period that such filings would have been required to have been made
under the Exchange Act. The Company further covenants that it will take such
further action as any Holder may reasonably request, all to the extent required
from time to time to enable such Person to sell Conversion Shares and Warrant
Shares without registration under the Securities Act within the limitation of
the exemptions provided by Rule 144 promulgated under the Securities Act,
including providing any legal opinions of counsel to the Company referred to in
the Purchase Agreement. Upon the request of any Holder, the Company shall
deliver to such Holder a written certification of a duly authorized officer as
to whether it has complied with such requirements.
Miscellaneous.
RR. Remedies. In the event of a breach by the Company or by a Holder, of
any of their obligations under this Agreement, each Holder or the
Company, as the case may be, in
<PAGE>
addition to being entitled to exercise all rights granted by law and
under this Agreement, including recovery of damages, will be entitled
to specific performance of its rights under this Agreement. The
Company and each Holder agree that monetary damages would not provide
adequate compensation for any losses incurred by reason of a breach by
it of any of the provisions of this Agreement and hereby further
agrees that, in the event of any action for specific performance in
respect of such breach, it shall waive the defense that a remedy at
law would be adequate.
SS. No Inconsistent Agreements. Neither the Company nor any of its
subsidiaries has, as of the date hereof entered into and currently in
effect, nor shall the Company or any of its subsidiaries, on or after
the date of this Agreement, enter into any agreement with respect to
its securities that is inconsistent with the rights granted to the
Holders in this Agreement or otherwise conflicts with the provisions
hereof. Neither the Company nor any of its subsidiaries has previously
entered into any agreement currently in effect granting any
registration rights with respect to any of its securities to any
Person, except as set forth on Schedule 7(c) hereto. Without limiting
the generality of the foregoing, without the written consent of the
Holders of a majority of the then outstanding Registrable Securities,
the Company shall not grant to any Person the right to request the
Company to register any securities of the Company under the Securities
Act unless the rights so granted are subject in all respects to the
prior rights in full of the Holders set forth herein, and are not
otherwise in conflict with the provisions of this Agreement.
TT. No Piggyback on Registrations. Neither the Company nor any of its
security holders (other than the Holders in such capacity pursuant
hereto and the security holders listed on Schedule 7(c) hereto) may
include securities of the Company in the Registration Statement, and
the Company shall not after the date hereof enter into any agreement
providing such right to any of its security holders, unless the right
so granted is subject in all respects to the prior rights in full of
the Holders set forth herein, and is not otherwise in conflict with
the provisions of this Agreement.
UU. Piggy-Back Registrations. If at any time when there is not an
effective Registration Statement covering Warrant Shares, the Company
shall determine to prepare and file with the Commission a registration
statement relating to an offering for its own account or the account
of others under the Securities Act of any of its equity securities,
other than on Form S-4 or Form S-8 (each as promulgated under the
Securities Act) or its then equivalents relating to equity securities
to be issued solely in connection with any acquisition of any entity
or business or equity securities issuable in connection with stock
option or other employee benefit plans, the Company shall send to each
holder of Registrable Securities written notice of such determination
and, if within thirty (30) days after receipt of such notice, any such
holder shall so request in writing (which request shall specify the
Registrable Securities intended to be disposed of by the Holders), the
Company will cause the registration under the Securities Act of all
Registrable Securities which the Company has been so requested to
register by the holder, to the extent requisite to permit the
disposition of the Registrable Securities so to be registered,
provided that if at any time after giving written notice of its
intention to register any securities and prior to the effective date
of the registration statement filed in connection with such
registration, the Company shall determine for any reason not to
register or to delay registration of such securities, the Company may,
at its election, give written notice of such determination to such
holder and, thereupon, (i) in the case
<PAGE>
of a determination not to register, shall be relieved of its
obligation to register any Registrable Securities in connection with
such registration (but not from its obligation to pay expenses in
accordance with Section 4 hereof), and (ii) in the case of a
determination to delay registering, shall be permitted to delay
registering any Registrable Securities being registered pursuant to
this Section 7(d) for the same period as the delay in registering such
other securities. The Company shall include in such registration
statement all or any part of such Registrable Securities such holder
requests to be registered; provided, however, that the Company shall
not be required to register any Registrable Securities pursuant to
this Section 7(d) that are eligible for sale pursuant to Rule 144(k)
of the Securities Act. In the case of an underwritten public offering,
if the managing underwriter(s) or underwriter(s) should reasonably
object to the inclusion of the Registrable Securities in such
registration statement, then if the Company after consultation with
the managing underwriter should reasonably determine that the
inclusion of such Registrable Securities, would materially adversely
affect the offering contemplated in such registration statement, and
based on such determination recommends inclusion in such registration
statement of fewer or none of the Registrable Securities of the
Holders, then (x) the number of Registrable Securities of the Holders
included in such registration statement shall be reduced pro-rata
among such Holders (based upon the number of Registrable Securities
requested to be included in the registration), if the Company after
consultation with the underwriter(s) recommends the inclusion of fewer
Registrable Securities, or (y) none of the Registrable Securities of
the Holders shall be included in such registration statement, if the
Company after consultation with the underwriter(s) recommends the
inclusion of none of such Registrable Securities; provided, however,
that if securities are being offered for the account of other persons
or entities as well as the Company, such reduction shall not represent
a greater fraction of the number of Registrable Securities intended to
be offered by the Holders than the fraction of similar reductions
imposed on such other persons or entities (other than the Company).
VV. Intentionally Omitted.
WW. Specific Enforcement, Consent to Jurisdiction.
1. The Company and the Holders acknowledge and agree that
irreparable damage would occur in the event that any of the
provisions of this Registration Rights Agreement or the Purchase
Agreement were not performed in accordance with their specific
terms or were otherwise breached. It is accordingly agreed that
the parties shall be entitled to an injunction or injunctions to
prevent or cure breaches of the provisions of this Registration
Rights Agreement or the Purchase Agreement and to enforce
specifically the terms and provisions hereof or thereof, this
being in addition to any other remedy to which any of them may be
entitled by law or equity.
2. Each of the Company and the Placement Advisor (i) hereby
irrevocably submits to the jurisdiction of the United States
District Court for the Southern District of New York and the
courts of the State of New York located in New York county for
the purposes of any suit, action or
<PAGE>
proceeding arising out of or relating to this Agreement or the
Purchase Agreement and (ii) hereby waives, and agrees not to
assert in any such suit, action or proceeding, any claim that it
is not personally subject to the jurisdiction of such court, that
the suit, action or proceeding is brought in an inconvenient
forum or that the venue of the suit, action or proceeding is
improper. Each of the Company and the Placement Advisor consents
to process being served in any such suit, action or proceeding by
mailing a copy thereof to such party at the address in effect for
notices to it under this Agreement and agrees that such service
shall constitute good and sufficient service of process and
notice thereof. Nothing in this Section 7(f) shall affect or
limit any right to serve process in any other manner permitted by
law.
XX. Amendments and Waivers. The provisions of this Agreement, including
the provisions of this sentence, may not be amended, modified or
supplemented, and waivers or consents to departures from the
provisions hereof may not be given, unless the same shall be in
writing and signed by the Company and each of the Holders.
Notwithstanding the foregoing, a waiver or consent to depart from the
provisions hereof with respect to a matter that relates exclusively to
the rights of Holders and that does not directly or indirectly affect
the rights of other Holders may be given by Holders of at least a
majority of the Registrable Securities to which such waiver or consent
relates; provided, however, that the provisions of this sentence may
not be amended, modified, or supplemented except in accordance with
the provisions of the immediately preceding sentence.
YY. Notices. Any and all notices or other communications or deliveries
required or permitted to be provided hereunder shall be in writing and
shall be deemed given and effective on the earlier of (i) the date of
transmission, if such notice or communication is delivered via
facsimile at the facsimile telephone number specified for notice prior
to 5:00 p.m., eastern standard time, on a Business Day, (ii) the
Business Day after the date of transmission, if such notice or
communication is delivered via facsimile at the facsimile telephone
number specified for notice later than 5:00 p.m., eastern standard
time, on any date and earlier than 11:59 p.m., eastern time, on such
date, (iii) the Business Day following the date of mailing, if sent by
nationally recognized overnight courier service or (iv) actual receipt
by the party to whom such notice is required to be given. The
addresses for such communications shall be
with respect to the Holder: Intercoastal Financial Services Corp.
760 U.S. Highway One
Suite 206
N. Palm Beach, Florida 33408
Telephone No.: (561) 776-8172
Facsimile No.: (561) 776-1091
with respect to the Company: Virtual Communities, Inc.
589 8th Avenue, 7th Floor
New York, New York 10018
Attention: Avi Moskowitz
Facsimile no.: (212) 214-0550
<PAGE>
or to such other address or addresses or facsimile number or numbers as any such
party may most recently have designated in writing to the other parties hereto
by such notice. Copies of notices to any Holder shall be sent to the address set
forth above, if applicable. Copies of notices to the Company shall be sent to
Wuersch & Gering LLP, 11 Hanover Square, 21st Floor, New York, New York 10005,
Attention: Travis Gering, Esq., Facsimile no.: (212) 509-9559. Copies of notices
to the Holders shall be sent to Parker Chapin LLP, The Chrysler Building, 405
Lexington Avenue, New York, New York 10174, Attention: Christopher S. Auguste,
Esq., Facsimile no.: (212) 704-6288.
ZZ. Successors and Assigns. This Agreement shall be binding upon and inure
to the benefit of the parties and their successors and permitted
assigns and shall inure to the benefit of each Holder and its
successors and assigns. The Company may not assign this Agreement or
any of its rights or obligations hereunder without the prior written
consent of each Holder. The Placement Advisor may assign its rights
hereunder in the manner and to the Persons as permitted under the
Purchase Agreement.
AAA. Assignment of Registration Rights. The rights of each Holder
hereunder, including the right to have the Company register for resale
Registrable Securities in accordance with the terms of this Agreement,
shall be automatically assignable by each Holder to any transferee of
such Holder of all or a portion of the shares of Registrable
Securities if: (i) the Holder agrees in writing with the transferee or
assignee to assign such rights, and a copy of such agreement is
furnished to the Company within a reasonable time after such
assignment, (ii) the Company is, within a reasonable time after such
transfer or assignment, furnished with written notice of (a) the name
and address of such transferee or assignee, and (b) the securities
with respect to which such registration rights are being transferred
or assigned, (iii) following such transfer or assignment the further
disposition of such securities by the transferee or assignees is
restricted under the Securities Act and applicable state securities
laws, (iv) at or before the time the Company receives the written
notice contemplated by clause (ii) of this Section, the transferee or
assignee agrees in writing with the Company to be bound by all of the
provisions of this Agreement, and (v) such transfer shall have been
made in accordance with the applicable requirements of the Purchase
Agreement. In addition, each Holder shall have the right to assign its
rights hereunder to any other Person with the prior written consent of
the Company, which consent shall not be unreasonably withheld. The
rights to assignment shall apply to the Holders (and to subsequent)
successors and assigns.
BBB. Counterparts. This Agreement may be executed in any number of
counterparts, each of which when so executed shall be deemed to be an
original and, all of which taken together shall constitute one and the
same Agreement. In the event that any signature is delivered by
facsimile transmission, such signature shall create a valid binding
obligation of the party executing (or on whose behalf such signature
is executed) the same with the same force and effect as if such
facsimile signature were the original thereof.
CCC. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York, without regard to
principles of conflicts of law thereof. This Agreement shall not be
interpreted or construed with any presumption against the party
causing this Agreement to be drafted.
<PAGE>
DDD. Cumulative Remedies. The remedies provided herein are cumulative and
not exclusive of any remedies provided by law.
EEE. Severability. If any term, provision, covenant or restriction of this
Agreement is held to be invalid, illegal, void or unenforceable in any
respect, the remainder of the terms, provisions, covenants and
restrictions set forth herein shall remain in full force and effect
and shall in no way be affected, impaired or invalidated, and the
parties hereto shall use their reasonable efforts to find and employ
an alternative means to achieve the same or substantially the same
result as that contemplated by such term, provision, covenant or
restriction. It is hereby stipulated and declared to be the intention
of the parties that they would have executed the remaining terms,
provisions, covenants and restrictions without including any of such
that may be hereafter declared invalid, illegal, void or
unenforceable.
FFF. Headings. The headings herein are for convenience only, do not
constitute a part of this Agreement and shall not be deemed to limit
or affect any of the provisions hereof.
GGG. Shares Held by the Company and its Affiliates. Whenever the consent or
approval of Holders of a specified percentage of Registrable
Securities is required hereunder, Registrable Securities held by the
Company or its Affiliates (other than any Holder or transferees or
successors or assigns thereof if such Holder is deemed to be an
Affiliate solely by reason of its holdings of such Registrable
Securities) shall not be counted in determining whether such consent
or approval was given by the Holders of such required percentage and
shall not be counted as outstanding.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Registration Rights
Agreement to be duly executed by their respective authorized persons as of the
date first indicated above.
VIRTUAL COMMUNITIES, INC.
By:
-----------------------------------------
Name:
Title:
INTERCOASTAL FINANCIAL SERVICES, CORP.
By:
----------------------------------------
Name:
Title:
<PAGE>
EXHIBIT A
FORM OF NOTICE OF EFFECTIVENESS
OF REGISTRATION STATEMENT
[TRANSFER AGENT]
[ADDRESS]
Attn: _____________
Re: Virtual Communities, Inc.
Ladies and Gentlemen:
We are counsel to Virtual Communities, Inc., a Delaware corporation (the
"Company"), and have represented the Company in connection with that certain
Common Stock and Warrants Purchase Agreement (the "Purchase Agreement"), dated
as of March 31, 2000, by and among the Company and the investors a party thereto
in connection with which the Company issued to Intercoastal Financial Services,
Corp. (the "Holder") warrants (the "Warrants") to purchase shares of the
Company's Common Stock, par value $.01 per share (the "Common Stock"). The
Company has entered into a Registration Rights Agreement with the Holder (the
"Registration Rights Agreement"), dated as of March 31, 2000, pursuant to which
the Company agreed, among other things, to register the Registrable Securities
(as defined in the Registration Rights Agreement), including the shares of
Common Stock issuable upon exercise of the Warrants, under the Securities Act of
1933, as amended (the "1933 Act"). In connection with the Company's obligations
under the Registration Rights Agreement, on ________________, 2000, the Company
filed a Registration Statement on Form ___ (File No. 333-________) (the
"Registration Statement") with the Securities and Exchange Commission (the
"SEC") relating to the resale of the Registrable Securities which names each of
the present Holders as a selling stockholder thereunder.
In connection with the foregoing, we advise you that a member of the SEC's
staff has advised us by telephone that the SEC has entered an order declaring
the Registration Statement effective under the 1933 Act at [ENTER TIME OF
EFFECTIVENESS] on [ENTER DATE OF EFFECTIVENESS] and we have no knowledge, after
telephonic inquiry of a member of the SEC's staff, that any stop order
suspending its effectiveness has been issued or that any proceedings for that
purpose are pending before, or threatened by, the SEC and, accordingly, the
Registrable Securities are available for resale under the 1933 Act in the manner
specified in, and pursuant to the terms of the Registration Statement.
Very truly yours,
By:
cc: [LIST NAMES OF HOLDERS]
<PAGE>
Exhibit 10(46)
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement is made and entered into as of March 31, 2000
(this "Agreement"), by and among Virtual Communities, Inc., a Delaware
corporation (the "Company"), and each of the Purchasers listed on Schedule A
attached hereto. Each of the Purchasers listed on Schedule A attached hereto is
referred to herein as a "Purchaser" and are collectively referred to herein as
the "Purchasers." This Agreement is being entered into pursuant to the Common
Stock and Warrants Purchase Agreement, dated as of the date hereof, by and among
the Company and the Purchasers (the "Purchase Agreement").
The Company and the Purchasers hereby agree as follows:
Definitions.
Capitalized terms used and not otherwise defined herein shall have the meanings
given such terms in the Purchase Agreement. As used in this Agreement, the
following terms shall have the following meanings:
"Advice" shall have the meaning set forth in Section 3(m).
"Affiliate" means, with respect to any Person, any other Person that
directly or indirectly controls or is controlled by or under common control with
such Person. For the purposes of this definition, "control," when used with
respect to any Person, means the possession, direct or indirect, of the power to
direct or cause the direction of the management and policies of such Person,
whether through the ownership of voting securities, by contract or otherwise;
and the terms of "affiliated," "controlling" and "controlled" have meanings
correlative to the foregoing.
"Blackout Period" shall have the meaning set forth in Section 3(n).
"Board" shall have the meaning set forth in Section 3(n).
"Business Day" means any day except Saturday, Sunday and any day which shall be
a legal holiday or a day on which banking institutions in the state of New York
generally are authorized or required by law or other government actions to
close.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means the Company's Common Stock, par value $.01 per share.
"Effectiveness Date" means with respect to the Registration Statement the
earlier of the 90th day following the Closing Date and the date which is within
five (5) days of the date on which the Commission informs the Company that the
Commission (i) will not review the Registration Statement or (ii) that the
Company may request the acceleration of the effectiveness of the Registration
Statement.
"Effectiveness Period" shall have the meaning set forth in Section 2.
"Event" shall have the meaning set forth in Section 7(e).
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Filing Date" means the date the Registration Statement is filed which date
shall be the 45th day following the date the Closing Date.
"Holder" or "Holders" means the holder or holders, as the case may be, from time
to time of Registrable Securities including, including without limitation, the
Purchasers and their assignees.
"Indemnified Party" shall have the meaning set forth in Section 5(c).
"Indemnifying Party" shall have the meaning set forth in Section 5(c).
"Liquidated Damages" shall have the meaning set forth in Section 7(e).
"Losses" shall have the meaning set forth in Section 5(a).
"Nasdaq" shall mean the Nasdaq SmallCap Market.
"Person" means an individual or a corporation, partnership, trust, incorporated
or unincorporated association, joint venture, limited liability company, joint
stock company, government (or an agency or political subdivision thereof) or
other entity of any kind.
"Proceeding" means an action, claim, suit, investigation or proceeding
(including, without limitation, an investigation or partial proceeding, such as
a deposition), whether commenced or threatened.
<PAGE>
"Prospectus" means the prospectus included in the Registration Statement
(including, without limitation, a prospectus that includes any information
previously omitted from a prospectus filed as part of an effective registration
statement in reliance upon Rule 430A promulgated under the Securities Act), as
amended or supplemented by any prospectus supplement, with respect to the terms
of the offering of any portion of the Registrable Securities covered by the
Registration Statement, and all other amendments and supplements to the
Prospectus, including post-effective amendments, and all material incorporated
by reference in such Prospectus.
"Registrable Securities" means (i) the shares of Common Stock (A) issued
pursuant to the Purchase Agreement (the "Common Shares") and (B) issuable upon
exercise of the Warrants (the "Warrant Shares") and upon any stock split, stock
dividend, recapitalization or similar event with respect to such Common Shares
or Warrant Shares, and (ii) any other dividend or other distribution with
respect to, conversion or exchange of, or in replacement of, Registrable
Securities; provided, however, that Registrable Securities shall include (but
not be limited to) a number of shares of Common Stock equal to no less than 100%
of the maximum number of shares of Common Stock which would be issuable pursuant
to the issuance of Common Shares pursuant to the Purchase Agreement and upon
exercise of the Warrants, assuming such exercise occurred on the Closing Date or
the Filing Date, whichever date would result in the greater number of
Registrable Securities. Notwithstanding anything herein contained to the
contrary, such registered shares of Common Stock shall be allocated among the
Holders pro rata based on the total number of Registrable Securities issued or
issuable as of each date that a Registration Statement, as amended, relating to
the resale of the Registrable Securities is declared effective by the
Commission. Notwithstanding anything contained herein to the contrary, if the
actual number of shares of Common Stock issuable upon exercise of the Warrants
exceeds 100% of the number of shares of Common Stock issuable (1) pursuant to
the issuance of the Common Shares pursuant to the Purchase Agreement and (2)
upon exercise of the Warrants based upon a computation as at the Closing Date or
the Filing Date, the term "Registrable Securities" shall be deemed to include
such additional shares of Common Stock.
"Registration Statement" means the registration statement and any additional
registration statements contemplated by Section 2, including (in each case) the
Prospectus, amendments and supplements to such registration statement or
Prospectus, including pre- and post-effective amendments, all exhibits thereto,
and all material incorporated by reference in such registration statement.
"Rule 144" means Rule 144 promulgated by the Commission pursuant to the
Securities Act, as such Rule may be amended from time to time, or any similar
rule or regulation hereafter adopted by the Commission having substantially the
same effect as such Rule.
"Rule 158" means Rule 158 promulgated by the Commission pursuant to the
Securities Act, as such Rule may be amended from time to time, or any similar
rule or regulation hereafter adopted by the Commission having substantially the
same effect as such Rule.
"Rule 415" means Rule 415 promulgated by the Commission pursuant to the
Securities Act, as such Rule may be amended from time to time, or any similar
rule or regulation hereafter adopted by the Commission having substantially the
same effect as such Rule.
"Securities Act" means the Securities Act of 1933, as amended.
"Special Counsel" means any special counsel to the Holders, for which the
Holders will be reimbursed by the Company pursuant to Section 4.
"Warrants" means the A warrants and B warrants to purchase shares of Common
Stock issued in connection with the Purchase Agreement, and any other warrants
of like tenor issued in substitution or exchange thereof.
Registration. On or prior to the Filing Date the Company shall prepare and file
with the Commission a "shelf" Registration Statement covering all
Registrable Securities for an offering to be made on a continuous basis
pursuant to Rule 415. The Registration Statement shall be on Form SB-2
(except if the Company is not then eligible to register for resale the
Registrable Securities on Form SB-2, in which case such registration shall
be on another appropriate form in accordance herewith). The Company shall
(i) not permit any securities other than the Registrable
<PAGE>
Securities to be included in the Registration Statement and those
securities on Schedule 7(c) hereto, (ii) use its best efforts to cause the
Registration Statement to be declared effective under the Securities Act
(including filing with the Commission a request for acceleration of
effectiveness in accordance with Rule 12dl-2 promulgated under the Exchange
Act within five (5) Business Days of the date that the Company is notified
(orally or in writing, whichever is earlier) by the Commission that a
Registration Statement will not be "reviewed," or not be subject to further
review) as soon as possible after the filing thereof, but in any event
prior to the Effectiveness Date, and to keep such Registration Statement
continuously effective under the Securities Act until such date as is the
earlier of (x) the date when all Registrable Securities covered by such
Registration Statement have been sold or (y) the date on which the
Registrable Securities may be sold without any restriction pursuant to Rule
144(k) as determined by the counsel to the Company pursuant to a written
opinion letter, addressed to the Company's transfer agent to such effect
(the "Effectiveness Period"). If an additional Registration Statement is
required, for any reason, to be filed because the actual number of shares
of Common Shares and Warrant Shares exceeds the number of shares of Common
Stock initially registered in respect of the Common Shares and the Warrant
Shares based upon the computation on the Closing Date, the Company shall
have twenty (20) Business Days to file such additional Registration
Statement, and the Company shall use its best efforts to cause such
additional Registration Statement to be declared effective by the
Commission as soon as possible, but in no event later than thirty (30) days
after filing.
Registration Procedures.
In connection with the Company's registration obligations hereunder, the Company
shall:
HHH. Prepare and file with the Commission on or prior to the Filing Date, a
Registration Statement on Form SB-2 (or if the Company is not then
eligible to register for resale the Registrable Securities on Form
SB-2 such registration shall be on another appropriate form in
accordance herewith) in accordance with the method or methods of
distribution thereof as specified by the Holders (except if otherwise
directed by the Holders), and cause the Registration Statement to
become effective and remain effective as provided herein; provided,
however, that not less than five (5) Business Days prior to the filing
of the Registration Statement or any related Prospectus or any
amendment or supplement thereto (including any document that would be
incorporated therein by reference), the Company shall (i) furnish to
the Holders and any Special Counsel, copies of all such documents
proposed to be filed, which documents (other than those incorporated
by reference) will be subject to the review of such Holders and such
Special Counsel, and (ii) at the request of any Holder cause its
officers and directors, counsel and independent certified public
accountants to respond to such inquiries as shall be necessary, in the
reasonable opinion of counsel to such Holders, to conduct a reasonable
investigation within the meaning of the Securities Act. The Company
shall not file the Registration Statement or any such Prospectus or
any amendments or supplements thereto to which the Holders of a
majority of the Registrable Securities or any Special Counsel shall
reasonably object in writing within three (3) Business Days of their
receipt thereof.
III. 1. Prepare and file with the Commission such amendments, including
post-effective amendments, to the Registration Statement as may be
necessary to keep the Registration Statement continuously effective as
to the applicable Registrable Securities for the Effectiveness Period
and prepare and file with the Commission such additional Registration
Statements in order to register for resale under the Securities Act
all of the Registrable Securities; (ii) cause the related Prospectus
to be amended or supplemented by any required Prospectus supplement,
and as so supplemented or amended to be filed pursuant to Rule 424 (or
any similar provisions then in force) promulgated under the Securities
Act; (iii) respond as promptly as possible to any comments received
from the Commission with respect to the Registration Statement or any
amendment thereto and as promptly as possible provide the Holders true
and complete copies of all correspondence from and to the Commission
relating to the Registration Statement; and
<PAGE>
(iv) comply in all material respects with the provisions of the
Securities Act and the Exchange Act with respect to the disposition of
all Registrable Securities covered by the Registration Statement
during the applicable period in accordance with the intended methods
of disposition by the Holders thereof set forth in the Registration
Statement as so amended or in such Prospectus as so supplemented.
JJJ. Notify the Holders of Registrable Securities to be sold and any
Special Counsel as promptly as possible (and, in the case of (i)(A)
below, not less than five (5) Business Days prior to such filing) and
(if requested by any such Person) confirm such notice in writing no
later than one (1) Business Day following the day (i)(A) when a
Prospectus or any Prospectus supplement or post-effective amendment to
the Registration Statement is proposed to be filed; (B) when the
Commission notifies the Company whether there will be a "review" of
such Registration Statement and whenever the Commission comments in
writing on such Registration Statement and (C) with respect to the
Registration Statement or any post-effective amendment, when the same
has become effective; (ii) of any request by the Commission or any
other Federal or state governmental authority for amendments or
supplements to the Registration Statement or Prospectus or for
additional information; (iii) of the issuance by the Commission of any
stop order suspending the effectiveness of the Registration Statement
covering any or all of the Registrable Securities or the initiation of
any Proceedings for that purpose; (iv) if at any time any of the
representations and warranties of the Company contained in any
agreement contemplated hereby ceases to be true and correct in all
material respects; (v) of the receipt by the Company of any
notification with respect to the suspension of the qualification or
exemption from qualification of any of the Registrable Securities for
sale in any jurisdiction, or the initiation or threatening of any
Proceeding for such purpose; and (vi) of the occurrence of any event
that makes any statement made in the Registration Statement or
Prospectus or any document incorporated or deemed to be incorporated
therein by reference untrue in any material respect or that requires
any revisions to the Registration Statement, Prospectus or other
documents so that, in the case of the Registration Statement or the
Prospectus, as the case may be, it will not contain any untrue
statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made,
not misleading.
The Company shall promptly furnish to Special Counsel, without charge, (i) any
correspondence from the Commission or the Commission's staff to the Company or
its representatives relating to any Registration Statement and (ii) promptly
after the same is prepared and filed with the Commission, a copy of any written
response to the correspondence received from the Commission.
KKK. Use its best efforts to avoid the issuance of, or, if issued, obtain
the withdrawal of, (i) any order suspending the effectiveness of the
Registration Statement or (ii) any suspension of the qualification (or
exemption from qualification) of any of the Registrable Securities for
sale in any jurisdiction, at the earliest practicable moment.
LLL. If requested by the Holders of a majority in interest of the
Registrable Securities, (i) promptly incorporate in a Prospectus
supplement or post-effective amendment to the Registration Statement
such information as the Company reasonably agrees should be included
therein and (ii) make all required filings of such Prospectus
supplement or such post-effective amendment as soon as practicable
after the Company has received notification of the matters to be
incorporated in such Prospectus supplement or post-effective
amendment.
<PAGE>
MMM. Furnish to each Holder and any Special Counsel, without charge, at
least one conformed copy of each Registration Statement and each
amendment thereto, including financial statements and schedules, all
documents incorporated or deemed to be incorporated therein by
reference, and all exhibits to the extent requested by such Person
(including those previously furnished or incorporated by reference)
promptly after the filing of such documents with the Commission.
NNN. Promptly deliver to each Holder and any Special Counsel, without
charge, as many copies of the Registration Statement, Prospectus or
Prospectuses (including each form of prospectus) and each amendment or
supplement thereto as such Persons may reasonably request; and the
Company hereby consents to the use of such Prospectus and each
amendment or supplement thereto by each of the selling Holders in
connection with the offering and sale of the Registrable Securities
covered by such Prospectus and any amendment or supplement thereto.
OOO. Prior to any public offering of Registrable Securities, use its best
efforts to register or qualify or cooperate with the selling Holders
and any Special Counsel in connection with the registration or
qualification (or exemption from such registration or qualification)
of such Registrable Securities for offer and sale under the securities
or Blue Sky laws of such jurisdictions within the United States as any
Holder requests in writing, to keep each such registration or
qualification (or exemption therefrom) effective during the
Effectiveness Period and to do any and all other acts or things
necessary or advisable to enable the disposition in such jurisdictions
of the Registrable Securities covered by a Registration Statement;
provided, however, that the Company shall not be required to qualify
generally to do business in any jurisdiction where it is not then so
qualified or to take any action that would subject it to general
service of process in any such jurisdiction where it is not then so
subject or subject the Company to any material tax in any such
jurisdiction where it is not then so subject.
PPP. Cooperate with the Holders to facilitate the timely preparation and
delivery of certificates representing Registrable Securities to be
sold pursuant to a Registration Statement, which certificates shall be
free of all restrictive legends, and to enable such Registrable
Securities to be in such denominations and registered in such names as
any Holder may request at least two (2) Business Days prior to any
sale of Registrable Securities.
QQQ. Upon the occurrence of any event contemplated by Section 3(c)(vi), as
promptly as possible, prepare a supplement or amendment, including a
post-effective amendment, to the Registration Statement or a
supplement to the related Prospectus or any document incorporated or
deemed to be incorporated therein by reference, and file any other
required document so that, as thereafter delivered, neither the
Registration Statement nor such Prospectus will contain an untrue
statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not
misleading.
RRR. Use its best efforts to cause all Registrable Securities relating to
such Registration Statement to be listed on Nasdaq and any other
securities exchange, quotation system, market or over-the-counter
bulletin board, if any, on which similar securities issued by the
Company are then listed as and when required pursuant to the Purchase
Agreement.
<PAGE>
SSS. Comply in all material respects with all applicable rules and
regulations of the Commission and make generally available to its
security holders earning statements satisfying the provisions of
Section 11(a) of the Securities Act and Rule 158 not later than
forty-five (45) days after the end of any twelve (12)-month period (or
ninety (90) days after the end of any twelve (12)-month period if such
period is a fiscal year) commencing on the first day of the first
fiscal quarter of the Company after the effective date of the
Registration Statement, which statement shall conform to the
requirements of Rule 158.
TTT. Require each selling Holder to furnish to the Company information
regarding such Holder and the distribution of such Registrable
Securities as is required by law to be disclosed in the Registration
Statement, and the Company may exclude from such registration the
Registrable Securities of any such Holder who fails to furnish such
information within a reasonable time prior to the filing of each
Registration Statement, supplemented Prospectus and/or amended
Registration Statement.
If the Registration Statement refers to any Holder by name or otherwise as the
holder of any securities of the Company, then such Holder shall have the right
to require (if such reference to such Holder by name or otherwise is not
required by the Securities Act or any similar federal statute then in force) the
deletion of the reference to such Holder in any amendment or supplement to the
Registration Statement filed or prepared subsequent to the time that such
reference ceases to be required.
Each Holder covenants and agrees that (i) it will not sell any Registrable
Securities under the Registration Statement until it has received copies of the
Prospectus as then amended or supplemented as contemplated in Section 3(g) and
notice from the Company that such Registration Statement and any post-effective
amendments thereto have become effective as contemplated by Section 3(c) and
(ii) it and its officers, directors or Affiliates, if any, will comply with the
prospectus delivery requirements of the Securities Act as applicable to them in
connection with sales of Registrable Securities pursuant to the Registration
Statement.
Each Holder agrees by its acquisition of such Registrable Securities that, upon
receipt of a notice from the Company of the occurrence of any event of the kind
described in Section 3(c)(ii), 3(c)(iii), 3(c)(iv), 3(c)(v) or 3(c)(vi), such
Holder will forthwith discontinue disposition of such Registrable Securities
under the Registration Statement until such Holder's receipt of the copies of
the supplemented Prospectus and/or amended Registration Statement contemplated
by Section 3(j), or until it is advised in writing (the "Advice") by the Company
that the use of the applicable Prospectus may be resumed, and, in either case,
has received copies of any additional or supplemental filings that are
incorporated or deemed to be incorporated by reference in such Prospectus or
Registration Statement.
UUU. If (i) there is material non-public information regarding the Company
which the Company's Board of Directors (the "Board") reasonably
determines not to be in the Company's best interest to disclose and
which the Company is not otherwise required to disclose, or (ii) there
is a significant business opportunity (including, but not limited to,
the acquisition or disposition of assets (other than in the ordinary
course of business) or any merger, consolidation, tender offer or
other similar transaction) available to the Company which the Board
reasonably determines not to be in the Company's best interest to
disclose and which the Company would be required to disclose under the
Registration Statement, then the Company may suspend effectiveness of
a registration statement and suspend the sale of Registrable
Securities under a Registration Statement for a period not to exceed
twenty (20) consecutive days, provided that the Company
<PAGE>
may not suspend its obligation under this Section 3(n) for more than
forty-five (45) days in the aggregate during any twelve (12) month
period (each, a "Blackout Period"); provided, however, that no such
suspension shall be permitted for consecutive twenty (20) day periods,
arising out of the same set of facts, circumstances or transactions.
VVV. Within two (2) business days after the Registration Statement which
includes the Registrable Securities is ordered effective by the
Commission, the Company shall deliver, and shall cause legal counsel
for the Company to deliver, to the transfer agent for such Registrable
Securities (with copies to the Holders whose Registrable Securities
are included in such Registration Statement) confirmation that the
Registration Statement has been declared effective by the Commission
in the form attached hereto as Exhibit A.
Registration Expenses
All fees and expenses incident to the performance of or compliance with this
Agreement by the Company shall be borne by the Company whether or not the
Registration Statement is filed or becomes effective and whether or not any
Registrable Securities are sold pursuant to the Registration Statement. The fees
and expenses referred to in the foregoing sentence shall include, without
limitation the following: (i) all registration and filing fees (including,
without limitation, fees and expenses (A) with respect to filings required to be
made with the Nasdaq and each other securities exchange or market on which
Registrable Securities are required hereunder to be listed, (B) with respect to
filings required to be made with the Commission, and (C) in compliance with
state securities or Blue Sky laws (including, without limitation, fees and
disbursements of counsel for the Holders in connection with Blue Sky
qualifications of the Registrable Securities and determination of the
eligibility of the Registrable Securities for investment under the laws of such
jurisdictions as the Holders of a majority of Registrable Securities may
designate)), (ii) printing expenses (including, without limitation, expenses of
printing certificates for Registrable Securities and of printing prospectuses if
the printing of prospectuses is requested by the holders of a majority of the
Registrable Securities included in the Registration Statement), (iii) messenger,
telephone and delivery expenses, (iv) fees and disbursements of counsel for the
Company and Special Counsel for the Holders, in the case of the Special Counsel,
to a maximum amount of $25,000 (v) Securities Act liability insurance, if the
Company so desires such insurance, and (vi) fees and expenses of all other
Persons retained by the Company in connection with the consummation of the
transactions contemplated by this Agreement, including, without limitation, the
Company's independent public accountants (including the expenses of any comfort
letters or costs associated with the delivery by independent public accountants
of a comfort letter or comfort letters). In addition, the Company shall be
responsible for all of its internal expenses incurred in connection with the
consummation of the transactions contemplated by this Agreement (including,
without limitation, all salaries and expenses of its officers and employees
performing legal or accounting duties), the expense of any annual audit, the
fees and expenses incurred in connection with the listing of the Registrable
Securities on any securities exchange as required hereunder.
Indemnification
WWW. Indemnification by the Company. The Company shall, notwithstanding any
termination of this Agreement, indemnify and hold harmless each
Holder, the officers, directors, agents, brokers (including brokers
who offer and sell Registrable Securities as principal as a result of
a pledge or any failure to perform under a margin call of Common
Stock), investment advisors and employees of each of them, each Person
who controls any such Holder (within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act) and the officers,
directors, agents and employees of
<PAGE>
each such controlling Person, and the respective successors, assigns,
estate and personal representatives of each of the foregoing, to the
fullest extent permitted by applicable law, from and against any and
all claims, losses, damages, liabilities, penalties, judgments, costs
(including, without limitation, costs of investigation) and expenses
(including, without limitation, attorneys' fees and expenses)
(collectively, "Losses"), as incurred, arising out of or relating to
any untrue or alleged untrue statement of a material fact contained in
the Registration Statement, any Prospectus or any form of prospectus
or in any amendment or supplement thereto or in any preliminary
prospectus, or arising out of or relating to any omission or alleged
omission of a material fact required to be stated therein or necessary
to make the statements therein (in the case of any Prospectus or form
of prospectus or supplement thereto, in the light of the circumstances
under which they were made) not misleading, except to the extent, but
only to the extent, that such untrue statements or omissions are based
solely upon information regarding such Holder furnished in writing to
the Company by such Holder expressly for use therein, which
information was reasonably relied on by the Company for use therein or
to the extent that such information relates to such Holder or such
Holder's proposed method of distribution of Registrable Securities and
was reviewed and expressly approved in writing by such Holder
expressly for use in the Registration Statement, such Prospectus or
such form of Prospectus or in any amendment or supplement thereto. The
Company shall notify the Holders promptly of the institution, threat
or assertion of any Proceeding of which the Company is aware in
connection with the transactions contemplated by this Agreement. Such
indemnity shall remain in full force and effect regardless of any
investigation made by or on behalf of an Indemnified Party (as defined
in Section 5(c) hereof) and shall survive the transfer of the
Registrable Securities by the Holders.
XXX. Indemnification by Holders. Each Holder shall, severally and not
jointly, indemnify and hold harmless the Company, the directors,
officers, agents and employees, each Person who controls the Company
(within the meaning of Section 15 of the Securities Act and Section 20
of the Exchange Act), and the directors, officers, agents or employees
of such controlling Persons, and the respective successors, assigns,
estate and personal representatives of each of the foregoing, to the
fullest extent permitted by applicable law, from and against all
Losses, as incurred, arising solely out of or based solely upon any
untrue statement of a material fact contained in the Registration
Statement, any Prospectus, or any form of prospectus, or arising
solely out of or based solely upon any omission of a material fact
required to be stated therein or necessary to make the statements
therein (in the case of any Prospectus or form of prospectus or
supplement thereto, in the light of the circumstances under which they
were made) not misleading, to the extent, but only to the extent, that
such untrue statement or omission is contained in or omitted from any
information so furnished in writing by such Holder to the Company
specifically for inclusion in the Registration Statement or such
Prospectus and that such information was reasonably relied upon by the
Company for use in the Registration Statement, such Prospectus or such
form of prospectus or to the extent that such information relates to
such Holder or such Holder's proposed method of distribution of
Registrable Securities and was reviewed and expressly approved in
writing by such Holder expressly for use in the Registration
Statement, such Prospectus or such form of Prospectus Supplement.
Notwithstanding anything to the contrary contained herein, the Holder
shall be liable under this Section 5(b) for only that amount
<PAGE>
as does not exceed the net proceeds to such Holder as a result of the
sale of Registrable Securities pursuant to such Registration
Statement.
YYY. Conduct of Indemnification Proceedings. If any Proceeding shall be
brought or asserted against any Person entitled to indemnity hereunder
(an "Indemnified Party"), such Indemnified Party promptly shall notify
the Person from whom indemnity is sought (the "Indemnifying Party) in
writing, and the Indemnifying Party shall assume the defense thereof,
including the employment of counsel reasonably satisfactory to the
Indemnified Party and the payment of all fees and expenses incurred in
connection with defense thereof; provided, that the failure of any
Indemnified Party to give such notice shall not relieve the
Indemnifying Party of its obligations or liabilities pursuant to this
Agreement, except (and only) to the extent that it shall be finally
determined by a court of competent jurisdiction (which determination
is not subject to appeal or further review) that such failure shall
have proximately and materially adversely prejudiced the Indemnifying
Party.
An Indemnified Party shall have the right to employ separate counsel in any such
Proceeding and to participate in the defense thereof, but the fees and expenses
of such counsel shall be at the expense of such Indemnified Party or Parties
unless: (1) the Indemnifying Party has agreed in writing to pay such fees and
expenses; or (2) the Indemnifying Party shall have failed promptly to assume the
defense of such Proceeding and to employ counsel reasonably satisfactory to such
Indemnified Party in any such Proceeding; or (3) the named parties to any such
Proceeding (including any impleaded parties) include both such Indemnified Party
and the Indemnifying Party, and such Indemnified Party shall have been advised
by counsel that a conflict of interest is likely to exist if the same counsel
were to represent such Indemnified Party and the Indemnifying Party (in which
case, if such Indemnified Party notifies the Indemnifying Party in writing that
it elects to employ separate counsel at the expense of the Indemnifying Party,
the Indemnifying Party shall not have the right to assume the defense thereof
and such counsel shall be at the expense of the Indemnifying Party). The
Indemnifying Party shall not be liable for any settlement of any such Proceeding
effected without its written consent, which consent shall not be unreasonably
withheld. No Indemnifying Party shall, without the prior written consent of the
Indemnified Party, effect any settlement of any pending Proceeding in respect of
which any Indemnified Party is a party, unless such settlement includes an
unconditional release of such Indemnified Party from all liability on claims
that are the subject matter of such Proceeding.
All fees and expenses of the Indemnified Party (including reasonable fees and
expenses to the extent incurred in connection with investigating or preparing to
defend such Proceeding in a manner not inconsistent with this Section) shall be
paid to the Indemnified Party, as incurred, within ten (10) Business Days of
written notice thereof to the Indemnifying Party (regardless of whether it is
ultimately determined that an Indemnified Party is not entitled to
indemnification hereunder; provided, that the Indemnifying Party may require
such Indemnified Party to undertake to reimburse all such fees and expenses to
the extent it is finally judicially determined that such Indemnified Party is
not entitled to indemnification hereunder).
ZZZ. Contribution. If a claim for indemnification under Section 5(a) or
5(b) is unavailable to an Indemnified Party because of a failure or
refusal of a governmental authority to enforce such indemnification in
accordance with its terms (by reason of public policy or otherwise),
then each Indemnifying Party, in lieu of indemnifying such Indemnified
Party, shall contribute to the amount paid or payable by such
Indemnified Party as a result of such Losses, in such proportion as is
appropriate to reflect the relative fault of the Indemnifying Party
and Indemnified Party in connection with the actions,
<PAGE>
statements or omissions that resulted in such Losses as well as any
other relevant equitable considerations. The relative fault of such
Indemnifying Party and Indemnified Party shall be determined by
reference to, among other things, whether any action in question,
including any untrue or alleged untrue statement of a material fact or
omission or alleged omission of a material fact, has been taken or
made by, or relates to information supplied by, such Indemnifying,
Party or Indemnified Party, and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent
such action, statement or omission. The amount paid or payable by a
party as a result of any Losses shall be deemed to include, subject to
the limitations set forth in Section 5(c), any reasonable attorneys'
or other reasonable fees or expenses incurred by such party in
connection with any Proceeding to the extent such party would have
been indemnified for such fees or expenses if the indemnification
provided for in this Section was available to such party in accordance
with its terms. Notwithstanding anything to the contrary contained
herein, the Holder shall be liable or required to contribute under
this Section 5(c) for only that amount as does not exceed the net
proceeds to such Holder as a result of the sale of Registrable
Securities pursuant to such Registration Statement.
The parties hereto agree that it would not be just and equitable if contribution
pursuant to this Section 5(d) were determined by pro rata allocation or by any
other method of allocation that does not take into account the equitable
considerations referred to in the immediately preceding paragraph. No Person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) shall be entitled to contribution from any Person who was
not guilty of such fraudulent misrepresentation. The indemnity and contribution
agreements contained in this Section are in addition to any liability that the
Indemnifying Parties may have to the Indemnified Parties
Rule 144.
As long as any Holder owns Common Shares, Warrants or Warrant Shares, the
Company covenants to timely file (or obtain extensions in respect thereof and
file within the applicable grace period) all reports required to be filed by the
Company after the date hereof pursuant to Section 13(a) or 15(d) of the Exchange
Act and to promptly furnish the Holders with true and complete copies of all
such filings. As long as any Holder owns Common Shares, Warrants or Warrant
Shares, if the Company is not required to file reports pursuant to Section 13(a)
or 15(d) of the Exchange Act, it will prepare and furnish to the Holders and
make publicly available in accordance with Rule 144(c) promulgated under the
Securities Act annual and quarterly financial statements, together with a
discussion and analysis of such financial statements in form and substance
substantially similar to those that would otherwise be required to be included
in reports required by Section 13(a) or 15(d) of the Exchange Act, as well as
any other information required thereby, in the time period that such filings
would have been required to have been made under the Exchange Act. The Company
further covenants that it will take such further action as any Holder may
reasonably request, all to the extent required from time to time to enable such
Person to sell Conversion Shares and Warrant Shares without registration under
the Securities Act within the limitation of the exemptions provided by Rule 144
promulgated under the Securities Act, including providing any legal opinions of
counsel to the Company referred to in the Purchase Agreement. Upon the request
of any Holder, the Company shall deliver to such Holder a written certification
of a duly authorized officer as to whether it has complied with such
requirements.
Miscellaneous.
AAAA. Remedies. In the event of a breach by the Company or by a Holder, of
any of their obligations under this Agreement, each Holder or the
Company, as the case may be, in
<PAGE>
addition to being entitled to exercise all rights granted by law and
under this Agreement, including recovery of damages, will be
entitled to specific performance of its rights under this Agreement.
The Company and each Holder agree that monetary damages would not
provide adequate compensation for any losses incurred by reason of a
breach by it of any of the provisions of this Agreement and hereby
further agrees that, in the event of any action for specific
performance in respect of such breach, it shall waive the defense
that a remedy at law would be adequate.
BBBB. No Inconsistent Agreements. Neither the Company nor any of its
subsidiaries has, as of the date hereof entered into and currently
in effect, nor shall the Company or any of its subsidiaries, on or
after the date of this Agreement, enter into any agreement with
respect to its securities that is inconsistent with the rights
granted to the Holders in this Agreement or otherwise conflicts with
the provisions hereof. Neither the Company nor any of its
subsidiaries has previously entered into any agreement currently in
effect granting any registration rights with respect to any of its
securities to any Person, except as set forth on Schedule 7(c)
hereto. Without limiting the generality of the foregoing, without
the written consent of the Holders of a majority of the then
outstanding Registrable Securities, the Company shall not grant to
any Person the right to request the Company to register any
securities of the Company under the Securities Act unless the rights
so granted are subject in all respects to the prior rights in full
of the Holders set forth herein, and are not otherwise in conflict
with the provisions of this Agreement.
CCCC. No Piggyback on Registrations. Neither the Company nor any of its
security holders (other than the Holders in such capacity pursuant
hereto and the security holders listed on Schedule 7(c) hereto) may
include securities of the Company in the Registration Statement, and
the Company shall not after the date hereof enter into any agreement
providing such right to any of its security holders, unless the
right so granted is subject in all respects to the prior rights in
full of the Holders set forth herein, and is not otherwise in
conflict with the provisions of this Agreement.
DDDD. Piggy-Back Registrations. If at any time when there is not an
effective Registration Statement covering (i) Common Shares or (ii)
Warrant Shares, the Company shall determine to prepare and file with
the Commission a registration statement relating to an offering for
its own account or the account of others under the Securities Act of
any of its equity securities, other than on Form S-4 or Form S-8
(each as promulgated under the Securities Act) or its then
equivalents relating to equity securities to be issued solely in
connection with any acquisition of any entity or business or equity
securities issuable in connection with stock option or other
employee benefit plans, the Company shall send to each holder of
Registrable Securities written notice of such determination and, if
within thirty (30) days after receipt of such notice, any such
holder shall so request in writing (which request shall specify the
Registrable Securities intended to be disposed of by the Holders),
the Company will cause the registration under the Securities Act of
all Registrable Securities which the Company has been so requested
to register by the holder, to the extent requisite to permit the
disposition of the Registrable Securities so to be registered,
provided that if at any time after giving written notice of its
intention to register any securities and prior to the effective date
of the registration statement filed in connection with such
registration, the Company shall determine for any reason not to
register or to delay registration of such securities, the Company
may, at its election, give written notice of such determination to
such holder and, thereupon, (i) in the case of a determination not
to register, shall be relieved of its obligation to register any
<PAGE>
Registrable Securities in connection with such registration (but not
from its obligation to pay expenses in accordance with Section 4
hereof), and (ii) in the case of a determination to delay
registering, shall be permitted to delay registering any Registrable
Securities being registered pursuant to this Section 7(d) for the
same period as the delay in registering such other securities. The
Company shall include in such registration statement all or any part
of such Registrable Securities such holder requests to be
registered; provided, however, that the Company shall not be
required to register any Registrable Securities pursuant to this
Section 7(d) that are eligible for sale pursuant to Rule 144(k) of
the Securities Act. In the case of an underwritten public offering,
if the managing underwriter(s) or underwriter(s) should reasonably
object to the inclusion of the Registrable Securities in such
registration statement, then if the Company after consultation with
the managing underwriter should reasonably determine that the
inclusion of such Registrable Securities, would materially adversely
affect the offering contemplated in such registration statement, and
based on such determination recommends inclusion in such
registration statement of fewer or none of the Registrable
Securities of the Holders, then (x) the number of Registrable
Securities of the Holders included in such registration statement
shall be reduced pro-rata among such Holders (based upon the number
of Registrable Securities requested to be included in the
registration), if the Company after consultation with the
underwriter(s) recommends the inclusion of fewer Registrable
Securities, or (y) none of the Registrable Securities of the Holders
shall be included in such registration statement, if the Company
after consultation with the underwriter(s) recommends the inclusion
of none of such Registrable Securities; provided, however, that if
securities are being offered for the account of other persons or
entities as well as the Company, such reduction shall not represent
a greater fraction of the number of Registrable Securities intended
to be offered by the Holders than the fraction of similar reductions
imposed on such other persons or entities (other than the Company).
EEEE. Failure to File Registration Statement and Other Events. The Company
and the Holders agree that the Holders will suffer damages if the
Registration Statement is not filed on or prior to the Filing Date
and not declared effective by the Commission on or prior to the
Effectiveness Date and maintained in the manner contemplated herein
during the Effectiveness Period or if certain other events occur.
The Company and the Holders further agree that it would not be
feasible to ascertain the extent of such damages with precision.
Accordingly, if (i) the Registration Statement is not filed on or
prior to the Filing Date, or is not declared effective by the
Commission on or prior to the Effectiveness Date (or in the event an
additional Registration Statement is filed because the actual number
of Common Shares and Common Stock into which the Warrants are
exercisable exceeds the number of shares of Common Stock initially
registered is not filed and declared effective within the time
periods set forth in Section 2), or (ii) the Company fails to file
with the Commission a request for acceleration in accordance with
Rule 12dl-2 promulgated under the Exchange Act within five (5)
Business Days of the date that the Company is notified (orally or in
writing, whichever is earlier) by the Commission that a Registration
Statement will not be "reviewed," or not subject to further review,
or (iii) the Registration Statement is filed with and declared
effective by the Commission but thereafter ceases to be effective as
to all Registrable Securities at any time prior to the expiration of
the Effectiveness Period, without being succeeded immediately by a
subsequent Registration Statement filed with and declared effective
by the Commission, or (iv) trading in the Common Stock shall be
suspended or if the
<PAGE>
Common Stock is delisted from Nasdaq for any reason for more than
three (3) Business Days in the aggregate, or (v) the conversion
rights of the Holders are suspended for any reason, including by the
Company, or (vi) the Company breaches in a material respect any
covenant or other material term or condition to this Agreement, the
Certificate of Designation, the Purchase Agreement (other than a
representation or warranty contained therein) or any other
agreement, document, certificate or other instrument delivered in
connection with the transactions contemplated hereby and thereby,
and such breach continues for a period of thirty days after written
notice thereof to the Company, or (vii) the Company has breached
Section 3(n) of this Agreement (any such failure or breach being
referred to as an "Event"), the Company shall pay as liquidated
damages for such failure and not as a penalty (the "Liquidated
Damages") to each Holder an amount equal to one percent (1%) of such
Holder's pro rata share of the purchase price paid by all Holders
for all shares of Common Shares purchased and then outstanding
pursuant to the Purchase Agreement for the initial thirty (30) day
period following the Event until the applicable Event has been
cured, which amount shall be pro rated for any period less than
thirty (30) days, and two percent (2%) of such Holder's pro rata
share of the purchase price paid by all Holders for all shares of
Common Shares purchased and then outstanding pursuant to the
Purchase Agreement for each thirty (30) day period thereafter until
the applicable Event has been cured, which shall be pro rated for
any period less than thirty (30) days (the "Periodic Amount").
Payments to be made pursuant to this Section 7(e) shall be due and
payable immediately upon demand at the option of the Holders in
cash. The parties agree that the Periodic Amount represents a
reasonable estimate on the part of the parties, as of the date of
this Agreement, of the amount of damages that may be incurred by the
Holders if the Registration Statement is not filed on or prior to
the Filing Date or has not been declared effective by the Commission
on or prior to the Effectiveness Date and maintained in the manner
contemplated herein during the Effectiveness Period or if any other
Event as described herein has occurred.
FFFF. Specific Enforcement, Consent to Jurisdiction.
1. The Company and the Holders acknowledge and agree that
irreparable damage would occur in the event that any of the
provisions of this Registration Rights Agreement or the
Purchase Agreement were not performed in accordance with their
specific terms or were otherwise breached. It is accordingly
agreed that the parties shall be entitled to an injunction or
injunctions to prevent or cure breaches of the provisions of
this Registration Rights Agreement or the Purchase Agreement
and to enforce specifically the terms and provisions hereof or
thereof, this being in addition to any other remedy to which
any of them may be entitled by law or equity.
2. Each of the Company and the Purchasers (i) hereby irrevocably
submits to the jurisdiction of the United States District
Court for the Southern District of New York and the courts of
the State of New York located in New York county for the
purposes of any suit, action or proceeding arising out of or
relating to this Agreement or the Purchase Agreement and (ii)
hereby waives, and agrees not to assert in any such suit,
action or proceeding, any claim that it is not personally
subject to the jurisdiction of such court, that
<PAGE>
the suit, action or proceeding is brought in an inconvenient forum
or that the venue of the suit, action or proceeding is improper.
Each of the Company and the Purchasers consents to process being
served in any such suit, action or proceeding by mailing a copy
thereof to such party at the address in effect for notices to it
under this Agreement and agrees that such service shall constitute
good and sufficient service of process and notice thereof. Nothing
in this Section 7(f) shall affect or limit any right to serve
process in any other manner permitted by law.
GGGG. Amendments and Waivers. The provisions of this Agreement,
including the provisions of this sentence, may not be amended,
modified or supplemented, and waivers or consents to
departures from the provisions hereof may not be given, unless
the same shall be in writing and signed by the Company and
each of the Holders. Notwithstanding the foregoing, a waiver
or consent to depart from the provisions hereof with respect
to a matter that relates exclusively to the rights of Holders
and that does not directly or indirectly affect the rights of
other Holders may be given by Holders of at least a majority
of the Registrable Securities to which such waiver or consent
relates; provided, however, that the provisions of this
sentence may not be amended, modified, or supplemented except
in accordance with the provisions of the immediately preceding
sentence.
HHHH. Notices. Any and all notices or other communications or
deliveries required or permitted to be provided hereunder
shall be in writing and shall be deemed given and effective on
the earlier of (i) the date of transmission, if such notice or
communication is delivered via facsimile at the facsimile
telephone number specified for notice prior to 5:00 p.m.,
eastern standard time, on a Business Day, (ii) the Business
Day after the date of transmission, if such notice or
communication is delivered via facsimile at the facsimile
telephone number specified for notice later than 5:00 p.m.,
eastern standard time, on any date and earlier than 11:59
p.m., eastern time, on such date, (iii) the Business Day
following the date of mailing, if sent by nationally
recognized overnight courier service or (iv) actual receipt by
the party to whom such notice is required to be given. The
addresses for such communications shall be with respect to
each Holder at its address set forth under its name on
Schedule A attached hereto, or with respect to the
Company, addressed to:
Virtual Communities, Inc.
589 8th Avenue, 7th Floor
New York, New York 10018
Attention: Avi Moskowitz
Facsimile no.: (212) 214-0550
or to such other address or addresses or facsimile number or numbers as any such
party may most recently have designated in writing to the other parties hereto
by such notice. Copies of notices to any Holder shall be sent to the addresses
listed on Schedule A attached hereto, if applicable. Copies of notices to the
Company shall be sent to Wuersch & Gering LLP, 11 Hanover Square, 21st Floor,
New York, New York 10005, Attention: Travis Gering, Esq., Facsimile no.: (212)
509-9559. Copies of notices to the Holders shall be sent to (i) Parker Chapin
LLP, The Chrysler Building, 405 Lexington Avenue, New York, New York 10174,
Attention: Christopher S. Auguste, Esq., Facsimile no.: (212) 704-6288.
IIII. Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties and their successors and
permitted assigns and shall inure to the benefit of each Holder and
its successors and assigns. The Company may not assign this
<PAGE>
Agreement or any of its rights or obligations hereunder without the
prior written consent of each Holder. Each Purchaser may assign its
rights hereunder in the manner and to the Persons as permitted under
the Purchase Agreement.
JJJJ. Assignment of Registration Rights. The rights of each Holder
hereunder, including the right to have the Company register for
resale Registrable Securities in accordance with the terms of this
Agreement, shall be automatically assignable by each Holder to any
transferee of such Holder of all or a portion of the shares of
Registrable Securities if: (i) the Holder agrees in writing with the
transferee or assignee to assign such rights, and a copy of such
agreement is furnished to the Company within a reasonable time after
such assignment, (ii) the Company is, within a reasonable time after
such transfer or assignment, furnished with written notice of (a)
the name and address of such transferee or assignee, and (b) the
securities with respect to which such registration rights are being
transferred or assigned, (iii) following such transfer or assignment
the further disposition of such securities by the transferee or
assignees is restricted under the Securities Act and applicable
state securities laws, (iv) at or before the time the Company
receives the written notice contemplated by clause (ii) of this
Section, the transferee or assignee agrees in writing with the
Company to be bound by all of the provisions of this Agreement, and
(v) such transfer shall have been made in accordance with the
applicable requirements of the Purchase Agreement. In addition, each
Holder shall have the right to assign its rights hereunder to any
other Person with the prior written consent of the Company, which
consent shall not be unreasonably withheld. The rights to assignment
shall apply to the Holders (and to subsequent) successors and
assigns.
KKKK. Counterparts. This Agreement may be executed in any number of
counterparts, each of which when so executed shall be deemed to be
an original and, all of which taken together shall constitute one
and the same Agreement. In the event that any signature is delivered
by facsimile transmission, such signature shall create a valid
binding obligation of the party executing (or on whose behalf such
signature is executed) the same with the same force and effect as if
such facsimile signature were the original thereof.
LLLL. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York, without regard to
principles of conflicts of law thereof. This Agreement shall not be
interpreted or construed with any presumption against the party
causing this Agreement to be drafted.
MMMM. Cumulative Remedies. The remedies provided herein are cumulative and
not exclusive of any remedies provided by law.
NNNN. Severability. If any term, provision, covenant or restriction of
this Agreement is held to be invalid, illegal, void or unenforceable
in any respect, the remainder of the terms, provisions, covenants
and restrictions set forth herein shall remain in full force and
effect and shall in no way be affected, impaired or invalidated, and
the parties hereto shall use their reasonable efforts to find and
employ an alternative means to achieve the same or substantially the
same result as that contemplated by such term, provision, covenant
or restriction. It is hereby stipulated and declared to be the
intention of the parties that they would have executed the remaining
terms, provisions, covenants and
<PAGE>
restrictions without including any of such that may be hereafter
declared invalid, illegal, void or unenforceable.
OOOO. Headings. The headings herein are for convenience only, do not
constitute a part of this Agreement and shall not be deemed to limit
or affect any of the provisions hereof.
PPPP. Shares Held by the Company and its Affiliates. Whenever the consent
or approval of Holders of a specified percentage of Registrable
Securities is required hereunder, Registrable Securities held by the
Company or its Affiliates (other than any Holder or transferees or
successors or assigns thereof if such Holder is deemed to be an
Affiliate solely by reason of its holdings of such Registrable
Securities) shall not be counted in determining whether such consent
or approval was given by the Holders of such required percentage and
shall not be counted as outstanding.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Registration Rights
Agreement to be duly executed by their respective authorized persons as of the
date first indicated above.
VIRTUAL COMMUNITIES, INC.
By:
--------------------------------------
Name:
Title:
MAGELLAN INTERNATIONAL, LTD.
By:
--------------------------------------
Name:
Title:
ASPEN INTERNATIONAL, LTD.
By:
--------------------------------------
Name:
Title:
ACQUA WELLINGTON VALUE FUND, LTD.
By:
--------------------------------------
Name: Anthony L.M. Inder Rieden
Title:
THE CUTTYHUNK FUND LIMITED
By:
--------------------------------------
Name:
Title:
<PAGE>
EXHIBIT A
FORM OF NOTICE OF EFFECTIVENESS
OF REGISTRATION STATEMENT
[TRANSFER AGENT]
[ADDRESS]
Attn: _____________
Re: Virtual Communities, Inc.
Ladies and Gentlemen:
We are counsel to Virtual Communities, Inc., a Delaware corporation (the
"Company"), and have represented the Company in connection with that certain
Common Stock and Warrants Purchase Agreement (the "Purchase Agreement"), dated
as of March 31, 2000, by and among the Company and the purchasers named therein
(collectively, the "Holders") pursuant to which the Company issued to the
Holders shares (the "Common Shares") of its Common Stock, par value $.01 per
share (the "Common Stock"), and issued warrants (the "Warrants") to purchase
shares of the Company's Common Stock. Pursuant to the Purchase Agreement, the
Company has also entered into a Registration Rights Agreement with the Holders
(the "Registration Rights Agreement"), dated as of March 31, 2000, pursuant to
which the Company agreed, among other things, to register the Registrable
Securities (as defined in the Registration Rights Agreement), including the
Common Shares and the shares of Common Stock issuable upon exercise of the
Warrants, under the Securities Act of 1933, as amended (the "1933 Act"). In
connection with the Company's obligations under the Registration Rights
Agreement, on ________________, 2000, the Company filed a Registration Statement
on Form ___ (File No. 333-________) (the "Registration Statement") with the
Securities and Exchange Commission (the "SEC") relating to the resale of the
Registrable Securities which names each of the present Holders as a selling
stockholder thereunder.
In connection with the foregoing, we advise you that a member of the SEC's
staff has advised us by telephone that the SEC has entered an order declaring
the Registration Statement effective under the 1933 Act at [ENTER TIME OF
EFFECTIVENESS] on [ENTER DATE OF EFFECTIVENESS] and we have no knowledge, after
telephonic inquiry of a member of the SEC's staff, that any stop order
suspending its effectiveness has been issued or that any proceedings for that
purpose are pending before, or threatened by, the SEC and, accordingly, the
Registrable Securities are available for resale under the 1933 Act in the manner
specified in, and pursuant to the terms of the Registration Statement.
Very truly yours,
By:
cc: [LIST NAMES OF HOLDERS]
<PAGE>
SCHEDULE A to the
REGISTRATION RIGHTS AGREEMENT
FOR VIRTUAL COMMUNITIES, INC.
Names and Address of Purchasers
Magellan International, Ltd.
Charlotte House
Charlotte Street
Nassau, Bahamas
Tel. no.: 242-323-8884
Fax no.: 242-323-7918
Attn: Anthony L.M. Inder Rieden
Aspen International, Ltd.
Charlotte House
Charlotte Street
Nassau, Bahamas
Tel. no.: 242-323-8884
Fax no.: 242-323-7918
Attn: Anthony L.M. Inder Rieden
Acqua Wellington Value Fund Ltd.
c/o MeesPierson Fund Services
(Bahamas) Limited
Montague Sterling Centre
P.O. Box SS-6238
East Bay Street
Nassau, Bahamas
Tel. no.: 242-394-2700
Fax no.: 242-394-8348
Attn: Anthony L.M. Inder Rieden
The Cuttyhunk Fund Limited
c/o Optima Fund Management
1285 Avenue of Americas
New York, NY 10019
Tel. no.: 212-484-3040
Fax no.: 212-484-3001
Attn: Geoffrey Lewis
<PAGE>
SCHEDULE 7(c) to the
REGISTRATION RIGHTS AGREEMENT
FOR VIRTUAL COMMUNITIES, INC.
<PAGE>
Exhibit 10(47)
COMMON STOCK AND WARRANTS PURCHASE AGREEMENT
Dated as of March 31, 2000
among
VIRTUAL COMMUNITIES, INC.
and
THE PURCHASERS LISTED ON EXHIBIT A
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I Purchase and Sale of Stock 225
ARTICLE II Representations and Warranties 226
Section 2.1 Representations and Warranties of the Company 226
Section 2.2 Representations and Warranties of the Purchasers
ARTICLE III Covenants 243
Section 3.1 Securities Compliance. 243
Section 3.2 Registration and Listing 244
Section 3.3 Inspection Rights 244
Section 3.4 Compliance with Laws 244
Section 3.5 Keeping of Records and Books of Account 245
Section 3.6 Reporting Requirements 245
Section 3.7 Amendments 245
Section 3.8 Other Agreements 245
Section 3.9 Distributions 245
Section 3.10 Intentionally Omitted. 245
Section 3.11 Intentionally Omitted. 245
Section 3.12 Intentionally Omitted. 246
Section 3.13 Subsequent Financing 246
Section 3.14 Reservation of Shares 246
Section 3.15 Transfer Agent Instructions 246
ARTICLE IV Conditions 247
Section 4.1 Conditions Precedent to the Obligation of the Company
to Sell the Shares at Closing 247
Section 4.2 Conditions Precedent to the Obligation of the Purchasers
to Purchase the Shares at the Closing 248
ARTICLE V Registration Rights 251
ARTICLE VI Stock Certificate Legend 251
Section 6.1 Legend 251
ARTICLE VII Termination 252
Section 7.1 Termination by Mutual Consent 252
Section 7.2 Other Termination 252
Section 7.3 Termination of Closing 252
Section 7.4 Effect of Termination 252
ARTICLE VIII Indemnification 253
Section 8.1 General Indemnity 253
Section 8.2 Indemnification Procedure 253
ARTICLE IX Miscellaneous 254
Section 9.1 Fees and Expenses 254
Section 9.2 Specific Enforcement, Consent to Jurisdiction. 254
Section 9.3 Entire Agreement; Amendment 255
Section 9.4 Notices 256
Section 9.5 Waivers 257
Section 9.6 Headings 257
<PAGE>
Section 9.7 Successors and Assigns 257
Section 9.8 No Third Party Beneficiaries 257
Section 9.9 Governing Law 257
Section 9.10 Survival 257
Section 9.11 Counterparts 257
Section 9.12 Publicity 257
Section 9.13 Severability 257
Section 9.14 Further Assurances 258
<PAGE>
COMMON STOCK AND WARRANTS PURCHASE AGREEMENT
This COMMON STOCK AND WARRANTS PURCHASE AGREEMENT (the "Agreement") is
dated as of March 31, 2000, by and among Virtual Communities, Inc., a
corporation organized under the laws of the State of Delaware (the "Company")
(NASDAQ: "VCIX"), and each of the Purchasers whose names are set forth on
Exhibit A hereto (individually, a "Purchaser" and collectively, the
"Purchasers").
WHEREAS, the parties desire that, upon the terms and subject to the
conditions contained herein, the Company shall issue and sell to the Purchasers
and the Purchasers shall purchase up to $3,000,000 of the Company's common
stock, .$01 par value per share (the "Common Stock"), and warrants to purchase
shares of Common Stock (singularly a "Warrant" and collectively, the
"Warrants"), in substantially the form attached hereto as Exhibit B; and;
WHEREAS, such purchase and sale will be made in reliance upon the
provisions of Section 4(2) and Rule 901 of Regulation S ("Regulation S") of the
United States Securities Act of 1933 as amended, and regulations promulgated
thereunder (the "Securities Act"), or upon such other exemption from the
registration requirements of the Securities Act as may be available with respect
to any or all of the purchases of Common Stock and Warrants to be made
hereunder.
The parties hereto agree as follows:
Purchase and Sale of Stock
QQQQ. Purchase and Sale of Common Shares. Upon the following terms and
subject to the conditions contained herein, the Company shall issue
and sell to the Purchasers and each of the Purchasers, severally and
not jointly shall purchase from the Company 517,800 shares of Common
Stock (the "Common Shares"), at a price per share equal to $5.79375.
The aggregate price of the Common Shares shall be $3,000,000.
RRRR. The Shares. The Company has authorized and has reserved and
covenants to continue to reserve, free of preemptive rights and
other similar contractual rights of stockholders, a sufficient
number of its authorized but unissued shares of its Common Stock, to
effect the issuance of the Common Shares and exercise of the
Warrants. Any shares of Common Stock issuable upon exercise of the
Warrants (and such shares when issued) are herein referred to as the
"Warrant Shares". The Common Shares and the Warrant Shares are
sometimes collectively referred to as the "Shares".
SSSS. Purchase Prices, Execution and Closing. In consideration of and in
express reliance upon the representations, warranties, covenants,
terms and conditions of this Agreement, the Company agrees to issue
and sell to the Purchasers and the Purchasers, severally but not
jointly, agree to purchase the Common Shares
<PAGE>
and Warrants exercisable for that number of Warrant Shares set forth
opposite their respective names on Exhibit A. The aggregate purchase price
of the Common Shares and the Warrants being acquired by each Purchaser is
set forth opposite such Purchaser's name on Exhibit A (for each such
Purchasers, a "Purchase Price", and collectively referred to as the
"Purchase Prices"). The closing of the purchase and sale of the Common
Shares and Warrants (the "Closing") to be acquired by the Purchasers from
the Company shall take place at the offices of Parker Chapin LLP, The
Chrysler Building, 405 Lexington Avenue, New York, New York 10174 at 10:00
a.m. E.S.T. on (i) the date on which the last to be fulfilled or waived of
the conditions set forth in Article IV hereof and applicable to the
Closing shall be fulfilled or waived in accordance herewith or (ii) such
other time and place or on such date as the Purchasers and the Company may
agree upon (the " Closing Date").
Escrow. On or before the Closing Date, (a) the Company shall execute and deliver
to the escrow agent (the "Escrow Agent") identified in the Escrow Agreement
attached hereto as Exhibit C (the "Escrow Agreement") all applicable
agreements, documents, instruments and writings required pursuant to
Section 4.2 herein (collectively, the "Closing Documents"), to be delivered
by the Company including, without limitation, certificates for the number
of Common Shares set forth opposite each Purchaser's name on Exhibit A, as
applicable, registered in such Purchaser's name and such Purchaser's
Warrants and (b) each of the Purchasers shall pay by wire transfer of
immediately available funds into escrow in accordance with the Escrow
Agreement such Purchaser's Purchase Price, as applicable, and execute and
deliver all applicable agreements, documents, instruments and writings
required pursuant to Section 4.1, to be delivered by such Purchaser. In
regard to the Closing, the Escrow Agent shall give notice (by telephone or
other means) (an "Escrow Agent Notice") to the parties hereto when the
Escrow Agent has received all of the Closing Documents and wire transfer
the funds constituting the Purchase Prices and deliver the other Closing
Documents to the Company pursuant to the terms of the Escrow Agreement. As
soon thereafter as is practicable on the Closing Date, the Escrow Agent
shall deliver the Company's Closing Documents to the Purchasers, including
applicable certificates for the Common Shares and the Warrants.
TTTT. Warrants. The Warrants shall be divided into separate Warrants and
shall be designated "A" Warrant and "B" Warrant. The initial
aggregate number of shares of Common Stock issuable upon exercise of
the A Warrants and B Warrants shall be equal to 129,450 and 500,000,
respectively. Each of the A Warrants shall be exercisable for three
(3) years from the Closing Date and each of the B Warrants shall be
exercisable until four (4) months from the Effectiveness Date (as
defined in Section 3.2 hereof).
Representations and Warranties
UUUU. Representations and Warranties of the Company. In order to induce
the Purchasers to enter into this Agreement and to purchase the
Shares, the Company hereby, makes the following representations and
warranties to the Purchasers,
<PAGE>
except as set forth in the Company's disclosure schedule delivered
with this Agreement:
1. Organization, Good Standing and Power. The Company is a
corporation duly incorporated, validly existing and in good
standing under the laws of the State of Delaware and has the
requisite corporate power to own, lease and operate its
properties and assets and to conduct its business as it is now
being conducted and to enter into this Agreement and to
perform its obligations hereunder. The Company does not have
any subsidiaries or own securities of any kind in any other
entity, except as set forth in Schedule 2.1(g) hereto. The
Company and each subsidiary is duly qualified as a foreign
corporation to do business and is in good standing in every
jurisdiction in which the nature of the business conducted or
property owned by it makes such qualification necessary except
for any jurisdiction(s) (alone or in the aggregate) in which
the failure to be so qualified will not have a Material
Adverse Effect (as defined hereinafter) on the Company's
financial condition. For the purposes of this Agreement,
"Material Adverse Effect" means any adverse effect on the
business, operations, properties, prospects, assets or
financial condition of the Company or its subsidiaries and
which is material to such entity or other entities controlling
or controlled by such entity or which is likely to materially
hinder the performance by the Company of its obligation
hereunder and under the other Transaction Documents (as
defined in Section 2.1(b) hereof).
2. Authorization; Enforcement. The Company has the requisite
corporate power and authority to enter into and perform this
Agreement, the Escrow Agreement, the Registration Rights
Agreement attached hereto as Exhibit D (the "Registration
Rights Agreement"), the Transfer Agent Instructions (as
defined in Section 3.14 hereof) and the Warrants
(collectively, the "Transaction Documents") and to issue and
sell the Shares in accordance with the terms hereof and the
Warrants. The execution, delivery and performance of the
Transaction Documents by the Company and the consummation by
it of the transactions contemplated hereby and thereby have
been duly and validly authorized by all necessary corporate
action, and no further consent or authorization of the Company
or its Board of Directors or stockholders is required. This
Agreement has been duly executed and delivered by the Company.
The Registration Rights Agreement will have been duly executed
and delivered by the Company on or before the Closing Date.
Each of the Transaction Documents constitutes, or shall
constitute when executed and delivered, a valid and binding
obligation of the Company enforceable against the Company in
accordance with its terms, except as such enforceability may
be limited by applicable bankruptcy,
<PAGE>
insolvency, reorganization, moratorium, liquidation,
conservatorship, receivership or similar laws relating to, or
affecting generally the enforcement of, creditor's rights and
remedies or by other equitable principles of general
application.
3. Capitalization. The authorized capital stock of the Company
and the shares thereof currently issued and outstanding as of
March 31, 2000 are set forth on Schedule 2.1(c) hereto. All of
the outstanding shares of the Company's Common Stock and any
other security of the Company have been duly and validly
authorized. Except as set forth in this Agreement and the
Registration Rights Agreement and as set forth on Schedule
2.1(c) hereto, no shares of Common Stock or any other
securities issued by the Company are entitled to preemptive
rights or registration rights and there are no outstanding
options, warrants, scrip, rights to subscribe to, call or
commitments of any character whatsoever relating to, or
securities or rights convertible into, any shares of capital
stock of the Company. Furthermore, except as set forth in this
Agreement and the Registration Rights Agreement and as set
forth on Schedule 2.1(c), there are no contracts, commitments,
understandings, or arrangements by which the Company is or may
become bound to issue additional shares of the capital stock
of the Company or options, securities or rights convertible
into shares of capital stock of the Company. Except for
customary transfer restrictions contained in agreements
entered into by the Company in order to sell restricted
securities or as provided on Schedule 2.1 (c) hereto, the
Company is not a party to or bound by any agreement or
understanding granting registration or anti-dilution rights to
any person with respect to any of its equity or debt
securities. The Company is not a party to, and it has no
knowledge of, any agreement or understanding restricting the
voting or transfer of any shares of the capital stock of the
Company. Except as set forth on Schedule 2.1(c) hereto, the
offer and sale of all capital stock, convertible securities,
rights, warrants, or options of the Company issued prior to
the Closing complied with all applicable federal and state
securities laws, and no holder of such securities has a right
of rescission or claim for damages with respect thereto which
could have a Material Adverse Effect. The Company has
furnished or made available to the Purchasers true and correct
copies of the Company's Articles of Incorporation as in effect
on the date hereof (the "Articles"), and the Company's Bylaws
as in effect on the date hereof (the "Bylaws").
4. Issuance of Shares. The Common Shares to be issued at the
Closing have been duly authorized by all necessary corporate
action and, when paid for or issued in accordance with the
terms hereof, the Common Shares shall be validly issued and
outstanding, fully paid
<PAGE>
and nonassessable and entitled to all applicable rights and
preferences set forth in the Articles. When the Warrant Shares
are issued in accordance with the terms of this Agreement and
as set forth in the Warrants, such shares will be duly
authorized by all necessary corporate action and validly
issued and outstanding, fully paid and non-assessable, and the
holders shall be entitled to all rights accorded to a holder
of Common Stock.
5. No Conflicts. The execution, delivery and performance of the
Transaction Documents by the Company and the consummation by
the Company of the transactions contemplated herein and
therein do not and will not (i) violate any provision of the
Company's Articles or Bylaws, (ii) conflict with, or
constitute a default (or an event which with notice or lapse
of time or both would become a default) under, or give to
others any rights of termination, amendment, acceleration or
cancellation of, any agreement, mortgage, deed of trust,
indenture, note, bond, license, lease agreement, instrument or
obligation to which the Company is a party or by which any of
its respective properties or assets are bound, (iii) create or
impose a lien, mortgage, security interest, charge or
encumbrance of any nature whatsoever on any property of the
Company under any agreement or any commitment to which the
Company is a party or by which the Company is bound or by
which any of its respective properties or assets are bound, or
(iv) result in a violation of any federal, state, local or
foreign statute, rule, regulation, order, judgment or decree
(including federal and state securities laws and regulations)
applicable to the Company or any of its subsidiaries or by
which any property or asset of the Company or any of its
subsidiaries are bound or affected, except, in all cases other
than violations pursuant to clause (i) above, for such
conflicts, defaults, terminations, amendments, acceleration,
cancellations and violations as would not, individually or in
the aggregate, have a Material Adverse Effect. The business of
the Company and its subsidiaries is not being conducted in
violation of any laws, ordinances or regulations of any
governmental entity, except for possible violations which
singularly or in the aggregate do not and will not have a
Material Adverse Effect. The Company is not required under
federal, state or local law, rule or regulation to obtain any
consent, authorization or order of, or make any filing or
registration with, any court or governmental agency in order
for it to execute, deliver or perform any of its obligations
under the Transaction Documents, or issue and sell the Common
Shares and the Warrant Shares in accordance with the terms
hereof or thereof (other than any filings which may be
required to be made by the Company with the Commission or
state securities administrators subsequent to a Closing, and
any registration statement which may be filed pursuant
hereto); provided that, for purposes of the representation
made in this
<PAGE>
sentence, the Company is assuming and relying upon the
accuracy of the relevant representations and agreements of the
Purchasers herein.
6. Commission Documents, Financial Statements. The Company has
provided to the Purchasers prior to the date hereof copies of
its annual report on Form 10-KSB for the fiscal year ended
December 31, 1998, its quarterly reports for the fiscal
quarters ended March 31, 1999, June 30, 1999, September 30,
1999 and its Form SB-2, as amended (the "Form SB-2), filed
January 14, 2000 (all such documents are collectively referred
to herein as the "SEC Documents"). The Company has not
provided to the Purchasers any material non-public information
or other information which, according to applicable law, rule
or regulation, should have been disclosed publicly by the
Company but which has not been so disclosed, other than with
respect to the transactions contemplated by this Agreement.
The financial statements of the Company furnished to the
Purchasers comply as to form in all material respects with
applicable accounting requirements and the published rules and
regulations of the Commission or other applicable rules and
regulations with respect thereto. Such financial statements
have been prepared in accordance with generally accepted
accounting principles ("GAAP") applied on a consistent basis
during the periods involved (except (i) as may be otherwise
indicated in such financial statements or the notes thereto or
(ii) in the case of unaudited interim statements, to the
extent they may not include footnotes or may be condensed or
summary statements), and fairly present in all material
respects the financial position of the Company and its
subsidiaries as of the dates thereof and the results of
operations and cash flows for the periods then ended (subject,
in the case of unaudited statements, to normal year-end audit
adjustments).
7. Subsidiaries. Schedule 2.1(g) hereto sets forth each
subsidiary of the Company showing the jurisdiction of its
incorporation or organization and showing the percentage of
the Company's ownership of the outstanding stock or other
interests of such subsidiary. For the purposes of this
Agreement, "subsidiary" shall mean any corporation or other
entity of which at least a majority of the securities or other
ownership interest having ordinary voting power (absolutely or
contingently) for the election of directors or other persons
performing similar functions are at the time owned directly or
indirectly by the Company and/or any of its other
subsidiaries. All of the outstanding shares of capital stock
of each subsidiary have been duly authorized and validly
issued, and are fully paid and non-assessable. Except as
disclosed on Schedule 2.1(g) there are no outstanding
preemptive, conversion or other rights, options, warrants or
agreements granted or issued by or binding upon any subsidiary
for the purchase or
<PAGE>
acquisition of any shares of capital stock of any subsidiary
or any other securities convertible into, exchangeable for or
evidencing the rights to subscribe for any shares of such
capital stock. Neither the Company nor any subsidiary is
subject to any obligation (contingent or otherwise) to
repurchase or otherwise acquire or retire any shares of the
capital stock of any subsidiary or any convertible securities,
rights, warrants or options of the type described in the
preceding sentence. Neither the Company nor any subsidiary is
party to, nor has any knowledge of, any agreement restricting
the voting or transfer of any shares of the capital stock of
any subsidiary.
8. No Material Adverse Change. Since September 30, 1999, the date
through which the most recent report of the Company has been
prepared and filed with the Commission (a copy of which is
included in the Commission Documents) the Company has not
experienced or suffered any Material Adverse Effect, except as
disclosed on Schedule 2.1(h) hereto.
9. No Undisclosed Liabilities. Except as disclosed on Schedule
2.1(i) hereto, neither the Company nor any of its subsidiaries
has any liabilities, obligations, claims or losses (whether
liquidated or unliquidated, secured or unsecured, absolute,
accrued, contingent or otherwise) other than those incurred in
the ordinary course of the Company's or its subsidiaries
respective businesses since September 30, 1999, and which,
individually or in the aggregate, do not or would not have a
Material Adverse Effect.
10. No Undisclosed Events or Circumstances. No event or
circumstance has occurred or exists with respect to the
Company or its subsidiaries or their respective businesses,
properties, prospects, operations or financial condition,
which, under applicable law, rule or regulation, requires
public disclosure or announcement by the Company but which has
not been so publicly announced or disclosed.
11. Indebtedness. Schedule 2.1(k) hereto sets forth as of the date
hereof all outstanding secured and unsecured Indebtedness of
the Company or any subsidiary, or for which the Company or any
subsidiary has commitments. For the purposes of this
Agreement, "Indebtedness" shall mean (a) any liabilities for
borrowed money or amounts owed in excess of $25,000 (other
than trade accounts payable incurred in the ordinary course of
business), (b) all guaranties, endorsements and other
contingent obligations in respect of Indebtedness of others,
whether or not the same are or should be reflected in the
Company's balance sheet (or the notes thereto), except
guaranties by endorsement of negotiable instruments for
deposit or collection or similar transactions in the ordinary
course of business; and (c) the present
<PAGE>
value of any lease payments in excess of $25,000 due under
leases required to be capitalized in accordance with GAAP.
Except as disclosed on Schedule 2.1(k), neither the Company
nor any subsidiary is in default with respect to any
Indebtedness.
12. Title to Assets. Each of the Company and its subsidiaries has
good and marketable title to all of its real and personal
property, free of any mortgages, pledges, charges, liens,
security interests or other encumbrances, except for those
indicated on Schedule 2.1(l) hereto or such that, individually
or in the aggregate, do not cause a Material Adverse Effect on
the Company's financial condition or operating results. Except
as described on Schedule 2.1(l), all said leases of the
Company and each of its subsidiaries are valid and subsisting
and in full force and effect.
13. Actions Pending. There is no action, suit, claim,
investigation or proceeding pending or, to the knowledge of
the Company, threatened against the Company or any subsidiary
which questions the validity of this Agreement or the
transactions contemplated hereby or any action taken or to be
taken pursuant hereto or thereto. There is no action, suit,
claim, investigation or proceeding pending or, to the
knowledge of the Company, threatened, against or involving the
Company, any subsidiary or any of their respective properties
or assets, except as set forth on Schedule 2.1(m) hereto.
There are no outstanding orders, judgments, injunctions,
awards or decrees of any court, arbitrator or governmental or
regulatory body against the Company or any subsidiary or any
officers or directors of the Company or subsidiary in their
capacities as such.
14. Compliance with Law. The business of the Company and the
subsidiaries has been and is presently being conducted in
accordance with all applicable federal, state and local
governmental laws, rules, regulations and ordinances, except
as set forth on Schedule 2.1(n) hereto or such that,
individually or in the aggregate, the noncompliance therewith
would not have a Material Adverse Effect. The Company and each
of its subsidiaries have all franchises, permits, licenses,
consents and other governmental or regulatory authorizations
and approvals necessary for the conduct of its business as now
being conducted by it unless the failure to possess such
franchises, permits, licenses, consents and other governmental
or regulatory authorizations and approvals, individually or in
the aggregate, could not reasonably be expected to have a
Material Adverse Effect.
15. Taxes. Except as set forth on Schedule 2.1(o) hereto, the
Company and each of the subsidiaries has accurately prepared
and filed all
<PAGE>
federal, state and other tax returns required by law to be
filed by it, has paid or made provisions for the payment of
all taxes shown to be due and all additional assessments, and
adequate provisions have been and are reflected in the
financial statements of the Company and the subsidiaries for
all current taxes and other charges to which the Company or
any subsidiary is subject and which are not currently due and
payable. Except as disclosed on Schedule 2.1(o) hereto, none
of the federal income tax returns of the Company or any
subsidiary have been audited by the Internal Revenue Service.
The Company has no knowledge of any additional assessments,
adjustments or contingent tax liability (whether federal or
state) of any nature whatsoever, whether pending or threatened
against the Company or any subsidiary for any period, nor of
any basis for any such assessment, adjustment or contingency.
16. Certain Fees. The Company has not employed any broker or
finder or incurred any liability for any brokerage or
investment banking fees, commissions, finders' or structuring
fees, financial advisory fees or other similar fees in
connection with the Transaction Documents, except as set forth
on Schedule 2.1(p) hereto. All those entities listed on
Schedule 2.1(p) hereto are broker/dealers (i) registered and
in good standing with the National Association of Securities
Dealers, Inc. and (ii) registered pursuant to Section 15 of
the Securities Exchange Act of 1934, as amended (the "Exchange
Act").
17. Disclosure. To the best of the Company's knowledge, neither
this Agreement or the Schedules hereto nor any other
documents, certificates or instruments furnished to the
Purchasers by or on behalf of the Company or any subsidiary in
connection with the transactions contemplated by this
Agreement or any of the other Transaction Document contain or
will contain any untrue statement of a material fact or omit
to state a material fact necessary in order to make the
statements made herein or therein, in the light of the
circumstances under which they were made herein or therein,
not misleading.
18. Operation of Business. The Company and each of the
subsidiaries owns or possesses all patents, trademarks, domain
names (whether or not registered) and any patentable
improvements or copyrightable derivative works thereof,
websites and intellectual property rights relating thereto,
service marks, trade names, copyrights, licenses and
authorizations, including (but not limited to) those set forth
on Schedule 2.1(r) hereto, and all rights with respect to the
foregoing, which are necessary for the conduct of its business
as now conducted without any conflict with the rights of
others except as disclosed on Schedule 2.1(r).
<PAGE>
19. Environmental Compliance. Except as disclosed on Schedule
2.1(s) hereto, the Company and each of its subsidiaries have
obtained all material approvals, authorization, certificates,
consents, licenses, orders and permits or other similar
authorizations of all governmental authorities, or from any
other person, that are required under any Environmental Laws.
Schedule 2.1(s) hereto sets forth all material permits,
licenses and other authorizations issued under any
Environmental Laws to the Company or its subsidiaries.
"Environmental Laws" shall mean all applicable laws relating
to the protection of the environment including, without
limitation, all requirements pertaining to reporting,
licensing, permitting, controlling, investigating or
remediating emissions, discharges, releases or threatened
releases of hazardous substances, chemical substances,
pollutants, contaminants or toxic substances, materials or
wastes, whether solid, liquid or gaseous in nature, into the
air, surface water, groundwater or land, or relating to the
manufacture, processing, distribution, use, treatment,
storage, disposal, transport or handling of hazardous
substances, chemical substances, pollutants, contaminants or
toxic substances, material or wastes, whether solid, liquid or
gaseous in nature. Except as set forth on Schedule 2.1(s)
hereto, the Company has all necessary governmental approvals
required under all Environmental Laws and used in its business
or in the business of any of its subsidiaries. The Company and
each of its subsidiaries are also in compliance with all other
limitations, restrictions, conditions, standards,
requirements, schedules and timetables required or imposed
under all Environmental Laws. Except for such instances as
would not individually or in the aggregate have a Material
Adverse Effect, there are no past or present events,
conditions, circumstances, incidents, actions or omissions
relating to or in any way affecting the Company or its
subsidiaries that violate or may violate any Environmental Law
after any of the Closings or that may give rise to any
environmental liability, or otherwise form the basis of any
claim, action, demand, suit, proceeding, hearing, study or
investigation (i) under any Environmental Law, or (ii) based
on or related to the manufacture, processing, distribution,
use, treatment, storage (including without limitation
underground storage tanks), disposal, transport or handling,
or the emission, discharge, release or threatened release of
any hazardous substance. "Environmental Liabilities" means all
liabilities of a person (whether such liabilities are owed by
such person to governmental authorities, third parties or
otherwise) whether currently in existence or arising hereafter
which arise under or relate to any Environmental Law.
20. Books and Record Internal Accounting Controls. The records and
documents of the Company and its subsidiaries accurately
reflect in
<PAGE>
all material respects the information relating to the business
of the Company and the subsidiaries, the location and
collection of their assets, and the nature of all transactions
giving rise to the obligations or accounts receivable of the
Company or any subsidiary. The Company and each of its
subsidiaries maintain a system of internal accounting controls
sufficient, in the judgment of the Company's board of
directors, to provide reasonable assurance that (i)
transactions are executed in accordance with management's
general or specific authorizations, (ii) transactions are
recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting
principles and to maintain asset accountability, (iii) access
to assets is permitted only in accordance with management's
general or specific authorization and (iv) the recorded
accountability for assets is compared with the existing assets
at reasonable intervals and appropriate actions is taken with
respect to any differences.
21. Material Agreements. Except as set forth in the Commission
Documents or on Schedule 2.1(u) hereto, neither the Company
nor any subsidiary is a party to any written or oral contract,
instrument, agreement, commitment, obligation, plan or
arrangement, a copy of which would be required to be filed
with the Commission as an exhibit to a registration statement
on Form S-1 or applicable form (collectively, "Material
Agreements") if the Company or any subsidiary were registering
securities under the Securities Act. Except as set forth on
Schedule 2.1(u) hereto, the Company and each of its
subsidiaries has in all material respects performed all the
obligations required to be performed by them to date under the
foregoing agreements, have received no notice of default and,
to the best of the Company's knowledge are not in default
under any Material Agreement now in effect, the result of
which could cause a Material Adverse Effect. No written or
oral contract, instrument, agreement, commitment, obligation,
plan or arrangement of the Company or of any subsidiary limits
or shall limit the payment of dividends on the Company's
Common Stock.
22. Transactions with Affiliates. Except as set forth on Schedule
2.1(v) hereto, there are no loans, leases, agreements,
contracts, royalty agreements, management contracts or
arrangements or other continuing transactions exceeding
$100,000 between (a) the Company, any subsidiary or any of
their respective customers or suppliers on the one hand, and
(b) on the other hand, any officer, employee, consultant or
director of the Company, or any of its subsidiaries, or any
person owning any capital stock of the Company or any
subsidiary or any member of the immediate family of such
officer, employee, consultant, director or stockholder or any
corporation or other entity controlled
<PAGE>
by such officer, employee, consultant, director or
stockholder, or a member of the immediate family of such
officer, employee, consultant, director or stockholder.
23. Securities Act of 1933. The Company has complied and will
comply with all applicable federal and state securities laws
in connection with the offer, issuance and sale of the Common
Shares and the Warrants hereunder. Neither the Company nor
anyone acting on its behalf, directly or indirectly, has or
will sell, offer to sell or solicit offers to buy any of the
Shares, or similar securities to, or solicit offers with
respect thereto from, or enter into any preliminary
conversations or negotiations relating thereto with, any
person, or has taken or will take any action so as to bring
the issuance and sale of any of the Shares under the
registration provisions of the Securities Act and any other
applicable federal and state securities laws. Neither the
Company nor any of its affiliates, nor any person acting on
its or their behalf, has engaged in any form of general
solicitation or general advertising (within the meaning of
Regulation D under the Securities Act) in connection with any
of the Shares.
24. Governmental Approvals. Except as set forth on Schedule 2.1(x)
hereto, and except for the filing of any notice prior or
subsequent to the Closing that may be required under
applicable state or federal securities laws (which if
required, shall be filed on a timely basis), including, but
not limited to, the filing of a registration statement or
statements pursuant to the Registration Rights Agreement, no
authorization, consent, approval, license exemption of, filing
or registration with any court or governmental department,
commission, board, bureau, agency or instrumentality, domestic
or foreign, is or will be necessary for, or in connection
with, the execution or delivery of the Common Shares, or for
the performance by the Company of its obligations under the
Transaction Documents.
25. Employees. Neither the Company nor any subsidiary has any
collective bargaining arrangements or agreements covering any
of its employees, except as set forth on Schedule 2.1(y)
hereto. Except as set forth on Schedule 2.1(y) hereto, neither
the Company nor any subsidiary has any employment contract,
agreement regarding proprietary information, non-competition
agreement, non-solicitation agreement, confidentiality
agreement, or any other similar contract or restrictive
covenant, relating to the right of any officer, employee or
consultant to be employed or engaged by the Company or such
subsidiary. Since September 30, 1999, no officer, consultant
or key employee of the Company or any subsidiary whose
termination, either individually or in the aggregate, could
have a Material Adverse Effect, has terminated or, to the
knowledge of the Company, has any present
<PAGE>
intention of terminating his or her employment or engagement
with the Company or any subsidiary.
26. Absence of Certain Developments. Except as provided in
Schedule 2.1(z) hereto, since September 30, 1999, neither the
Company nor any subsidiary has:
(a) issued any stock, bonds or other corporate securities or
any rights, options or warrants with respect thereto;
(b) borrowed any amount or incurred or become subject to any
liabilities (absolute or contingent) except current
liabilities incurred in the ordinary course of business
which are comparable in nature and amount to the current
liabilities incurred in the ordinary course of business
during the comparable portion of its prior fiscal year,
as adjusted to reflect the current nature and volume of
the Company's or such subsidiary's business;
(c) discharged or satisfied any lien or encumbrance or paid
any obligation or liability (absolute or contingent),
other than current liabilities paid in the ordinary
course of business;
(d) declared or made any payment or distribution of cash or
other property to stockholders with respect to its
stock, or purchased or redeemed, or made any agreements
so to purchase or redeem, any shares of its capital
stock;
(e) sold, assigned or transferred any other tangible assets,
or canceled any debts or claims, except in the ordinary
course of business;
(f) sold, assigned or transferred any patent rights,
trademarks, trade names, copyrights, trade secrets or
other intangible assets or intellectual property rights,
or disclosed any proprietary confidential information to
any person except to customers in the ordinary course of
business or to the Purchasers or their representatives;
(g) suffered any substantial losses or waived any rights of
material value, whether or not in the ordinary course of
business, or suffered the loss of any material amount of
prospective business;
(h) made any changes in employee compensation except in the
ordinary course of business and consistent with past
practices;
<PAGE>
(i) made capital expenditures or commitments therefor that
aggregate in excess of $100,000;
(j) entered into any other transaction other than in the
ordinary course of business, or entered into any other
material transaction, whether or not in the ordinary
course of business;
(k) made charitable contributions or pledges in excess of
$25,000;
(l) suffered any material damage, destruction or casualty
loss, whether or not covered by insurance;
(m) experienced any material problems with labor or
management in connection with the terms and conditions
of their employment;
(n) effected any two (2) or more events of the foregoing
kind which in the aggregate would be material to the
Company or its subsidiaries; or
(o) entered into an agreement, written or otherwise, to take
any of the foregoing actions.
27. Use of Proceeds. The proceeds from the sale of the Common
Shares and the Warrants will be used by the Company for
working capital and general corporate purposes.
28. Public Utility Holding Company Act and Investment Company Act
Status. The Company is not a "holding company" or a "public
utility company" as such terms are defined in the Public
Utility Holding Company Act of 1935, as amended. The Company
is not, and as a result of and immediately upon any Closing
will not be, an "investment company" or a company "controlled"
by an "investment company," within the meaning of the
Investment Company Act of 1940, as amended.
29. ERISA. No liability to the Pension Benefit Guaranty
Corporation has been incurred with respect to any Plan by the
Company or any of its subsidiaries which is or would be
materially adverse to the Company and its subsidiaries. The
execution, delivery and performance of this Agreement and the
other Transaction Documents and the issue and sale of the
Common Shares and the Warrants will not involve any
transaction which is subject to the prohibitions of Section
406 of ERISA or in connection with which a tax could be
imposed pursuant to Section 4975 of the Internal Revenue Code
of 1986, as amended,
<PAGE>
provided that, if any of the Purchasers, or any person or
entity that owns a beneficial interest in any of the
Purchasers, is an "employee pension benefit plan" (within the
meaning of Section 3(2) of ERISA) with respect to which the
Company is a "party in interest" (within the meaning of
Section 3(14) of ERISA), the requirements of Sections
407(d)(5) and 408(e) of ERISA, if applicable, are met. As used
in this Section 2.1(ac), the term "Plan" shall mean an
"employee pension benefit plan" (as defined in Section 3 of
ERISA) which is or has been established or maintained, or to
which contributions are or have been made, by the Company or
any subsidiary or by any trade or business, whether or not
incorporated, which, together with the Company or any
subsidiary, is under common control, as described in Section
414(b) or (c) of the Code.
30. Dilutive Effect. The Company understands and acknowledges that
the number of the Warrant Shares issuable upon exercise of the
Warrants will increase in certain circumstances. The Company
further acknowledges that its obligations to issue the Warrant
Shares upon the exercise of the Warrants in accordance with
this Agreement and the Warrants, is, in each case, absolute
and unconditional regardless of the dilutive effect that such
issuance may have on the ownership interest of other
stockholders of the Company.
31. No "Directed Selling Efforts". In connection with the offer
and sale of the Common Shares, the Warrants and the Warrant
Shares, no distributor or any affiliates or any person acting
on behalf of the Company or any affiliate of the Company or
any distributor has engaged in any "directed selling efforts"
(as such term is defined in Rule 902(c) of Regulation S) nor
conducted any general solicitation relating to the offer to
persons residing within the United States or to "U.S. Persons"
(as such term is defined in Rule 902(o) of Regulation S).
VVVV. Representations and Warranties of the Purchasers Each of the
Purchasers hereby makes the following representations and warranties
to the Company with respect solely to itself and not with respect to
any other Purchaser:
1. Organization and Standing of the Purchasers. If the Purchaser
is an entity, such Purchaser is a corporation, limited
liability company or partnership duly incorporated or
organized, validly existing and in good standing under the
laws of the jurisdiction of its incorporation or organization,
and such Purchaser was not formed for the specific purpose of
acquiring the Shares.
2. Authorization and Power. The Purchaser has the requisite power
and authority to enter into and perform this Agreement, the
Registration
<PAGE>
Rights Agreement and the Escrow Agreement and to purchase the
Common Shares and the Warrants being sold to it hereunder. The
execution, delivery and performance of this Agreement, the
Registration Rights Agreement, the Escrow Agreement and the
documents contemplated hereby by such Purchaser and the
consummation by it of the transactions contemplated hereby and
thereby have been duly authorized by all necessary corporate,
limited liability company or partnership action, as applicable
(if the Purchaser is an entity), and no further consent or
authorization of such Purchaser or its Board of Directors,
stockholders, members, managers or partners, as the case may
be, is required. Each of this Agreement, the Registration
Rights Agreement and the Escrow Agreement will have been duly
executed and delivered by the Purchasers on the Closing Date.
Each of this Agreement, the Registration Rights Agreement and
the Escrow Agreement constitutes, or shall constitute when
executed and delivered, a valid and binding obligation of the
Purchaser enforceable against the Purchaser in accordance with
its terms, except as such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium,
liquidation, conservatorship, or similar laws relating to, or
affecting generally the enforcement of, creditor's rights,
remedies or by other equitable principles of general
application.
3. No Conflicts. The execution, delivery and performance of this
Agreement, the Registration Rights Agreement, the Escrow
Agreement and the documents contemplated hereby and thereby
and the consummation by such Purchaser of the transactions
contemplated hereby and thereby or relating hereto do not and
will not (i) result in a violation of such Purchaser's charter
documents, bylaws, partnership agreement, operating agreement
or other organizational documents, or (ii) conflict with,
constitute a default (or an event which with notice or lapse
of time or both would become a default) under, or give to
others any rights of termination, amendment, acceleration or
cancellation of any agreement, indenture or instrument to
which such Purchaser is a party, or result in a violation of
any law, rule, or regulation, or any order, judgment or decree
of any court or governmental agency applicable to such
Purchaser or its properties (except for such conflicts,
defaults and violations as would not, individually or in the
aggregate, have a material adverse effect on such Purchaser).
Such Purchaser is not required to obtain any consent,
authorization or order of, or make any filing or registration
with, any court or governmental agency in order for it to
execute, deliver or perform any of its obligations under this
Agreement, the Registration Rights Agreement, the Escrow
Agreement or the documents contemplated hereby and thereby or
to purchase the Common Shares and the Warrants in accordance
with
<PAGE>
the terms hereof, provided that for purposes of the
representation made in this sentence, such Purchaser is
assuming and relying upon the accuracy of the relevant
representations and agreements of the Company herein.
4. Acquisition for Investment. Such Purchaser is purchasing the
Common Shares and the Warrants solely for its own account for
the purpose of investment and not with a view to or for sale
in connection with distribution. Such Purchaser does not have
a present intention to sell the Common Shares or the Warrants,
nor a present arrangement (whether or not legally binding) or
intention to effect any distribution of the Common Shares or
the Warrants to or through any person or entity; provided,
however, that by making the representations herein and subject
to Section 2.2(f) below, such Purchaser does not agree to hold
the Common Shares or the Warrants for any minimum or other
specific term and reserves the right to dispose of the Common
Shares or the Warrants at any time in accordance with federal
securities laws applicable to such disposition. Such Purchaser
acknowledges that it is able to bear the financial risks
associated with an investment in the Common Shares or the
Warrants and that it has been given full access to such
records of the Company and the subsidiaries and to the
officers of the Company and the subsidiaries as it has deemed
necessary or appropriate to conduct its due diligence
investigation.
5. Non-U.S. Person. Such Purchaser is not a "U.S. Person" (as
defined in Rule 902(o) of Regulation S) and is not acquiring
any of the Common Shares, the Warrants or the Warrant Shares
for the account or benefit of any U.S. Person. The documents
effecting the purchase and sale of the Common Shares and the
Warrants has been executed by such Purchaser outside the
"United States" (as defined in Rule 902(p) of Regulation S).
6. Offshore Transaction. The Common Shares and the Warrants were
not offered to such Purchaser in the United States and at the
time of execution of this Agreement and the time of any offer
to such Purchaser to purchase the Common Shares and the
Warrants, such Purchaser was physically outside of the United
States. The offer leading to the sale evidenced hereby was
made in an "offshore transaction" (as defined in Rule 902(h)
of Regulation S).
7. Accredited Purchasers. Such Purchaser is an "accredited
investor" as defined in Regulation D promulgated under the
Securities Act and is a resident of the jurisdiction indicated
on Exhibit A hereto. Purchaser has such knowledge and
experience in financial and
<PAGE>
business matters that Purchaser is capable of evaluating the
merits and risks of Purchaser's investment in the Company.
8. Rule 144. Such Purchaser understands that the Shares and
Warrants must be held indefinitely unless such Shares and
Warrants are registered under the Securities Act or an
exemption from registration is available. Such Purchaser
acknowledges that such Purchaser is familiar with Rule 144 of
the rules and regulations of the Commission, as amended,
promulgated pursuant to the Securities Act ("Rule 144"), and
that such Purchaser has been advised that Rule 144 permits
resales only under certain circumstances. Such Purchaser
understands that to the extent that Rule 144 is not available,
such Purchaser will be unable to sell any Shares and the
Warrants without either registration under the Securities Act
or the existence of another exemption from such registration
requirement.
9. Transfer of Shares. Such Purchaser will not sell, offer for
sale, transfer or otherwise convey the Common Shares, the
Warrants or the Warrant Share to a U.S. Person or for the
account or benefit of a U.S. Person unless in accordance with
the provisions of Regulation S, pursuant to registration of
the Common Shares, the Warrants or the Warrant Shares under
the Securities Act or pursuant to an exemption from
registration.
10. No Broker-Dealer Affiliation. None of the Purchasers is a
broker-dealer registered with the Commission or an affiliate
(as such term is defined in Rule 144(a) promulgated under the
Securities Act) of a broker-dealer registered with the
Commission.
11. General. Such Purchaser understands that the Shares are being
offered and sold in reliance on a transactional exemption from
the registration requirement of federal and state securities
laws and the Company is relying upon the truth and accuracy of
the representations, warranties, agreements, acknowledgments
and understandings of such Purchaser set forth herein in order
to determine the applicability of such exemptions and the
suitability of such Purchaser to acquire the Shares. Purchaser
understands that no United States federal or state agency or
any government or governmental agency has passed upon or made
any recommendation or endorsement of the Common Shares and the
Warrants.
12. Opportunities for Additional Information. Such Purchaser
acknowledges that such Purchaser has had the opportunity to
ask questions of and receive answers from, or obtain
additional information from, the executive officers of the
Company concerning the financial and other affairs of the
Company, and to the extent
<PAGE>
deemed necessary in light of such Purchaser's personal
knowledge of the Company's affairs, such Purchaser has asked
such questions and received answers to the full satisfaction
of such Purchaser, and such Purchaser desires to invest in the
Company.
13. No General Solicitation. Such Purchaser acknowledges that the
Common Shares and Warrants were not offered to such Purchaser
by means of any form of general or public solicitation or
general advertising, or publicly disseminated advertisements
or sales literature, including (i) any advertisement, article,
notice or other communication published in any newspaper,
magazine, or similar media, or broadcast over television or
radio, or (ii) any seminar or meeting to which such Purchaser
was invited by any of the foregoing means of communications.
14. No Commissions or Similar Fees. In connection with the
purchase of the Common Shares and Warrants by such Purchaser,
such Purchaser has not and will not pay, and has no knowledge
of the payment of, any commission or other direct or indirect
remuneration to any person or entity for soliciting or
otherwise coordinating the purchase of such securities, except
to such persons or entities as are duly licensed and/or
registered to engage in securities offering and selling
activities (or are exempt from such licensing and/or
registration requirements) under applicable federal laws and
the laws of the state(s) in which such activities have taken
place in connection with the transaction contemplated by this
agreement.
15. Reliance by the Company. Purchaser understands fully the
meaning and legal consequences of the provisions herein, and
agrees to indemnify and hold harmless the Company, and each
other person, if any subject to liability because of such
person's connection with the Company, against all actions,
claims, losses, damages and liabilities arising out of or
based upon any false representation or warranty herein, or any
breach by the undersigned of any provision hereof, and to
reimburse the Company and each such other person for any legal
and other expenses incurred by the Company and each such other
person in connection with investigating, defending, and, if
appropriate, settling any action, claim, loss, damage or
liability.
Covenants
The Company covenants with each of the Purchasers, which covenants are for the
benefit of each of the Purchasers and their permitted assignees (as defined
herein) as follows:
WWWW. Securities Compliance.
<PAGE>
1. The Company shall notify the Commission in accordance with
their rules and regulations of the transactions contemplated
by any of the Transaction Documents, as may be required, and
shall take all other necessary action and proceedings as may
be required and permitted by applicable law, rule and
regulation, for the legal and valid issuance of the Common
Shares and the Warrant Shares to the Purchasers or subsequent
holders.
2. The Company is relying upon the truth and accuracy of the
representations, warranties, agreements, acknowledgments and
understandings of such Purchasers set forth herein in order to
determine the applicability of federal and state securities
laws exemptions and the suitability of such Purchasers to
acquire the Shares and the Warrants.
XXXX. Registration and Listing. The Company will cause a registration
statement registering the Common Shares and the Warrant Shares to be
filed no later than forty-five (45) days after the Closing Date and
cause the registration statement to be declared effective within (i)
ninety (90) days after the Closing Date or (ii) five (5) business
days of the date on which the Commission informs the Company that it
may request the acceleration of the effectiveness of the
registration statement, whichever date is the earlier (the
"Effectiveness Date"), will comply in all respects with its
reporting and filing obligations under the Exchange Act, will comply
with all requirements related to any registration statement filed
pursuant to this Agreement or the Registration Rights Agreement, and
will not take any action or file any document (whether or not
permitted by the Securities Act or the rules promulgated thereunder)
to terminate or suspend such registration or to terminate or suspend
its reporting and filing obligations under the Exchange Act or
Securities Act, except as permitted herein. The Company will take
all action necessary to continue the listing or trading of its
Common Stock on the Nasdaq SmallCap Market.
YYYY. Inspection Rights. The Company shall permit, during normal business
hours and upon reasonable request and reasonable notice, each
Purchaser or any employees, agents or representatives thereof, so
long as such Purchaser shall be obligated hereunder to purchase the
Common Shares or shall own Common Shares which, in the aggregate,
represent more than 2% of the total combined voting power of all
voting securities then outstanding, to examine and make reasonable
copies of and extracts from the records and books of account of, and
visit and inspect the properties, assets, operations and business of
the Company and any subsidiary, and to discuss the affairs, finances
and accounts of the Company and any subsidiary with any of its
officers, consultants, directors, and key employees.
ZZZZ. Compliance with Laws. The Company shall comply, and cause each
subsidiary to comply, with all applicable laws, rules, regulations
and orders, noncompliance with which could have a Material Adverse
Effect.
<PAGE>
AAAAA. Keeping of Records and Books of Account. The Company shall keep
and cause each subsidiary to keep adequate records and books of
account, in which complete entries will be made in accordance with
GAAP consistently applied, reflecting all financial transactions
of the Company and its subsidiaries, and in which, for each fiscal
year, all proper reserves for depreciation, depletion,
obsolescence, amortization, taxes, bad debts and other purposes in
connection with its business shall be made.
BBBBB. Reporting Requirements The Company shall furnish the following, if
and when applicable, to each Purchaser so long as such Purchaser
shall be obligated hereunder to purchase the Common Shares or
shall own Common Shares which, in the aggregate, represent more
than 2% of the total combined voting power of all voting
securities then outstanding:
1. Reports filed with the Commission on Form 10-QSB, as soon
as available, and in any event within fifteen (15) days
after filing such report with the Commission;
2. Annual Reports filed with the Commission on Form 10-KSB, as
soon as available, and in any event within ninety (90) days
after the end of each fiscal year of the Company; and
3. Copies of all notices and information, including without
limitation notices and proxy statements in connection with
any meetings, that are provided to holders of shares of
Common Stock, contemporaneously with the delivery of such
notices or information to such holders of Common Stock.
CCCCC. Amendments. The Company shall not amend or waive any provision of
the Articles or Bylaws of the Company, or the Registration Rights
Agreement in any way that would adversely affect the liquidation
preferences, dividends rights, conversion rights, voting rights or
redemption rights of the holders of the Common Shares or the
Warrant Shares.
DDDDD. Other Agreements The Company shall not enter into any agreement in
which the terms of such agreement would restrict or impair the
right or ability to perform of the Company or any subsidiary under
any Transaction Document.
EEEEE. Distributions. So long as any Warrants remain outstanding, the
Company agrees that it shall not (i) declare or pay any dividends
or make any distributions to any holder(s) of Common Stock or (ii)
purchase or otherwise acquire for value, directly or indirectly,
any Common Stock or other equity security of the Company.
FFFFF. Intentionally Omitted.
GGGGG. Intentionally Omitted.
<PAGE>
HHHHH. Intentionally Omitted.
IIIII. Subsequent Financing. During the ninety (90) day period
immediately following the Effectiveness Date, the Company
covenants and agrees that it will not, without the prior written
consent of the Purchasers, enter into any subsequent offer or sale
to, or exchange with (or other type of distribution to), any third
party (a "Subsequent Financing"), of Common Stock or any
securities convertible or exchangeable into Common Stock,
including debt securities (collectively, the "Financing
Securities"). Notwithstanding the foregoing, a Subsequent
Financing shall not include any transaction involving the
Company's (i) issuance of any Financing Securities (other than for
cash) in connection with a merger and/or acquisition,
consolidation, sale or disposition of all or substantially all of
the Company's assets, (ii) exchange of capital stock for assets,
(iii) public offering at market, or (iv) issuance of Common Stock
or the issuance of options to purchase Common Stock as such is
related to any employee stock ownership plan.
JJJJJ. Reservation of Shares. So long as any of the Common Shares or
Warrants remain outstanding, the Company shall take all action
necessary to at all times have authorized, and reserved for the
purpose of issuance, no less than 100% of the aggregate number of
shares of Common Stock needed to provide for the issuance of the
Common Shares and the Warrant Shares.
KKKKK. Transfer Agent Instructions. The Company shall issue irrevocable
instructions to its transfer agent, and any subsequent transfer
agent, to issue certificates, registered in the name of each
Purchaser or its respective nominee(s), for the Common Shares and
the Warrant Shares in such amounts as specified from time to time
by each Purchaser to the Company upon issuance of the Common
Shares or exercise of the Warrants in the form of Exhibit E
attached hereto (the "Irrevocable Transfer Agent Instructions").
Prior to registration of the Common Shares and the Warrant Shares
under the Securities Act, all such certificates shall bear the
restrictive legend specified in Section 6.1 of this Agreement. The
Company warrants that no instruction other than the Irrevocable
Transfer Agent Instructions referred to in this Section 3.15 will
be given by the Company to its transfer agent and that the Shares
shall otherwise be freely transferable on the books and records of
the Company as and to the extent provided in this Agreement and
the Registration Rights Agreement. Nothing in this Section 3.15
shall affect in any way each Purchaser's obligations and
agreements set forth in Section 6.1 to comply with all applicable
prospectus delivery requirements, if any, upon resale of the
Shares. If a Purchaser provides the Company with an opinion of
counsel, in a generally acceptable form, to the effect that a
public sale, assignment or transfer of the Shares may be made
without registration under the Securities Act or the Purchaser
provides the Company with reasonable assurances that the Shares
can be sold pursuant to Rule 144 without any restriction as to the
number of securities acquired as of a particular date that can
then be immediately sold, the Company shall permit the transfer,
and, in the case of the Common Shares and the Warrant Shares,
promptly instruct its transfer agent to issue one (1) or more
certificates in such name and in such denominations as specified
by such
<PAGE>
Purchaser and without any restrictive legend. The Company
acknowledges that a breach by it of its obligations under this
Section 3.15 will cause irreparable harm to the Purchasers by
vitiating the intent and purpose of the transaction contemplated
hereby. Accordingly, the Company acknowledges that the remedy at
law for a breach of its obligations under this Section 3.15 will
be inadequate and agrees, in the event of a breach or threatened
breach by the Company of the provisions of this Section 3.15, that
the Purchasers shall be entitled, in addition to all other
available remedies, to an order and/or injunction restraining any
breach and requiring immediate issuance and transfer, without the
necessity of showing economic loss and without any bond or other
security being required.
Conditions
LLLLL. Conditions Precedent to the Obligation of the Company to Sell the
Shares at Closing. The obligation hereunder of the Company to
issue and sell the Common Shares and Warrants to the Purchasers at
the Closing is subject to the satisfaction or waiver, at or before
the Closing, of each of the conditions set forth below. These
conditions are for the Company's sole benefit and may be waived by
the Company at any time in its sole discretion.
<PAGE>
1. Accuracy of Each Purchaser's Representations and
Warranties. The representations and warranties of each
Purchaser shall be true and correct in all material
respects as of the date when made and as of the Closing
Date as though made at that time, except for
representations and warranties that are expressly made as
of a particular date, which shall be true and correct in
all material respects as of such date.
2. Performance by the Purchasers. Each Purchaser shall have
performed, satisfied and complied in all material respects
with all covenants, agreements and conditions required by
this Agreement to be performed, satisfied or complied with
by such Purchaser at or prior to the Closing, including
having paid by wire transfer of funds into escrow in
accordance with this Agreement and the Escrow Agreement the
Purchase Price set forth opposite such Purchaser's name on
Exhibit A under the heading "Purchase Prices"; such
Purchaser shall have executed and delivered this Agreement,
the Registration Rights Agreement and the Escrow Agreement
to the Escrow Agent on behalf of the Company. The Escrow
Agent shall have performed, satisfied and complied in all
material respects with all covenants, agreements and
conditions required by this Agreement and the Escrow
Agreement to be performed, satisfied or complied with by
the Escrow Agent at or prior to the Closing, including
delivery of all of the Purchaser's Closing Documents to the
Company.
3. No Injunction. No statute, rule, regulation, executive
order, decree, ruling or injunction shall have been
enacted, entered, promulgated or endorsed by any court or
governmental authority of competent jurisdiction which
prohibits the consummation of any of the transactions
contemplated by this Agreement.
MMMMM. Conditions Precedent to the Obligation of the Purchasers to
Purchase the Shares at the Closing. The obligation hereunder of
each Purchaser to acquire and pay for the applicable Common Shares
and Warrants at the Closing is subject to the satisfaction or
waiver, at or before the Closing, of each of the conditions set
forth below. These conditions are for each Purchaser's sole
benefit and may be waived by such Purchaser at any time in its
sole discretion.
1. Accuracy of the Company's Representations and Warranties.
Each of the representations and warranties of the Company
shall be true and correct in all material respects as of
the date when made and as of the Closing Date as though
made at that time (except for representations and
warranties that speak as of a particular date), which shall
be true and correct in all material respects as of such
date.
2. Performance by the Company. The Company shall have
performed, satisfied and complied in all material respects
with all covenants,
<PAGE>
agreements and conditions required by this Agreement to be
performed, satisfied or complied with by the Company at or
prior to the Closing.
3. No Suspension, Etc. From the date hereof to the Closing
Date, trading in the Company's Common Stock shall not have
been suspended by the Commission, and, at any time prior to
the Closing Date, trading in securities generally as
reported by Bloomberg Financial Markets ("Bloomberg") shall
not have been suspended or limited, or minimum prices shall
not have been established on securities whose trades are
reported by Bloomberg, or on the New York Stock Exchange,
nor shall a banking moratorium have been declared either by
the United States, or New York State authorities, nor shall
there have occurred any material outbreak or escalation of
hostilities or other national or international calamity or
crisis of such magnitude in its effect on, or any material
adverse change in any financial market which, in each case,
in the judgment of such Purchaser, makes it impracticable
or inadvisable to purchase the Common Shares.
4. No Injunction. No statute, rule, regulation, executive
order, decree, ruling or injunction shall have been
enacted, entered, promulgated or endorsed by any court or
governmental authority of competent jurisdiction which
prohibits the consummation of any of the transactions
contemplated by this Agreement.
5. No Proceedings or Litigation. No action, suit or proceeding
before any arbitrator or any governmental authority shall
have been commenced, and no investigation by any
governmental authority shall have been threatened, against
the Company, or any of the officers, directors or
affiliates of the Company seeking to restrain, prevent or
change the transactions contemplated by this Agreement, or
seeking damages in connection with such transactions.
6. Opinion of Counsel, Etc. At the Closing, the Purchasers
shall have received an opinion of counsel to the Company,
dated the date of such Closing, in the form of Exhibit F
hereto, and the such other certificates and documents as
the Purchaser or its counsel shall reasonably require
incident to the Closing.
7. Registration Rights Agreement. Prior to the Closing, the
Company shall have executed and delivered the Registration
Rights Agreement to the Escrow Agent on behalf of each
Purchaser.
8. Stock and Warrant Certificates. The Company shall have
executed and delivered to the Escrow Agent on behalf of
each Purchaser, the
<PAGE>
certificates (in such denominations as such Purchaser shall
request) for the Common Shares and the Warrants being
purchased by such Purchaser at the Closing.
9. Resolutions. Prior to the Closing, the Board of Directors
of the Company shall have adopted resolutions consistent
with Section 2.1(b) above in a form reasonably acceptable
to each Purchaser (the "Resolutions").
10. Reservation of Shares. As of the Closing Date, the Company
shall have reserved out of its authorized and unissued
Common Stock, solely for the purpose of effecting the
issuance of the Common Shares and the exercise of the
Warrants, a number of shares of Common Stock equal to at
least 100% of the shares of Common Stock which would be
issuable upon issuance of the Common Shares and upon
exercise of the Warrants following the Closing (after
giving effect to the Common Shares and Warrants to be
issued on the Closing Date and assuming all such Common
Shares and Warrants were fully issuable and exercisable, as
applicable, on such date regardless of any limitation on
the timing or amount of such issuances or exercises).
11. Transfer Agent Instructions. As of the Closing Date, the
Irrevocable Transfer Agent Instructions, in the form of
Exhibit E attached hereto, shall have been delivered to and
acknowledged in writing by the Company's transfer agent.
12. Secretary's Certificate. At the Closing, the Company shall
have delivered to the Escrow Agent on behalf of each
Purchaser a secretary's certificate, dated as of such
Closing Date, as to (i) the Resolutions, (ii) the Articles
and (iii) the Bylaws, each as in effect at the Closing, and
(iv) the authority and incumbency of the officers of the
Company executing the Transaction Documents and any other
documents required to be executed or delivered in
connection therewith.
13. Escrow Agreement. Prior to the Closing, the Company shall
have executed and delivered the Escrow Agreement to the
Escrow Agent on behalf of each Purchaser.
14. Officer's Certificate. At the Closing, the Company shall
have delivered to such Purchaser a certificate of an
executive officer of the Company, dated as of the Closing
Date, confirming the accuracy of the Company's
representations, warranties and covenants as of the Closing
Date and confirming the compliance by the Company with the
conditions precedent set forth in this Section 4.2 as of
the Closing Date.
<PAGE>
Registration Rights
At the Closing, the Company and each of the Purchasers shall enter into a
Registration Rights Agreement in the form attached hereto as Exhibit D (the
"Registration Rights Agreement").
Stock Certificate Legend
NNNNN. Legend. Each certificate representing the Common Shares, the
Warrants, and the securities issued upon exercise thereof, as
applicable and appropriate, shall be stamped or otherwise
imprinted with a legend in substantially the following form (in
addition to any legend required by applicable federal, provincial
or state securities or "blue sky" laws):
THE SECURITIES REPRESENTED BY THIS CERTIFICATE (THE "SECURITIES") HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT") OR STATE SECURITIES LAWS AND MAY NOT BE SOLD,
TRANSFERRED, ASSIGNED, PLEDGED OR HYPOTHECATED OR OTHERWISE DISPOSED OF
UNLESS IN ACCORDANCE WITH REGULATION S OF THE ACT, REGISTERED UNDER THE
ACT AND UNDER APPLICABLE STATE SECURITIES LAWS OR VIRTUAL COMMUNITIES,
INC. (THE "COMPANY") SHALL HAVE RECEIVED AN OPINION IN FORM, SCOPE AND
SUBSTANCE REASONABLY ACCEPTABLE TO THE COMPANY, OF COUNSEL, WHO IS
REASONABLY ACCEPTABLE TO THE COMPANY THAT REGISTRATION OF SUCH SECURITIES
UNDER THE SECURITIES ACT AND UNDER THE PROVISIONS OF APPLICABLE FEDERAL
AND STATE SECURITIES LAWS IS NOT REQUIRED.
The Company agrees to reissue certificates representing the Shares or the
Warrants, without the legend set forth above if at such time, prior to making
any transfer of any Shares or the Warrants such holder thereof shall give
written notice to the Company describing the manner and terms of such transfer
and removal as the Company may reasonably request and such holder otherwise
complies with the terms of the Transaction Documents. The legend set forth above
shall be removed and the Company shall issue a certificate without such legend
to the holder of any Shares or Warrants upon which it is stamped if, unless
otherwise required by federal or state securities laws, (a) the sale of such
Shares or Warrants is registered under the Securities Act (including
registration pursuant to Rule 416 thereunder) as contemplated by the
Registration Rights Agreement (b) such holder provides the Company with an
opinion of counsel, in form, substance and scope customary for opinions of
counsel in comparable transactions, to the effect that a sale or transfer of
such Shares or Warrants may be made without registration under the Securities
Act; or (c) such holder provides the Company with reasonable assurances that
such Shares or Warrants can be sold under Rule 144(k). Each Purchaser agrees
that it will only sell Shares or Warrants, including those represented by a
certificate(s) from which the legend has been removed, pursuant to an effective
registration statement, under an exemption from the registration requirements of
the Securities Act or in accordance with Rule 144(k). In
<PAGE>
the event the above legend is removed from any Shares or Warrants and the
effectiveness of a registration statement covering such Shares or Warrants is
suspended or the Company determines that a supplement or amendment thereto is
required by applicable securities laws, then upon reasonable advance notice to
such Purchaser the Company may require that the above legend be placed on any
such Shares or Warrants that cannot then be sold pursuant to an effective
registration statement, under an exemption from the registration requirements of
the Securities Act or under Rule 144(k) and such Purchaser shall cooperate in
the replacement of such legend. Such legend shall thereafter be removed when
such Shares or Warrants may again be sold pursuant to an effective registration
statement, under an exemption from the registration requirements of the
Securities Act or under Rule 144(k). The restrictions on transfer contained in
Section 6.1 shall be in addition to, and not by way of limitation of, any other
restrictions on transfer contained in any other section of this Agreement.
Termination
OOOOO. Termination by Mutual Consent. This Agreement may be terminated at
any time prior to any Closing by the mutual written consent of the
Company and the Purchasers.
PPPPP. Other Termination. This Agreement may be terminated by the action
of the Board of Directors of the Company or by any one or more of
the Purchasers at any time if the Closing shall not have been
consummated by the Closing Date, as long as the failure to so
consummate is not the fault of the terminating party.
QQQQQ. Termination of Closing. If the Closing has not occurred on or
prior to the Closing Date, those sections and provisions relating
to the Closing in this Agreement may be terminated by the action
of the Board of Directors of the Company or by any one or more of
the Purchasers as long as the failure to consummate the Closing is
not the fault of the terminating party.
RRRRR. Effect of Termination. In the event of termination by the Company
or any one or more of the Purchasers of this Agreement or any part
hereof, written notice thereof shall forthwith be given to the
other party and the transactions contemplated by this Agreement
and the Registration Rights Agreement shall be terminated without
further action by either party. If this Agreement is terminated as
provided in Section 7.1 or 7.2 herein, this Agreement shall become
void and of no further force and effect, except for Sections 9.1
and 9.2, and Article VIII herein. Nothing in this Section 7.4
shall be deemed to release the Company or any Purchaser from any
liability for any breach under this Agreement or the Registration
Rights Agreement, or to impair the rights of the Company and the
Purchasers to compel specific performance by the other party of
its obligations under this Agreement and the Registration Rights
Agreement.
<PAGE>
Indemnification
SSSSS. General Indemnity. The Company agrees to indemnify and hold
harmless the Purchasers (and their respective directors, officers,
affiliates, agents, successors and assigns) from and against any
and all losses, liabilities, deficiencies, costs, damages and
expenses (including, without limitation, reasonable attorney's
fees, charges and disbursements) incurred by the Purchasers as a
result of any inaccuracy in or breach of the representations,
warranties or covenants made by the Company herein. Each Purchaser
severally but not jointly agrees to indemnify and hold harmless
the Company and its directors, officers, affiliates, agents,
successors and assigns from and against any and all losses,
liabilities, deficiencies, costs, damages and expenses (including,
without limitation, reasonable attorneys fees, charges and
disbursements) incurred by the Company as result of any inaccuracy
in or breach of the representations, warranties or covenants made
by such Purchaser herein.
TTTTT. Indemnification Procedure. Any party entitled to indemnification
under this Article VIII (an "indemnified party") will give written
notice to the indemnifying party of any matters giving rise to a
claim for indemnification; provided, that the failure of any party
entitled to indemnification hereunder to give notice as provided
herein shall not relieve the indemnifying party of its obligations
under this Article VIII except to the extent that the indemnifying
party is actually prejudiced by such failure to give notice. In
case any action, proceeding or claim is brought against an
indemnified party in respect of which indemnification is sought
hereunder, the indemnifying party shall be entitled to participate
in and, unless in the reasonable judgment of the indemnified party
a conflict of interest between it and the indemnifying party may
exist with respect of such action, proceeding or claim, to assume
the defense thereof with counsel reasonably satisfactory to the
indemnified party. In the event that the indemnifying party
advises an indemnified party that it will contest such a claim for
indemnification hereunder, or fails, within thirty (30) days of
receipt of any indemnification notice to notify, in writing, such
person of its election to defend, settle or compromise, at its
sole cost and expense, any action, proceeding or claim (or
discontinues its defense at any time after it commences such
defense), then the indemnified party may, at its option, defend,
settle or otherwise compromise or pay such action or claim. In any
event, unless and until the indemnifying party elects in writing
to assume and does so assume the defense of any such claim,
proceeding or action, the indemnified party's costs and expenses
arising out of the defense, settlement or compromise of any such
action, claim or proceeding shall be losses subject to
indemnification hereunder. The indemnified party shall cooperate
fully with the indemnifying party in connection with any
negotiation or defense of any such action or claim by the
indemnifying party and shall furnish to the indemnifying party all
information reasonably available to the indemnified party which
relates to such action or claim. The indemnifying party shall keep
the indemnified party fully apprised at all times as to the status
of the defense or any settlement negotiations with respect
thereto. If the indemnifying party elects to defend any
<PAGE>
such action or claim, then the indemnified party shall be entitled
to participate in such defense with counsel of its choice at its
sole cost and expense. The indemnifying party shall not be liable
for any settlement of any action, claim or proceeding effected
without its prior written consent. Notwithstanding anything in
this Article VIII to the contrary, the indemnifying party shall
not, without the indemnified party's prior written consent, settle
or compromise any claim or consent to entry of any judgment in
respect thereof which imposes any future obligation on the
indemnified party or which does not include, as an unconditional
term thereof, the giving by the claimant or the plaintiff to the
indemnified party of a release from all liability in respect of
such claim. The indemnification required by this Article VIII
shall be made by periodic payments of the amount thereof during
the course of investigation or defense, as and when bills are
received or expense, loss, damage or liability is incurred, so
long as the indemnified party irrevocably agrees to refund such
moneys if it is ultimately determined by a court of competent
jurisdiction that such party was not entitled to indemnification.
The indemnity agreements contained herein shall be in addition to
(a) any cause of action or similar rights of the indemnified party
against the indemnifying party or others, and (b) any liabilities
the indemnifying party may be subject to pursuant to the law.
Miscellaneous
UUUUU. Fees and Expenses. Each party shall pay the fees and expenses of
its advisors, counsel, accountants and other experts, if any, and
all other expenses, incurred by such party incident to the
negotiation, preparation, execution, delivery and performance of
this Agreement, provided that the Company shall pay $35,000, at
the Closing, from the aggregate Purchase Prices, to pay for all
attorneys fees and expenses (exclusive of disbursements and
out-of-pocket expenses) incurred by the Purchasers in connection
with the preparation, negotiation, execution and delivery of this
Agreement, the other Transaction Documents and the consummation of
the transactions contemplated hereunder and thereunder. In
addition, the Company shall pay all reasonable fees and expenses
incurred by the Purchasers in connection with any amendments,
modifications or waivers of this Agreement or any of the other
Transaction Documents, or incurred in connection with the
enforcement of this Agreement or any of the other Transaction
Documents, including, without limitation, all reasonable attorneys
fees and expenses. The Company shall pay all stamp or other
similar taxes and duties levied in connection with issuance of the
Shares pursuant hereto.
VVVVV. Specific Enforcement, Consent to Jurisdiction.
1. The remedies provided in this Agreement and the
Registration Rights Agreement shall be cumulative and in
addition to all other remedies available under this
Agreement and the Registration Rights Agreement, at law or
in equity (including a decree of specific
<PAGE>
performance and/or other injunctive relief), no remedy
contained herein shall be deemed a waiver of compliance
with the provisions giving rise to such remedy and nothing
herein shall limit a Purchaser's right to pursue actual
damages for any failure by the Company to comply with the
terms of this Agreement or the Registration Rights
Agreement. Amounts set forth or provided for herein and
therein with respect to payments, conversion and the like
(and the computation thereof) shall be the amounts to be
received by the Purchasers thereof and shall not, except as
expressly provided herein, be subject to any other
obligation of the Company (or the performance thereof). The
Company acknowledges that a breach by it of its obligations
hereunder and thereunder will cause irreparable harm to the
holders of the Common Shares and Warrants that the remedy
at law for any such breach may be inadequate. The Company
therefore agrees that, in the event of any such breach or
threatened breach, the holders of the Common Shares and
Warrants shall be entitled, in addition to all other
available remedies, to an injunction restraining any
breach, without the necessity of showing economic loss and
without any bond or other security being required.
2. Each of the Company and the Purchasers (i) hereby
irrevocably submits to the jurisdiction of the United
States District Court sitting in the Southern District of
New York and the courts of the State of New York located in
New York county for the purposes of any suit, action or
proceeding arising out of or relating to this Agreement or
any of the other Transaction Documents or the transactions
contemplated hereunder or thereunder and (ii) hereby
waives, and agrees not to assert in any such suit, action
or proceeding, any claim that it is not personally subject
to the jurisdiction of such court, that the suit, action or
proceeding is brought in an inconvenient forum or that the
venue of the suit, action or proceeding is improper. Each
of the Company and the Purchasers consents to process being
served in any such suit, action or proceeding by mailing a
copy thereof to such party at the address in effect for
notices to it under this Agreement and agrees that such
service shall constitute good and sufficient service of
process and notice thereof. Nothing in this Section 9.2
shall affect or limit any right to serve process in any
other manner permitted by law.
WWWWW. Entire Agreement; Amendment. This Agreement contains the entire
understanding and agreement of the parties with respect to the
matters covered hereby and, except as specifically set forth
herein or in the Transaction Documents, neither the Company nor
any of the Purchasers makes any representations, warranty,
covenant or undertaking with respect to such matters, and they
supersede all prior understandings and agreements with respect to
said subject matter, all of which are merged herein. No provision
of this Agreement may be waived or amended other than by a written
instrument signed by the
<PAGE>
Company and the Purchasers of at least two-thirds (2/3) of the
Common Shares then outstanding, and no provision hereof may be
waived other than by a written instrument signed by the party
against whom enforcement of any such amendment or waiver is
sought. No such amendment shall be effective to the extent that it
applies to less than all of the holders of the Common Shares then
outstanding. No consideration shall be offered or paid to any
person to amend or consent to a waiver or modification of any
provision of any of the Transaction Documents unless the same
consideration is also offered to all of the parties to the
Transaction Documents or holders of Common Shares, as the case may
be.
XXXXX. Notices. Any notice, demand, request, waiver or other
communication required or permitted to be given hereunder shall be
in writing and shall be effective (a) upon hand delivery by telex
(with correct answer back received), telecopy or facsimile at the
address or number designated below (if delivered on a business day
during normal business hours where such notice is to be received),
or the first business day following such delivery (if delivered
other than on a business day during normal business hours where
such notice is to be received) or (b) on the second business day
following the date of mailing by express courier service, fully
prepaid, addressed to such address, or upon actual receipt of such
mailing, whichever shall first occur. The addresses for such
communications shall be:
If to the Company: Virtual Communities, Inc.
589 8th Avenue, 7th Floor
New York, NY 10018
Attn.: Avi Moskowitz
Tel.: (212) 931-8600
Fax: (212) 214-0550
with copies to:
Wuersch & Gering LLP
11 Hanover Square, 21st Floor
New York, NY 10005
Attn: Travis Gering, Esq.
Telephone No.: (212) 509-5050
Facsimile No.: (212) 509-9559
If to any Purchaser:
At the address of such Purchaser as set forth on
Exhibit A to this Agreement, with copies as
specified in writing by such Purchaser and with copies
to:
with copies to:
Parker Chapin LLP
The Chrysler Building
405 Lexington Avenue
<PAGE>
New York, New York 10174
Attn: Christopher S. Auguste, Esq.
Tel.: (212) 704-6000
Fax: (212) 704-6288
Any party hereto may from time to time change its address for notices by giving
at least ten (10) days written notice of such changed address to the other party
hereto.
YYYYY. Waivers. No waiver by either party of any default with respect to
any provision, condition or requirement of this Agreement shall be
deemed to be a continuing waiver in the future or a waiver of any
other provisions, condition or requirement hereof, nor shall any
delay or omission of any party to exercise any right hereunder in
any manner impair the exercise of any such right accruing to it
thereafter.
ZZZZZ. Headings. The article, section and subsection headings in this
Agreement are for convenience only and shall not constitute a part
of this Agreement for any other purpose and shall not be deemed to
limit or affect any of the provisions hereof.
AAAAAA. Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties and their successors and
assigns. After each Closing, the assignment by a party to this
Agreement of any rights hereunder shall not affect the
obligations of such party under this Agreement.
BBBBBB. No Third Party Beneficiaries. This Agreement is intended for the
benefit of the parties hereto and their respective permitted
successors and assigns and is not for the benefit of, nor may
any provision hereof be enforced by, any other person.
CCCCCC. Governing Law. This Agreement shall be governed by and construed
in accordance with the internal laws of the State of New York,
without giving effect to the choice of law provisions. This
Agreement shall not be interpreted or construed with any
presumption against the party causing this Agreement to be
drafted.
DDDDDD. Survival. The representations and warranties of the Company and
the Purchasers contained in: (i) Sections 2.1(o) and (s) shall
survive indefinitely and (ii)those contained in Article II, with
the exception of Sections 2.1(o) and (s), shall survive the
execution and delivery hereof and the applicable Closing until
the date three (3) years from the Closing Date; and (iii) the
agreements and covenants set forth in Articles I, III, V, VII,
VIII and IX of this Agreement shall survive the execution and
delivery hereof and any Closing hereunder, as applicable, until
the Purchasers in the aggregate beneficially own (determined in
accordance with Rule 13d-3 under the Exchange Act) less than 2%
of the total combined voting power of all voting securities then
outstanding, provided, that Sections 3.1, 3.2, 3.4, 3.7, 3.8,
3.9, 3.10 and 3.12 shall not expire until the Registration
Statement required by Section 2 of the Registration Rights
Agreement is no longer required to be effective under the terms
and conditions of Registration Rights Agreement.
<PAGE>
EEEEEE. Counterparts. This Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one
and the same instrument and shall become effective when
counterparts have been signed by each party and delivered to the
other parties hereto, it being understood that all parties need
not sign the same counterpart. In the event any signature is
delivered by facsimile transmission, the party using such means
of delivery shall cause four (4) additional executed signature
pages to be physically delivered to the other parties within
five (5) days of the execution and delivery hereof.
FFFFFF. Publicity. The Company agrees that it will not disclose, and
will not include in any public announcement, the name of the
Purchasers, unless and until such disclosure is required by law
or applicable regulation, and then only to the extent of such
requirement. In addition to the foregoing, any disclosure of the
name of the Purchasers shall be subject to review and comment by
the Purchasers prior to disclosure.
GGGGGG. Severability. The provisions of this Agreement and the
Registration Rights Agreement are severable and, in the event
that any court of competent jurisdiction shall determine that
any one or more of the provisions or part of the provisions
contained in this Agreement or the Registration Rights Agreement
shall, for any reason, be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provision or part of
a provision of this Agreement or the Registration Rights
Agreement shall be reformed and construed as if such invalid or
illegal or unenforceable provision, or part of such provision,
had never been contained herein, so that such provisions would
be valid, legal and enforceable to the maximum extent possible.
HHHHHH. Further Assurances. From and after the date of this Agreement,
upon the request of any Purchaser or the Company, each of the
Company and the Purchasers shall execute and deliver such
instruments, documents and other writings as may be reasonably
necessary or desirable to confirm and carry out and to
effectuate fully the intent and purposes of this Agreement, the
Common Shares, the Warrants, the Warrant Shares, and the
Registration Rights Agreement.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorize officer as of the date first above
written.
VIRTUAL COMMUNITIES, INC.
By:
--------------------------------
Name:
Title:
MAGELLAN INTERNATIONAL, LTD.
By:
--------------------------------
Name:
Title:
ASPEN INTERNATIONAL, LTD.
<PAGE>
By:
--------------------------------
Name:
Title:
ACQUA WELLINGTON VALUE FUND, LTD.
By:
--------------------------------
Name: Anthony L.M. Inder Rieden
Title:
THE CUTTYHUNK FUND LIMITED
By:
---------------------------------
<PAGE>
Name:
Title:
EXHIBIT A to the
COMMON STOCK AND WARRANTS PURCHASE AGREEMENT
VIRTUAL COMMUNITIES, INC.
Number of Common Shares
List of Purchasers and Warrants Purchase Price
- ------------------ ----------------------- --------------
Magellan International, Ltd. Common Shares: 86,300 $500,000
Charlotte House Warrants:
Charlotte Street A: 21,575
Nassau, Bahamas B: 63,333
Tel. no.: 242-323-8884
Fax no.: 242-323-7918
Attn: Anthony L.M. Inder Rieden
Aspen International, Ltd. Common Shares: 86,300 $500,000
Charlotte House Warrants:
Charlotte Street A: 21,575:
Nassau, Bahamas B: 63,333
Tel. no.: 242-323-8884
Fax no.: 242-323-7918
Attn: Anthony L.M. Inder Rieden
Acqua Wellington Value Fund Ltd. Common Shares: 86,300 $500,000
c/o MeesPierson Fund Services Warrants:
(Bahamas) Limited A: 21,575
Montague Sterling Centre B: 63,333
P.O. Box SS-6238
East Bay Street
Nassau, Bahamas
Tel. no.: 242-394-2700
Fax no.: 242-394-8348
Attn: Anthony L.M. Inder Rieden
<PAGE>
The Cuttyhunk Fund Limited Common Shares: 258,900 $1,500,000
c/o Optima Fund Management Warrants:
1285 Avenue of Americas A: 64,725
New York, NY 10019 B: 250,000
Tel. no.: 212-484-3040
Fax no.: 212-484-3001
Attn: Geoffrey Lewis
<PAGE>
Exhibit 10(48)
FORM OF B WARRANT
THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE HEREOF HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT") OR ANY STATE SECURITIES LAWS AND MAY NOT BE EXERCISED BY OR ON
BEHALF OF ANY U.S. PERSON, OR SOLD, TRANSFERRED, ASSIGNED, PLEDGED OR
HYPOTHECATED OR OTHERWISE DISPOSED OF UNLESS IN ACCORDANCE WITH REGULATION S OF
THE ACT, REGISTERED UNDER THAT ACT AND UNDER APPLICABLE STATE SECURITIES LAWS OR
VIRTUAL COMMUNITIES, INC. (THE "COMPANY") SHALL HAVE RECEIVED AN OPINION, IN
FORM, SCOPE AND SUBSTANCE REASONABLY ACCEPTABLE TO THE COMPANY, OF COUNSEL WHO
IS REASONABLY ACCEPTABLE TO THE COMPANY THAT REGISTRATION OF SUCH SECURITIES
UNDER THE SECURITIES ACT AND UNDER THE PROVISIONS OF APPLICABLE FEDERAL AND
STATE SECURITIES LAWS IS NOT REQUIRED.
WARRANT B TO PURCHASE
SHARES OF COMMON STOCK
OF
VIRTUAL COMMUNITIES, INC.
No.: W-__ Number of Shares: _____
Date of Issuance: April __, 2000
FOR VALUE RECEIVED, subject to the provisions hereinafter set forth, the
undersigned, Virtual Communities, Inc., a Delaware corporation (together with
its successors and assigns, the "Issuer"), hereby certifies that
___________________ or its registered assigns is entitled to subscribe for and
purchase, during the period specified in this Warrant, up to _____ shares
(subject to adjustment as hereinafter provided) of the duly authorized, validly
issued, fully paid and non-assessable Common Stock of the Issuer, at an exercise
price per share equal to the Warrant Price then in effect, subject, however, to
the provisions and upon the terms and conditions hereinafter set forth.
Capitalized terms used in this Warrant and not otherwise defined herein shall
have the respective meanings specified in Section 9 hereof.
<PAGE>
Term. The right to subscribe for and purchase shares of Warrant Stock
represented hereby shall commence on the Original Issue Date and shall
expire at 5:00 p.m., eastern time, on the four (4) month anniversary date
of the Effectiveness Date (such period being the "Term").
Method of Exercise Payment; Issuance of New Warrant; Transfer and Exchange.
IIIIII. Time of Exercise. The purchase rights represented by this
Warrant may be exercised in whole or in part at any time and
from time to time during the Term.
JJJJJJ. Method of Exercise. The Holder hereof may exercise this Warrant,
in whole or in part, by the surrender of this Warrant (with the
exercise form attached hereto duly executed) at the principal
office of the Issuer, and by the payment to the Issuer of an
amount of consideration therefor equal to the Warrant Price in
effect on the date of such exercise multiplied by the number of
shares of Warrant Stock with respect to which this Warrant is
then being exercised, payable at such Holder's election by
certified or official bank check
KKKKKK. Issuance of Stock Certificates. In the event of any exercise of
the rights represented by this Warrant in accordance with and
subject to the terms and conditions hereof, 1. certificates for
the shares of Warrant Stock so purchased shall be dated the date
of such exercise and delivered to the Holder hereof within a
reasonable time, not exceeding three (3) Trading Days after such
exercise, and the Holder hereof shall be deemed for all purposes
to be the Holder of the shares of Warrant Stock so purchased as
of the date of such exercise, and 2. unless this Warrant has
expired, a new Warrant representing the number of shares of
Warrant Stock, if any, with respect to which this Warrant shall
not then have been exercised (less any amount thereof which
shall have been canceled in payment or partial payment of the
Warrant Price as hereinabove provided) shall also be issued to
the Holder hereof at the Issuer's expense within such time.
LLLLLL. Transferability of Warrant. Subject to Section 2(e), this
Warrant may be transferred by a Holder without the consent of
the Issuer. If transferred pursuant to this subsection and
subject to the provisions of subsection (e) of this Section 2,
this Warrant may be transferred on the books of the Issuer by
the Holder hereof in person or by duly authorized attorney, upon
surrender of this Warrant at the principal office of the Issuer,
properly endorsed (by the Holder executing an assignment in the
form attached hereto) and upon payment of any necessary transfer
tax imposed upon such transfer. This Warrant is exchangeable at
the principal office of the Issuer for Warrants for the purchase
of the same aggregate number of shares of Warrant Stock, each
new Warrant to represent the right to purchase such number of
shares of Warrant Stock as the Holder hereof shall designate at
the time of such exchange. All Warrants issued on transfers or
exchanges shall be dated the Original Issue Date and shall be
identical with this Warrant except as to the number of shares of
Warrant Stock issuable pursuant hereto.
MMMMMM. Compliance with Securities Laws.
1. The Holder of this Warrant, by acceptance hereof,
acknowledges that this Warrant or the shares of Warrant
Stock to be issued upon exercise hereof are being
acquired solely for the Holder's own account and not as
a nominee for any other party, and for investment, and
that the Holder will not offer, sell or otherwise
dispose of this Warrant or any shares of
<PAGE>
Warrant Stock to be issued upon exercise hereof except
pursuant to an effective registration statement, or an
exemption from registration, under the Securities Act
and any applicable state securities laws.
2. Except as provided in paragraph (iii) below, this
Warrant and all certificates representing shares of
Warrant Stock issued upon exercise hereof shall be
stamped or imprinted with a legend in substantially the
following form:
THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON
EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") OR STATE
SECURITIES LAWS AND MAY NOT BE EXERCISED BY OR ON BEHALF OF ANY
U.S. PERSON, OR SOLD, TRANSFERRED, ASSIGNED, PLEDGED OR
HYPOTHECATED OR OTHERWISE DISPOSED OF UNLESS IN ACCORDANCE WITH
REGULATION S OF THE ACT, REGISTERED UNDER THAT ACT AND UNDER
APPLICABLE STATE SECURITIES LAWS OR VIRTUAL COMMUNITIES, INC.
(THE "COMPANY") SHALL HAVE RECEIVED AN OPINION, IN FORM, SCOPE
AND SUBSTANCE REASONABLY ACCEPTABLE TO THE COMPANY, OF COUNSEL
WHO IS REASONABLY ACCEPTABLE TO THE COMPANY THAT REGISTRATION OF
SUCH SECURITIES UNDER THE SECURITIES ACT AND UNDER THE
PROVISIONS OF APPLICABLE FEDERAL AND STATE SECURITIES LAWS IS
NOT REQUIRED.
3. The restrictions imposed by this subsection (e) upon the
transfer of this Warrant or the shares of Warrant Stock
to be purchased upon exercise hereof shall terminate (A)
when such securities shall have been resold pursuant to
being effectively registered under the Securities Act,
(B) upon the Issuer's receipt of an opinion of counsel,
in form and substance reasonably satisfactory to the
Issuer, addressed to the Issuer to the effect that such
restrictions are no longer required to ensure compliance
with the Securities Act and state securities laws or (C)
upon the Issuer's receipt of other evidence reasonably
satisfactory to the Issuer that such registration and
qualification under state securities laws is not
required. Whenever such restrictions shall cease and
terminate as to any such securities, the Holder thereof
shall be entitled to receive from the Issuer (or its
transfer agent and registrar), without expense (other
than applicable transfer taxes, if any), new Warrants
(or, in the case of shares of Warrant Stock, new stock
certificates) of like tenor not bearing the applicable
legend required by paragraph (ii) above relating to the
Securities Act and applicable state securities laws.
NNNNNN. Continuing Rights of Holder. The Issuer will, at the time of or
at any time after each exercise of this Warrant, upon the
request of the Holder hereof, acknowledge in writing the extent,
if any, of its continuing obligation to afford to such Holder
all rights
<PAGE>
to which such Holder shall continue to be entitled after such
exercise in accordance with the terms of this Warrant; provided
that if any such Holder shall fail to make any such request, the
failure shall not affect the continuing obligation of the Issuer
to afford such rights to such Holder.
Stock Fully Paid: Reservation and Listing of Shares: Covenants.
OOOOOO. Stock Fully Paid. The Issuer represents, warrants, covenants and
agrees that all shares of Warrant Stock which may be issued upon
the exercise of this Warrant or otherwise hereunder will, upon
issuance, be duly authorized, validly issued, fully paid and
non-assessable and free from all taxes and liens, security
interest, charges and encumbrances of any nature whatsoever
created by or through the Issuer. The Issuer further represents,
warrants, covenants and agrees that during the period within
which this Warrant may be exercised, the Issuer will at all
times have authorized and reserved for the purpose of the issue
upon exercise of this Warrant a sufficient number of shares of
Common Stock to provide for the exercise of this Warrant.
(v) Reservation. If any shares of Common Stock required to be reserved for
issuance upon exercise of this Warrant or as otherwise provided hereunder
require registration or qualification with any governmental authority under any
federal or state law before such shares may be so issued, the Issuer will in
good faith use its best efforts as expeditiously as possible at its expense to
cause such shares to be duly registered or qualified. If the Issuer shall list
any shares of Common Stock on any securities exchange or market it will, at its
expense, list thereon, maintain and increase when necessary such listing, of,
all shares of Warrant Stock from time to time issued upon exercise of this
Warrant or as otherwise provided hereunder, and, to the extent permissible under
the applicable securities exchange rules, all unissued shares of Warrant Stock
which are at any time issuable hereunder, so long as any shares of Common Stock
shall be so listed. The Issuer will also so list on each securities exchange or
market, and will maintain such listing of, any other securities which the Holder
of this Warrant shall be entitled to receive upon the exercise of this Warrant
if at the time any securities of the same class shall be listed on such
securities exchange or market by the Issuer.
(w) Covenants. The Issuer shall not by any action including, without
limitation, amending the Certificate of Incorporation or the by-laws of the
Issuer, or through any reorganization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities or any other action, avoid or
seek to avoid the observance or performance of any of the terms or provisions of
this Warrant, but will at all times in good faith carry out all such terms or
provisions and take all such actions as may be necessary or appropriate to
protect the rights of the Holder hereof against dilution (to the extent
specifically provided herein) or impairment. Without limiting the generality of
the foregoing, the Issuer will (i) not permit the par value, if any, of its
Common Stock to exceed the then effective Warrant Price, (ii) not amend or
modify any provision of the Certificate of Incorporation or by-laws of the
Issuer in any manner that would adversely affect in any way the powers,
preferences or relative participating, optional or other special rights of the
Common Stock or which would adversely affect the rights of the Holders of the
Warrants, (iii) take all such action as may be reasonably necessary in order
that the Issuer may validly and legally issue fully paid and nonassessable
shares of Common Stock, free and clear of any liens, security interests,
charges, claims, encumbrances and restrictions (other than as provided herein)
upon the exercise of this Warrant, and (iv) obtain all such authorizations,
exemptions or consents from any public regulatory body having jurisdiction
thereof as may be necessary to enable the Issuer to perform its obligations
under this Warrant.
<PAGE>
(x) Loss, Theft, Destruction of Warrants. Upon receipt of evidence
satisfactory to the Issuer of the ownership of and the loss, theft, destruction
or mutilation of any Warrant and, in the case of any such loss, theft or
destruction, upon receipt of indemnity or security satisfactory to the Issuer
or, in the case of any such mutilation, upon surrender and cancellation of such
Warrant, the Issuer will make and deliver, in lieu of such lost, stolen,
destroyed or mutilated Warrant, a new Warrant of like tenor and representing the
right to purchase the same number of shares of Common Stock.
(y) Rights and Obligations under the Registration Rights Agreement. The
shares of Warrant Stock are entitled to the benefits and subject to the terms of
the Registration Rights Agreement dated as of even date herewith between the
Issuer and the Holders listed on the signature pages thereof (as amended from
time to time, the "Registration Rights Agreement"). The Issuer shall keep or
cause to be kept a copy of the Registration Rights Agreement, and any amendments
thereto, at its chief executive office and shall furnish, without charge, copies
thereof to the Holder upon request.
Adjustment of Warrant Price and Warrant Share Number. The number and kind of
Securities purchasable upon the exercise of this Warrant and the Warrant
Price shall be subject to adjustment from time to time upon the happening
of certain events as follows:
(z) Recapitalization, Reorganization, Reclassification, Consolidation,
Merger or Sale.
1. In case the Issuer after the Original Issue Date shall do any of
the following (each, a "Triggering Event"): (a) consolidate with
or merge into any other Person and the Issuer shall not be the
continuing or surviving Person of such consolidation or merger,
or (b) permit any other Person to consolidate with or merge into
the Issuer and the Issuer shall be the continuing or surviving
Person but, in connection with such consolidation or merger, any
Capital Stock of the Issuer shall be changed into or exchanged
for Securities of any other Person or cash or any other property,
or (c) transfer all or substantially all of its properties or
assets to any other Person, or (d) effect a capital
reorganization or reclassification of its Capital Stock, then,
and in the case of each such Triggering Event, proper provision
shall be made so that, upon the basis and the terms and in the
manner provided in this Warrant, the Holder of this Warrant shall
be entitled, at the option of such Holder, (x) upon the exercise
hereof at any time after the consummation of such Triggering
Event, to the extent this Warrant is not exercised prior to such
Triggering Event, to receive at the Warrant Price in effect at
the time immediately prior to the consummation of such Triggering
Event in lieu of the Common Stock issuable upon such exercise of
this Warrant prior to such Triggering Event, the Securities, cash
and property to which such Holder would have been entitled upon
the consummation of such Triggering Event if such Holder had
exercised the rights represented by this Warrant immediately
prior thereto, subject to adjustments (subsequent to such
corporate action) as nearly equivalent as possible to the
adjustments provided for in Section 4 hereof or (y) to sell this
Warrant (or, at such Holder's election, a portion hereof)
concurrently with the Triggering Event to the Person continuing
after or surviving such Triggering Event, or to the Issuer (if
Issuer is the continuing or surviving Person) at a sales price
equal to the amount of cash, property and/or Securities to which
a holder of the number of shares of Common Stock
<PAGE>
which would otherwise have been delivered upon the exercise of
this Warrant would have been entitled upon the effective date or
closing of any such Triggering Event (the "Event Consideration"),
less the amount or portion of such Event Consideration having a
fair value equal to the aggregate Warrant Price applicable to
this Warrant or the portion hereof so sold.
2. Notwithstanding anything contained in this Warrant to the
contrary, the Issuer will not effect any Triggering Event unless,
prior to the consummation thereof, each Person (other than the
Issuer) which may be required to deliver any Securities, cash or
property upon the exercise of this Warrant as provided herein
shall assume, by written instrument delivered to, and reasonably
satisfactory to, the Holder of this Warrant, (A) the obligations
of the Issuer under this Warrant (and if the Issuer shall survive
the consummation of such Triggering Event, such assumption shall
be in addition to, and shall not release the Issuer from, any
continuing obligations of the Issuer under this Warrant) and (B)
the obligation to deliver to such Holder such shares of
Securities, cash or property as, in accordance with the foregoing
provisions of this subsection (a), such Holder shall be entitled
to receive, and such Person shall have similarly delivered to
such Holder an opinion of counsel for such Person, which counsel
shall be reasonably satisfactory to such Holder, stating that
this Warrant shall thereafter continue in full force and effect
and the terms hereof (including, without limitation, all of the
provisions of this subsection (a)) shall be applicable to the
Securities, cash or property which such Person may be required to
deliver upon any exercise of this Warrant or the exercise of any
rights pursuant hereto.
3. If with respect to any Triggering Event, the Holder of this
Warrant has exercised its right as provided in clause (y) of
subparagraph (i) of this subsection (a) to sell this Warrant or a
portion thereof, the Issuer agrees that as a condition to the
consummation of any such Triggering Event the Issuer shall secure
such right of Holder to sell this Warrant to the Person
continuing after or surviving such Triggering Event and the
Issuer shall not effect any such Triggering Event unless upon or
prior to the consummation thereof the amounts of cash, property
and/or Securities required under such clause (y) are delivered to
the Holder of this Warrant. The obligation of the Issuer to
secure such right of the Holder to sell this Warrant shall be
subject to such Holder's cooperation with the Issuer, including,
without limitation, the giving of reasonable and customary
representations and warranties to the purchaser in connection
with any such sale. Prior notice of any Triggering Event shall be
given to the Holder of this Warrant in accordance with Section 13
hereof.
(aa) Subdivision or Combination of Shares. If the Issuer, at any time while
this Warrant is outstanding, shall subdivide or combine any shares of Common
Stock, (i) in case of subdivision of shares, the Warrant Price shall be
proportionately reduced (as at the effective date of such subdivision or, if the
Issuer shall take a record of holders of its Common Stock for the purpose of so
subdividing, as at the applicable record date, whichever is earlier) to reflect
the increase in the total number of
<PAGE>
shares of Common Stock outstanding as a result of such subdivision, or (ii) in
the case of a combination of shares, the Warrant Price shall be proportionately
increased (as at the effective date of such combination or, if the Issuer shall
take a record of holders of its Common Stock for the purpose of so combining, as
at the applicable record date, whichever is earlier) to reflect the reduction in
the total number of shares of Common Stock outstanding as a result of such
combination.
(bb) Certain Dividends and Distributions. If the Issuer, at any time while
this Warrant is outstanding, shall:
4. Stock Dividends. Pay a dividend in, or make any other
distribution to its stockholders (without consideration therefor)
of, shares of Common Stock, the Warrant Price shall be adjusted,
as at the date the Issuer shall take a record of the holders of
the Issuer's Capital Stock for the purpose of receiving such
dividend or other distribution (or if no such record is taken, as
at the date of such payment or other distribution), to that price
determined by multiplying the Warrant Price in effect immediately
prior to such record date (or if no such record is taken, then
immediately prior to such payment or other distribution), by a
fraction (1) the numerator of which shall be the total number of
shares of Common Stock outstanding immediately prior to such
dividend or distribution, and (2) the denominator of which shall
be the total number of shares of Common Stock outstanding
immediately after such dividend or distribution (plus in the
event that the Issuer paid cash for fractional shares, the number
of additional shares which would have been outstanding had the
Issuer issued fractional shares in connection with said
dividends); or
5. Other Dividends. Pay a dividend on, or make any distribution of
its assets upon or with respect to (including, but not limited
to, a distribution of its property as a dividend in liquidation
or partial liquidation or by way of return of capital), the
Common Stock (other than as described in clause (i) of this
subsection (c)), or in the event that the Company shall offer
options or rights to subscribe for shares of Common Stock, or
issue any Common Stock Equivalents, to all of its holders of
Common Stock, then on the record date for such payment,
distribution or offer or, in the absence of a record date, on the
date of such payment, distribution or offer, the Holder shall
receive what the Holder would have received had it exercised this
Warrant in full immediately prior to the record date of such
payment, distribution or offer or, in the absence of a record
date, immediately prior to the date of such payment, distribution
or offer.
PPPPPP. Intentionally Omitted.
QQQQQQ. Intentionally Omitted.
RRRRRR. Intentionally Omitted.
SSSSSS. Intentionally Omitted.
<PAGE>
(cc) Other Action Affecting Common Stock. In case after the Original Issue
Date the Issuer shall take any action affecting its Common Stock, other than an
action described in any of the foregoing subsections (a) through (c) of this
Section 4, inclusive, and the failure to make any adjustment would not fairly
protect the purchase rights represented by this Warrant in accordance with the
essential intent and principle of this Section 4, then the Warrant Price shall
be adjusted in such manner and at such time as the Board may in good faith
determine to be equitable in the circumstances.
(dd) Other Adjustments of Warrant Price. If on the three (3) month
anniversary date of the Effectiveness Date, the Per Share Market Value of the
Common Stock is less than the Purchase Price of the Common Stock, then,
notwithstanding any redemption of this Warrant pursuant to Section 8 hereof, the
Warrant Price shall be adjusted to $.01 per share with respect to the number of
shares of Warrant Stock determined by multiplying the number of Purchased Shares
by a fraction:
a) the numerator of which shall be equal to the difference of
(x) the Purchase Price minus (y) the Per Share Market Value
then in effect, and
b) the denominator of which shall be equal to the Per Share
Market Value then in effect.
(ee) Adjustment of Warrant Share Number. Upon each adjustment in the
Warrant Price pursuant to any of the foregoing provisions of this Section 4
(other than pursuant to subsection (i) of this Section 4), the Warrant Share
Number shall be adjusted, to the nearest one hundredth of a whole share, to the
product obtained by multiplying the Warrant Share Number immediately prior to
such adjustment in the Warrant Price by a fraction, the numerator of which shall
be the Warrant Price immediately before giving effect to such adjustment and the
denominator of which shall be the Warrant Price immediately after giving effect
to such adjustment. If the Issuer shall be in default under any provision
contained in Section 3 of this Warrant so that shares issued at the Warrant
Price adjusted in accordance with this Section 4 would not be validly issued,
the adjustment of the Warrant Share Number provided for in the foregoing
sentence shall nonetheless be made and the Holder of this Warrant shall be
entitled to purchase such greater number of shares at the lowest price at which
such shares may then be validly issued under applicable law. Such exercise shall
not constitute a waiver of any claim arising against the Issuer by reason of its
default under Section 3 of this Warrant.
(ff) Form of Warrant after Adjustments. The form of this Warrant need not
be changed because of any adjustments in the Warrant Price or the number and
kind of Securities purchasable upon the exercise of this Warrant.
Notice of Adjustments. Whenever the Warrant Price or Warrant Share Number shall
be adjusted pursuant to Section 4 hereof (for purposes of this Section 5,
each an "adjustment"), the Issuer shall cause its Chief Financial Officer
to prepare and execute a certificate setting forth, in reasonable detail,
the event requiring the adjustment, the amount of the adjustment, the
method by which such adjustment was calculated (including a description of
the basis on which the Board made any determination hereunder), and the
Warrant Price and Warrant Share Number after giving effect to such
adjustment, and shall cause copies of such certificate to be delivered to
the Holder of this Warrant promptly after each adjustment. Any dispute
between the Issuer and the Holder of this Warrant with respect to the
matters set forth in such certificate may at the option of the Holder of
this Warrant be submitted to one of the national accounting firms currently
known as the "big five" selected by the Holder, provided that the Issuer
shall have ten (10) days after receipt of notice from such Holder of its
selection of such firm to object thereto, in which case such Holder shall
select another such firm and the Issuer shall have no such right of
<PAGE>
objection. The firm selected by the Holder of this Warrant as provided in
the preceding sentence shall be instructed to deliver a written opinion as
to such matters to the Issuer and such Holder within thirty (30) days after
submission to it of such dispute. Such opinion shall be final and binding
on the parties hereto. The fees and expenses of such accounting firm shall
be paid by the Issuer.
Fractional Shares. No fractional shares of Warrant Stock will be issued in
connection with and exercise hereof, but in lieu of such fractional shares,
the Issuer shall make a cash payment therefor equal in amount to the
product of the applicable fraction multiplied by the Per Share Market Value
then in effect.
Intentionally Omitted.
Redemption. On or after the Original Issue Date, the Issuer may redeem all or a
portion of this Warrant which is outstanding upon five (5) days prior
written notice (the "Redemption Notice") at a price per share of Warrant
Stock equal to $0.75 (the "Redemption Price"); provided; however, that
beginning on the three (3) month anniversary date of the Effectiveness
Date, the Redemption Price shall be reduced by $0.25 for the first month
and by $.05 for each month thereafter. Notwithstanding anything to the
contrary contained herein, the minimum Redemption Price shall be equal to
$0.25 per share. The Redemption Notice shall state the date of redemption
which date shall be the sixth (6th) day after the Issuer has delivered the
Redemption Notice (the "Redemption Date"), the Redemption Price and the
number of shares of Warrant Stock to be redeemed by the Company. The Issuer
shall not send a Redemption Notice unless it has good and clear funds for a
minimum of the amount it intends to redeem in a bank account controlled by
the Issuer. The Issuer shall deliver the Redemption Price to each Holder
within three (3) business days after the Issuer has delivered the
Redemption Notice against receipt. If the Issuer fails to pay the
Redemption Price by the sixth (6th) business day after the Issuer has
delivered the Redemption Notice, the redemption will be declared null and
void and the Issuer shall lose its right to serve a Redemption Notice in
the future.
Definitions. For the purposes of this Warrant, the following terms have the
following meanings:
"A Warrants" means the non-callable A Warrants issued in connection with the
sale and issuance of Common Stock pursuant to the Purchase Agreement.
"Additional Shares of Common Stock" means all shares of Common Stock issued by
the Issuer after the Original Issue Date, and all shares of Other Common, if
any, issued by the Issuer after the Original Issue Date, except the Warrant
Stock and the shares of Common Stock issued upon exercise of the A Warrants and
the Callable Warrants.
"Board" shall mean the Board of Directors of the Issuer.
"Callable Warrants" means the callable warrant issued in connection with the
sale and issuance of Common Stock pursuant to the Purchase Agreement.
"Capital Stock" means and includes (i) any and all shares, interests,
participations or other equivalents of or interests in (however designated)
corporate stock, including, without limitation, shares of preferred or
preference stock, (ii) all partnership interests (whether general or limited) in
any Person which is a partnership, (iii) all membership interests or limited
liability company interests in any limited liability company, and (iv) all
equity or ownership interests in any Person of any other type.
"Certificate of Incorporation" means the Certificate of Incorporation, as
amended, of the Issuer as in effect on the Original Issue Date, and as hereafter
from time to time amended, modified, supplemented or restated in accordance with
the terms hereof and thereof and pursuant to applicable law.
"Common Stock" means the Common Stock, $.01 par value, of the Issuer and any
other Capital Stock into which such stock may hereafter be changed.
"Common Stock Equivalent" means any Convertible Security or warrant, option or
other right to subscribe for or purchase any Additional Shares of Common Stock
or any Convertible Security.
<PAGE>
"Convertible Securities" means evidences of Indebtedness, shares of Capital
Stock or other Securities which are or may be at any time convertible into or
exchangeable for Additional Shares of Common Stock. The term "Convertible
Security" means one of the Convertible Securities.
"Effectiveness Date" means the date of effectiveness of the Registration
Statement (as defined in the Registration Rights Agreement) filed pursuant to
the Registration Rights Agreement.
"Governmental Authority" means any governmental, regulatory or self-regulatory
entity, department, body, official, authority, commission, board, agency or
instrumentality, whether federal, state or local, and whether domestic or
foreign.
"Holders" mean the Persons who shall from time to time own any Warrant. The term
"Holder" means one of the Holders.
"Independent Appraiser" means a nationally recognized or major regional
investment banking firm or firm of independent certified public accountants of
recognized standing (which may be the firm that regularly examines the financial
statements of the Issuer) that is regularly engaged in the business of
appraising the Capital Stock or assets of corporations or other entities as
going concerns, and which is not affiliated with either the Issuer or the Holder
of any Warrant.
"Issuer" means Virtual Communities, Inc., a Delaware corporation, and its
successors.
"Majority Holders" means at any time the Holders of Warrants exercisable for a
majority of the shares of Warrant Stock issuable under the Warrants at the time
outstanding.
"Original Issue Date" means April __, 2000.
"Other Common" means any other Capital Stock of the Issuer of any class which
shall be authorized at any time after the date of this Warrant (other than
Common Stock) and which shall have the right to participate in the distribution
of earnings and assets of the Issuer without limitation as to amount.
"OTC Bulletin Board" means the over-the-counter electronic bulletin board.
"Person" means an individual, corporation, limited liability company,
partnership, joint stock company, trust, unincorporated organization, joint
venture, Governmental Authority or other entity of whatever nature.
"Per Share Market Value" means on any particular date (a) the closing bid price
per share of the Common Stock on such date the Nasdaq SmallCap Market, Nasdaq
National Market or other registered national stock exchange on which the Common
Stock is then listed or if there is no such price on such date, then the closing
bid price on such exchange or quotation system on the date nearest preceding
such date, or (b) if the Common Stock is not listed then on the Nasdaq SmallCap
Market, Nasdaq National Market or any registered national stock exchange, the
closing bid price for a share of Common Stock in the over-the-counter market, as
reported by NASDAQ or in the National Quotation Bureau Incorporated or similar
organization or agency succeeding to its functions of reporting prices) at the
close of business on such date, or (c) if the Common Stock is not then reported
by NASDAQ the National Quotation Bureau Incorporated (or similar organization or
agency succeeding to its functions of
<PAGE>
reporting prices), then the average of the "Pink Sheet" quotes for the relevant
conversion period, as determined in good faith by the holder, or (d) if the
Common Stock is not then publicly traded the fair market value of a share of
Common Stock as determined by an Independent Appraiser selected in good faith by
the Majority Holders; provided, however, that the Issuer, after receipt of the
determination by such Independent Appraiser, shall have the right to select an
additional Independent Appraiser, in which case, the fair market value shall be
equal to the average of the determinations by each such Independent Appraiser;
and provided, further that all determinations of the Per Share Market Value
shall be appropriately adjusted for any stock dividends, stock splits or other
similar transactions during such period. The determination of fair market value
by an Independent Appraiser shall be based upon the fair market value of the
Issuer determined on a going concern basis as between a willing buyer and a
willing seller and taking into account all relevant factors determinative of
value, and shall be final and binding on all parties. In determining the fair
market value of any shares of Common Stock, no consideration shall be given to
any restrictions on transfer of the Common Stock imposed by agreement or by
federal or state securities laws, or to the existence or absence of, or any
limitations on, voting rights.
"Purchase Agreement" means the Common Stock and Warrants Purchase Agreement
dated as of March 31, 2000 among the Issuer and the investors a party thereto.
"Purchase Price" means $5.79375 per share.
"Purchased Shares" means the total number of shares of Common Stock purchased by
the initial Holder of this Warrant pursuant to the Purchase Agreement.
"Registration Rights Agreement" has the meaning specified in Section 3(e)
hereof.
"Redemption Date" has the meaning specified in Section 8 hereof.
"Redemption Notice" has the meaning specified in Section 8 hereof.
"Redemption Price" has the meaning specified in Section 8 hereof.
"Securities" means any debt or equity securities of the Issuer, whether now or
hereafter authorized, any instrument convertible into or exchangeable for
Securities or a Security, and any option, warrant or other right to purchase or
acquire any Security. "Security" means one of the Securities.
"Securities Act" means the Securities Act of 1933, as amended, or any similar
federal statute then in effect.
"Subsidiary" means any corporation at least 50% of whose outstanding Voting
Stock shall at the time be owned directly or indirectly by the Issuer or by one
or more of its Subsidiaries, or by the Issuer and one or more of its
Subsidiaries.
"Term" has the meaning specified in Section 1 hereof.
"Trading Day" means (a) a day on which the Common Stock is traded on the Nasdaq
SmallCap Market, Nasdaq National Market or other registered national stock
exchange on which the Common Stock has been listed, or (b) if the Common Stock
is not listed on the Nasdaq SmallCap Market, Nasdaq National Market or other
registered national stock exchange on which the Common Stock has been listed, a
day on which the Common Stock is quoted in the over-the-counter market, as
<PAGE>
reported by the OTC Bulletin Board, or (c) if the Common Stock is not quoted on
the OTC Bulletin Board, a day on which the Common Stock is quoted in the
over-the-counter market as reported by the National Quotation Bureau
Incorporated (or any similar organization or agency succeeding its functions of
reporting prices); provided, however, that in the event that the Common Stock is
not listed or quoted as set forth in (a), (b) and (c) hereof, then Trading Day
shall mean any day except Saturday, Sunday and any day which shall be a legal
holiday or a day on which banking institutions in the State of New York are
authorized or required by law or other government action to close.
"Voting Stock", as applied to the Capital Stock of any corporation, means
Capital Stock of any class or classes (however designated) having ordinary
voting power for the election of a majority of the members of the Board of
Directors (or other governing body) of such corporation, other than Capital
Stock having such power only by reason of the happening of a contingency.
"VWAP" shall mean the daily volume weighted average price (based on a Trading
Day from 9:30 a.m. to 4:00 p.m., E.S.T.) of the Company on the Nasdaq SmallCap
Market (or any successor thereto) as reported by Bloomberg Financial LP using
the AQR function.
"Warrants" means the B Warrants issued in connection with the sale and issuance
of Common Stock pursuant to the Purchase Agreement, including, without
limitation, this Warrant, and any other warrants of like tenor issued in
substitution or exchange for any thereof pursuant to the provisions of Section
2(c), 2(d) or 2(e) hereof or of any of such other Warrants.
"Warrant Price" means $14.875 per share, as such price may be adjusted from time
to time as shall result from the adjustments specified in Section 4 hereof.
"Warrant Share Number" means at any time the aggregate number of shares of
Warrant Stock which may at such time be purchased upon exercise of this Warrant,
after giving effect to all prior adjustments and increases to such number made
or required to be made under the terms hereof.
"Warrant Stock" means Common Stock issuable upon exercise of any Warrant or
Warrants or otherwise issuable pursuant to any Warrant or Warrants.
Other Notices. In case at any time:
c) the Issuer shall make any distributions to the holders of
Common Stock; or
d) the Issuer shall authorize the granting to all holders of
its Common Stock of rights to subscribe for or purchase any
shares of Capital Stock of any class or of any Common Stock
Equivalents or Convertible Securities or other rights; or
e) there shall be any reclassification of the Capital Stock of
the Issuer; or
f) there shall be any capital reorganization by the Issuer; or
g) there shall be any (i) consolidation or merger involving the
Issuer or (ii) sale, transfer or other disposition of all or
substantially all of the
<PAGE>
Issuer's property, assets or business (except a merger or
other reorganization in which the Issuer shall be the
surviving corporation and its shares of Capital Stock shall
continue to be outstanding and unchanged and except a
consolidation, merger, sale, transfer or other disposition
involving a wholly-owned Subsidiary); or
h) there shall be a voluntary or involuntary dissolution,
liquidation or winding-up of the Issuer or any partial
liquidation of the Issuer or distribution to holders of
Common Stock;
then, in each of such cases, the Issuer shall give written notice to the Holder
of the date on which (i) the books of the Issuer shall close or a record shall
be taken for such dividend, distribution or subscription rights or (ii) such
reorganization, reclassification, consolidation, merger, disposition,
dissolution, liquidation or winding-up, as the case may be, shall take place.
Such notice also shall specify the date as of which the holders of Common Stock
of record shall participate in such dividend, distribution or subscription
rights, or shall be entitled to exchange their certificates for Common Stock for
securities or other property deliverable upon such reorganization,
reclassification, consolidation, merger, disposition, dissolution, liquidation
or winding-up, as the case may be. Such notice shall be given at least twenty
(20) days prior to the action in question and not less than twenty (20) days
prior to the record date or the date on which the Issuer's transfer books are
closed in respect thereto. The Issuer shall give to the Holder notice of all
meetings and actions by written consent of its stockholders, at the same time in
the same manner as notice of any meetings of stockholders is required to be
given to stockholders who do not waive such notice (or, if such actions require
no notice, then two (2) Trading Days written notice thereof describing the
matters upon which action is to be taken). The Holder shall have the right to
send two representatives selected by it to each meeting, who shall be permitted
to attend, but not vote at, such meeting and any adjournments thereof. This
Warrant entitles the Holder to receive copies of all financial and other
information distributed or required to be distributed to the holders of the
Common Stock.
Amendment and Waiver. Any term, covenant, agreement or condition in this Warrant
may be amended, or compliance therewith may be waived (either generally or
in a particular instance and either retroactively or prospectively), by a
written instrument or written instruments executed by the Issuer and the
Majority Holders; provided, however, that no such amendment or waiver shall
reduce the Warrant Share Number, increase the Warrant Price, shorten the
period during which this Warrant may be exercised or modify any provision
of this Section 11 without the consent of the Holder of this Warrant.
Governing Law. THIS WARRANT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO PRINCIPLES
OF CONFLICTS OF LAW. THIS WARRANT SHALL NOT BE INTERPRETED OR CONSTRUED
WITH ANY PRESUMPTION AGAINST THE PARTY CAUSING THIS WARRANT TO BE DRAFTED.
Notices. Any and all notices or other communications or deliveries required or
permitted to be provided hereunder shall be in writing and shall be deemed
given and effective on the earlier of (i) the date of transmission, if such
notice or communication is delivered via facsimile at the facsimile
telephone number specified for notice prior to 5:00 p.m., eastern standard
time, on a Trading Day, (ii) the Trading Day after the date of
transmission, if such notice or communication is delivered via facsimile at
the facsimile telephone number specified for notice later than 5:00 p.m.,
eastern standard time, on any date and earlier than 11:59 p.m., eastern
standard time, on such date, (iii) the Trading Day following the date of
mailing, if sent by nationally recognized overnight courier service or (iv)
actual receipt by the party to whom such notice is required to be given.
The addresses for such communications shall be with respect to the Holder
of this Warrant or of Warrant Stock issued pursuant hereto, addressed to
such Holder at its last known address or facsimile number appearing on the
books of the Issuer maintained for such purposes, or with respect to the
Issuer, addressed to:
Virtual Communities, Inc.
589 Eighth Avenue, 7th Floor
<PAGE>
New York, New York 10018
Facsimile Number: (212) 214-0550
Attention: Avi Moskowitz
or to such other address or addresses or facsimile number or numbers as any such
party may most recently have designated in writing to the other parties hereto
by such notice. Copies of notices to the Issuer shall be sent to Wuersch &
Gering LLP, 11 Hanover Square, 21st Floor, New York, New York, Attention: Travis
Gering, Esq., Facsimile no.(212) 509-9559. Copies of notices to the Holder shall
be sent to (a) Parker Chapin LLP, 405 Lexington Avenue, New York, New York
10174, Attention: Christopher S. Auguste, Esq., Facsimile no.: (212) 704-6288.
Warrant Agent. The Issuer may, by written notice to each Holder of this Warrant,
appoint an agent having an office in New York, New York for the purpose of
issuing shares of Warrant Stock on the exercise of this Warrant pursuant to
subsection (b) of Section 2 hereof, exchanging this Warrant pursuant to
subsection (d) of Section 2 hereof or replacing this Warrant pursuant to
subsection (d) of Section 3 hereof, or any of the foregoing, and thereafter
any such issuance, exchange or replacement, as the case may be, shall be
made at such office by such agent.
Remedies. The Issuer stipulates that the remedies at law of the Holder of this
Warrant in the event of any default or threatened default by the Issuer in
the performance of or compliance with any of the terms of this Warrant are
not and will not be adequate and that, to the fullest extent permitted by
law, such terms may be specifically enforced by a decree for the specific
performance of any agreement contained herein or by an injunction against a
violation of any of the terms hereof or otherwise.
Successors and Assigns. This Warrant and the rights evidenced hereby shall inure
to the benefit of and be binding upon the successors and assigns of the
Issuer, the Holder hereof and (to the extent provided herein) the Holders
of Warrant Stock issued pursuant hereto, and shall be enforceable by any
such party.
Modification and Severability. If, in any action before any court or agency
legally empowered to enforce any provision contained herein, any provision
hereof is found to be unenforceable, then such provision shall be deemed
modified to the extent necessary to make it enforceable by such court or
agency. If any such provision is not enforceable as set forth in the
preceding sentence, the unenforceability of such provision shall not affect
the other provisions of this Warrant, but this Warrant shall be construed
as if such unenforceable provision had never been contained herein.
Headings. The headings of the Sections of this Warrant are for convenience of
reference only and shall not, for any purpose, be deemed a part of this
Warrant.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
IN WITNESS WHEREOF, the Issuer has executed this Warrant as of the day and year
first above written.
VIRTUAL COMMUNITIES, INC.
By:
--------------------------------------
Name:
Title:
<PAGE>
EXERCISE FORM
[NAME OF ISSUER]
The undersigned _______________, pursuant to the provisions of the within
Warrant, hereby elects to purchase _____ shares of Common Stock of
___________________ covered by the within Warrant.
Dated: _________________ Signature __________________________________
Address ____________________________
____________________________
ASSIGNMENT
FOR VALUE RECEIVED, _________________ hereby sells, assigns and transfers unto
__________________ the within Warrant and all rights evidenced thereby and does
irrevocably constitute and appoint _____________, attorney, to transfer the said
Warrant on the books of the within named corporation.
Dated: _________________ Signature __________________________________
Address ____________________________
____________________________
PARTIAL ASSIGNMENT
FOR VALUE RECEIVED, _________________ hereby sells, assigns and transfers unto
__________________ the right to purchase _________ shares of Warrant Stock
evidenced by the within Warrant together with all rights therein, and does
irrevocably constitute and appoint ___________________, attorney, to transfer
that part of the said Warrant on the books of the within named corporation.
Dated: _________________ Signature __________________________________
Address ____________________________
____________________________
FOR USE BY THE ISSUER ONLY:
This Warrant No. W-A- cancelled (or transferred or exchanged) this _____ day of
___________, _____, shares of Common Stock issued therefor in the name of
_______________, Warrant No. W-A- issued for ____ shares of Common Stock in the
name of _______________.
<PAGE>
EXHIBIT 23(1)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report dated April 14, 2000 (and to all references to our Firm) included in or
made a part of this registration statement.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
New York, New York
May 5, 2000
