<PAGE>
As filed with the Securities and Exchange Commission on March 16, 2000
Registration No. 333-85095
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 2 to
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
ACTIVEWORLDS.COM, INC.
- --------------------------------------------------------------------------------
(Name of Small Business Issuer in Its Charter)
<TABLE>
<CAPTION>
Delaware 511210 13-3883101
- ------------------------------------ ------------------------------ --------------------
<S> <C> <C>
(State or Other Jurisdiction of (Primary Standard Industrial (IRS Employer
Incorporation or Organization) Classification Code Number) Identification No.)
</TABLE>
95 PARKER STREET
NEWBURYPORT, MASSACHUSETTS 01950
(978) 499-0222
----------------------------------------------------
(Address and telephone number of Principal Executive Offices)
Mr. J.P. McCormick, Chief Financial Officer
Activeworlds.com, Inc.
95 Parker Street
Newburyport, MA 01950
(978) 499-0222
----------------------------------------------------
(Name, address and telephone number of agent for service)
Please send a copy of all communications to:
John A. Kostrubanic, Esq. Asher S. Levitsky P.C.
Peabody & Arnold LLP Esanu Katsky Korins & Siger, LLP
50 Rowes Wharf 605 Third Avenue
Boston, MA 02110-3342 New York, NY 10158
(617) 951-2100 (212) 953-6000
Fax: (617) 951-2125 Fax: (212) 953-6899
<PAGE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
---------------------
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, 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 effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
---------------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
---------------------
The Registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with section 8(a) of
the securities act of 1933 or until the registration statement shall become
effective on such date as the commission, acting pursuant to said section 8(a),
may determine.
================================================================================
<PAGE>
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Proposed
Title of Each Maximum Proposed Amount of
Class of Securities Amount Offering Price(1) Maximum Registration
To be Registered to be Registered Per Unit Aggregate Fee
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Units each consisting of one share of
common stock and one series B
redeemable common stock purchase
warrant(2): .......................... 1,380,000 $ 5.00 $6,900,000 $ 1,821.60
- -------------------------------------------------------------------------------------------------------
Common stock(3) ...................... 1,380,000 6.00 8,280,000 2,185.92
- -------------------------------------------------------------------------------------------------------
Underwriters' unit purchase option(4) 120,000 .0001 12.01 --
- -------------------------------------------------------------------------------------------------------
Units issuable upon exercise of the
Underwriters' unit purchase option(5) 120,000 $ 8.25 $990,000 $261.36
- -------------------------------------------------------------------------------------------------------
Common stock(6) ...................... 120,000 6.00 720,000 190.08
- -------------------------------------------------------------------------------------------------------
Totals ................................................................................. $4,458.97(7)
- -------------------------------------------------------------------------------------------------------
</TABLE>
- ----------
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457 (a) promulgated under the Securities Act of 1933, as
amended, based on a price of $5.00 per unit. The price of the common stock
on the Over-the-Counter Bulletin Board (OTC Bulletin Board) on March 9,
2000, after giving effect to the two-for-three reverse split which is to be
effective on the effective date of this registration statement was $5.2969.
(2) Includes 180,000 units issuable upon exercise of the underwriters'
over-allotment option.
(3) Represents shares of common stock issuable upon exercise of the Series B
common stock purchase warrants included in the units offered hereby,
including warrants issuable upon exercise of the over-allotment option.
(4) The underwriters' unit purchase option entitles the underwriters to purchase
120,000 units at 165% of the initial public offering price per unit.
(5) Each unit consists of one share of common stock and one warrant.
(6) Represents shares of common stock issuable upon exercise of the warrants
issued pursuant to the underwriters' unit purchase option.
(7) Of which $3,389.39 has been paid.
<PAGE>
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
Form SB-2 Item Numbers and Caption Heading in Prospectus
- ------------------------------------------------------- ---------------------------------------------
<S> <C>
1. Front of the Registration Statement and Outside
Front Cover of Prospectus ....................... Cover Page of Form SB-2 and of Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus ...................................... Inside Front and Outside Back Cover Pages of
Prospectus
3. Summary Information and Risk Factors .............. Prospectus Summary and Risk Factors
4. Use of Proceeds ................................... Use of Proceeds
5. Determination of Offering Price ................... Cover Page of Prospectus, Risk Factors and
Underwriting
6. Dilution .......................................... Dilution
7. Selling Security Holders .......................... Not applicable
8. Plan of Distribution .............................. Cover Page of Prospectus and Underwriting
9. Legal Proceedings ................................. Not Applicable
10. Directors, Promoters, Executive Officers,
Promoters and Control Persons ................... Management
11. Security Ownership of Certain Beneficial
Owners and Management ........................... Principal Stockholders
12. Description of Securities ......................... Description of Securities
13. Interest of Named Experts and Counsel ............. Legal Matters
14. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities... Not Applicable
15. Organization Within Last Five Years ............... Related Party Transactions
16. Description of Business ........................... Risk Factors and Business
17. Management's Discussion and Analysis or Plan
of Operation .................................... Management's Discussion and Analysis of
Financial Condition and Results of Operations
18. Description of Property ........................... Business
19. Certain Relationships and Related Transactions..... Related Party Transactions
20. Market for Common Equity and Related
Stockholder Matters ............................. Market for Common Stock
21. Executive Compensation ............................ Management
22. Financial Statements .............................. Financial Statements
23. Changes In and Disagreements With
Accountants on Accounting and Financial
Disclosure ...................................... Not Applicable
</TABLE>
<PAGE>
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. This 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.
SUBJECT TO COMPLETION, DATED March 16, 2000
1,200,000 Units
ACTIVEWORLDS.COM, INC.
This is a firm-commitment offering of 1,200,000 of our units. For each unit
you purchase you will receive one share of our common stock and a Series B
redeemable common stock purchase warrant to purchase one share of our common
stock at $5.00 per share.
No public market currently exists for our units or warrants.
Our common stock is traded on the OTC Bulletin Board under the symbol AWLD.
We have applied for the listing of our common stock and units on the Nasdaq
SmallCap Market and the Boston Stock Exchange. The warrants will not be listed
on any exchange or market until they may be separately traded. At that time, we
intend to apply for the listing of the warrants on the Nasdaq SmallCap Market
and the Boston Stock Exchange.
The initial offering price of the units may not reflect the market price
after the offering.
Investing in the units involves a high degree of risk. Please see the "Risk
Factors" beginning on page 6.
Per Unit Total
---------- -------
Public Offering Price.................. $ $
Underwriting Discounts ................ $ $
Proceeds, before expenses,
to Activeworlds.com ................. $ $
We have granted the underwriters a 45-day option to purchase up to 180,000
additional units on the same terms and conditions as set forth above solely to
cover over-allotments, if any.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is accurate or complete. Any representation to the contrary is a
criminal offense.
The underwriters expect to deliver the units to purchasers on or about ,
2000.
HD Brous & Co., Inc. Solid ISG Capital Markets, LLC
The date of this prospectus is March ,2000
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information that we present more fully elsewhere in
this prospectus. You should carefully read the entire prospectus, including
"Risk Factors" and the financial statements, before making any investment
decision.
Our Business
Activeworlds.com, Inc. is a provider of Internet software products and
services that enable the efficient delivery of three-dimensional content over
the Internet and intranets. Our comprehensive software platform is comprised of
proprietary three-dimensional server software, browser and authoring tools.
Users can use our Active Worlds technology to create objects and structures in
virtual worlds which other users can see and explore in real time. We also act
as an application service provider and permit users to license our technology
for integration into their web applications, which may be hosted on our server.
We believe that the emergence of the Internet as a global communications medium
has increased the demand for efficient delivery of three-dimensional content.
Our goals are to be the leader in three-dimensional Internet environments
and interactive communication and to position our software platform as a
standard for the delivery of three-dimensional content over the Internet. In
furtherance of these goals, we have chosen to offer our three-dimensional
browser to users free of charge to promote the use of our software platform. We
currently have a worldwide user base of more than 1,000,000 users.
We believe that by continually enhancing our technology, developing new
applications for the three-dimensional Internet market and implementing an
extensive marketing effort, we will be able to achieve our goals. We believe
that three-dimensional Internet applications provide enhanced richness that will
be of interest to users developing Internet-based advertising, distance
learning, training, entertainment, e-commerce, leisure time and chat
applications and other on-line activities. As three-dimensional Internet
technology becomes more accepted, we believe that a market will develop for our
technology in these areas.
We have licensed our software products to such well-known companies as
Boeing, Carlsberg Brewing, Centropolis Studios (a division of Columbia
Pictures), Earthweb, Kodak, Philips Multimedia, United States Government
agencies (including NASA), the Canadian Ministry of Education, The Amsterdam
Stock Exchange, Helsinki Telephone, Scandinavia Online and Swiss Telecom.
Additionally, The University of Colorado, Cornell University, The University of
Santa Cruz, The University of London, and Nagoya University (Japan) are using
our software. Our software has received reviews, awards and coverage from
numerous sources, including Bloomberg TV, CNET, Der Spiegel magazine, Industry
Standard magazine, Softseek, Tucows, Yahoo Internet Life magazine and ZDNet.
We currently derive our revenue primarily from three sources:
o Licenses for our software, which include the right to use our technology
either on our server or on a separate server which is licensed to the
client for use at its facilities
o Membership fees, which are paid by users who become citizens
o Three dimensional content production for our licensees
2
<PAGE>
The Offering
Securities Offered....... 1,200,000 units, each unit consisting of one share
of common stock and a series B warrant to purchase
one share of common stock. For one year from the
date of this prospectus, or earlier at the
discretion of the representatives, you will be able
to sell or otherwise transfer the common stock and
warrants which comprise the units only as units. As
a result, during this period you will not be able to
sell separately the common stock or warrants which
comprise the units.
Description of the Warrants
Exercise price:........ Each warrant will entitle you to purchase one share
of common stock at $ per share, subject to
adjustment.
Exercise period:....... Unless we redeem the warrants, you may exercise the
warrants at any time during the period commencing
, 2001, or earlier with the consent of the
representatives, until , 2005.
Redemption:............ Commencing , 2001, we may redeem the warrants
at a price of $.10 per warrant if the closing price
of our common stock for each day of a 20 trading day
period ending not earlier than three trading days
prior to the date the warrants are called for
redemption is at least 150% of the exercise price of
the warrants.
Common Stock Outstanding
Prior to this offering. 7,342,762 shares
After this offering:... 8,542,762 shares
The number of shares of common stock outstanding
prior to and after this offering does not include
3,189,225 shares of common stock which we may issue
as follows:
o 913,332 shares issuable upon exercise of stock
options which are either outstanding (including
246,667 options granted to two directors outside
of our 1999 stock plan) or which we may grant
pursuant to our 1999 long-term incentive plan;
o 475,893 shares issuable upon exercise of
outstanding warrants;
o 1,200,000 shares issuable upon exercise of the
warrants included in the units offered by this
prospectus;
o 360,000 shares issuable as part of the units
issuable upon exercise of the underwriters'
over-allotment option and the underlying
warrants; and
o 240,000 shares issuable upon exercise of the
underwriters' unit purchase option and the
underlying warrants.
Risk Factors............. An investment in our units involves a high degree
of risk. You should not consider purchasing our
units unless you can afford to lose your entire
investment. See "Risk Factors" for important factors
you should consider.
3
<PAGE>
Use of Proceeds.......... The net proceeds of this offering will be used for
marketing, research and development, equipment
purchases, working capital and other corporate
purposes.
Market Symbols:
Common Stock:.......... AWLD (OTC Bulletin Board (present) and Nasdaq
SmallCap Market (proposed) XXX (Boston Stock
Exchange)(proposed))
Unit:.................. AWLDU (Nasdaq SmallCap Market)(proposed) XXX(Boston
Stock Exchange)(proposed)
We have applied for the listing of our common stock
and units on the Nasdaq SmallCap Market and the
Boston Stock Exchange. We intend to apply for
listing of the warrants and a trading symbol for the
warrants at the time the warrants become separately
traded
All share and per share information in this prospectus reflects and, where
appropriate, is restated for, a one-for-two reverse split of our common stock,
effective in January 1999 and a two-for-three reverse split of our common stock,
which was approved by our board of directors and stockholders in March 2000 and
will become effective on the effective date of this prospectus.
Unless we say otherwise, all information in this prospectus assumes that
the over-allotment option has not been exercised.
About Activeworlds.com
Activeworlds.com, Inc. is a Delaware corporation and was incorporated on
September 5, 1995 under the name Vanguard Enterprises, Inc. In January 1999:
o We acquired all of the issued and outstanding stock of Circle of Fire
Studios, Inc., a Nevada corporation, in exchange for 5,433,211 shares of
our common stock.
o We effected a one-for-two reverse split of our common stock.
o We sold 1,333,333 shares of our common stock in an offering pursuant to a
private placement.
o We changed our corporate name to Activeworlds.com, Inc., and we changed
the name of our subsidiary from Circle of Fire Studios, Inc., to
Activeworlds, Inc.
o Our sole business became the business of Circle of Fire Studios, which is
described in this prospectus. The former business of Vanguard
Enterprises, which was the marketing of hair care products on cable
television, was discontinued in 1996.
The transaction by which we acquired the stock of Circle of Fire Studios is
referred to as the "Circle of Fire Acquisition."
Our address is 95 Parker Street, Newburyport, Massachusetts 01950. Our
telephone number is (978) 499-0222. Our website address is www.activeworlds.com.
Information contained on our website is not a part of this prospectus.
4
<PAGE>
SUMMARY FINANCIAL INFORMATION
Statement of Operations Data:
Year Ended Year Ended
December 31, 1999 December 31, 1998
----------------- -----------------
Revenue ............................ $808,993 $ 576,163
(Loss) from operations ............. (860,289) (69,533)
(Loss) before extraordinary item ... (835,819) (69,533)
Extraordinary item ................. -- 109,807
Net income (loss) .................. (835,819) 40,274
Net income (loss) per share
Basic and diluted................. (.116) .007
Common stock outstanding:
basic ............................ 7,207,145 5,433,211
diluted .......................... 7,207,145 5,476,051
Balance Sheet Data:
<TABLE>
<CAPTION>
December 31, 1999
---------------------------------
As Adjusted(1) Actual December 31, 1998
---------------- --------------- ------------------
<S> <C> <C> <C>
Current assets ............................ $ 5,421,250 $ 621,250 $ 148,847
Working capital (deficiency)............... 5,091,922 291,922 (410,934)
Short-term debt ........................... -- -- 54,753
Accumulated deficit ....................... (1,620,488) (1,620,488) (784,669)
Stockholders' equity (deficiency) ......... 5,417,774 617,774 (393,946)
Net tangible book value per share ......... .59 .033 (.08)
</TABLE>
- -------------
(1) As adjusted to reflect the sale of the 1,200,000 units offered hereby at an
assumed public offering price of $5.00 per unit, and our receipt of the net
proceeds from the sale of the units.
5
<PAGE>
RISK FACTORS
An investment in our units involves a high degree of risk, and you should
only consider purchasing our units if you can afford to sustain the loss of your
entire investment. You should carefully consider the risks described below and
the other information before deciding to purchase any units.
RISKS RELATED TO OUR BUSINESS
We have not generated significant revenue, and are likely to continue to
generate losses. We have incurred operating losses since our organization and we
are likely continue to incur losses. We may never generate revenues sufficient
to allow us to operate profitably. For the year ended December 31, 1999, we had
a net loss of $836,000, or $.116 per share (basic and diluted) on revenue of
$809,000. For the year ended December 31, 1998, we had a loss before
extraordinary item of $70,000 and net income of $40,000 on revenue of $576,000.
Our net income for 1998 reflects an extraordinary gain of $110,000, which
resulted from our eliminating debt in connection with a litigation settlement.
We require significant funds to continue our operations. At December 31,
1999, our working capital was $292,000, which was sufficient to meet only our
most immediate cash requirements. Unless we complete this offering or raise
substantial capital from another financing, we will not have sufficient cash for
our operations and we may have to suspend or reduce our operations. Our
auditors' report on our financial statement includes an explanatory paragraph as
to our ability to continue as a going concern.
Our revenue from advertising has been nominal and may never develop into a
significant source of revenue. The majority of our revenue has been generated
from registration fees paid by our citizens. We believe that our long-term
success is dependent upon our ability to generate revenue from advertising. To
be successful in this regard we will need to develop brand recognition and an
effective internal sales force. We do not believe that our present user base is
sufficient to attract significant advertising revenue. Furthermore, in order to
attract advertisers to our website, we must make the website attractive both
through marketing and the content we offer to the persons sought by desired
advertisers. If our marketing effort is not successful in generating brand
recognition for the Active Worlds name and increasing advertising revenue, our
business and financial positions would be impaired.
We may not be successful in marketing our technology for e-commerce
applications. To operate profitably we need to license our technology for use as
an integral component in e-commerce solutions for business, educational,
training, entertainment, leisure-time and other commercial applications. We
intend to do so through aggressive marketing campaigns online and using
traditional media to promote the use of our technology. If our marketing efforts
are unsuccessful, we will face difficult and costly choices in deciding whether
and how to redirect these efforts. If we are unable to develop a successful
licensing program, our business will be materially and adversely affected.
Our failure to develop strategic relationships could inhibit our ability to
grow. We believe that, in order to market our technology, we need to enter into
strategic relationships with other businesses to develop commercial applications
6
<PAGE>
of our technology directed at specific businesses. We do not presently have any
agreements relating to strategic relationships, we may never enter into such
agreements, and our failure to develop such relationships could impair our
ability to grow.
Because we are seeking to expand our business and have limited management
personnel, we may have difficulty in managing our growth. Our expenses,
particularly personnel expenses incurred in connection with hiring and training
new employees, have increased substantially. We expect these expenses to
continue to increase as we implement our marketing and research and development
programs. As a result, since our senior management is comprised only of our
chief executive and financial officers, our personnel, management systems and
resources are being strained, with no assurance that the implementation of our
programs will result in increased revenue. To manage our growth, we must
implement operational and financial systems and controls and recruit, train and
manage new employees, including executive, middle management and technical
personnel. We cannot be certain that we will be able to integrate new executives
and other employees into our organization effectively. If we do not manage our
growth effectively, our business, results of operations and financial condition
could be materially and adversely affected.
We may have difficulty hiring qualified employees with technical or sales
experience. There is significant competition for qualified employees in the
computer programming and Internet industries, and in the area of sales and we
have experienced, and we expect to continue to experience, difficulty in hiring
and retaining highly skilled employees with appropriate qualifications. We
cannot be certain that we will be able to recruit and retain employees to meet
our technical staffing or sales needs.
We are dependent upon our key personnel. We are dependent upon the services
of J.P. McCormick, our chief financial officer, Richard F. Noll, our president
and Roland Villet, our lead programmer. The loss of any of these persons'
services would have a material adverse effect on our business and future
prospects. Although Mr. McCormick, Mr. Noll and Mr. Villet have entered into
employment agreements with us, the existence of employment agreements does not
guarantee their continued employment with us.
If our expenses exceed our expectation, we may require significant cash in
addition to the proceeds of this offering. We require the net proceeds from this
offering to fund our marketing and research and development programs as well as
our administrative infrastructure. To the extent that these expenses exceed our
expectations and we are unable to generate funds from our operations, the net
proceeds from this offering may not be sufficient to fund our operations for the
next twelve months. We may not be able to obtain financing when we require it,
and any financing may not be on terms which are acceptable to us and may result
7
<PAGE>
in substantial dilution to our stockholders. If we are unable to raise needed
funds, we may have to reduce the scope of our marketing and research and
development activities, which would have a material adverse effect upon our
business and financial condition.
We may be unable to respond to the rapid technological change in our
industry. The computer and Internet industries are characterized by rapidly
changing technologies, frequent new product and service introductions and
evolving industry standards. Our future success will depend on our ability to
adapt to rapidly changing technologies by continually improving the performance,
features and reliability of our services, particularly with respect to other
companies in the virtual reality area. If three-dimensional Internet standards
evolve in a manner which is incompatible with our technology, we may not be able
to effectively market our technology. Other software and hardware companies may
have the market power to impose on the marketplace an incompatible technology,
and we may not have access to that technology. Our failure to offer the most
current or widely accepted technologies could have a material adverse effect
upon our business.
We may make acquisitions following completion of this offering without
informing stockholders or seeking their approval. Following this offering, we
may make acquisitions of other businesses. Although we anticipate that any
business we acquire will be related directly or indirectly to our present
business, it is possible that we may make acquisitions in one or more unrelated
businesses. Any acquisition may be made using a portion of the net proceeds of
this offering or with our securities or a combination of cash and securities. At
present, we are not engaged in formal or informal discussions with respect to
any acquisition. However, if we make an acquisition, we may not seek stockholder
approval or provide stockholders with any information concerning the acquisition
prior to the execution of an acquisition agreement. Furthermore, we cannot
assure you that any acquisitions which we may make will be profitable.
Future acquisitions may disrupt or otherwise have a negative impact on our
business. If we make acquisitions, we could have difficulty integrating the
acquired company's personnel and operations with our own. Furthermore, even if
an acquisition is not completed, the negotiations relating to the acquisition
could disrupt our business, distract our management and employees, increase our
expenses and otherwise impair our operations and financial condition.
We do not have any patent protection for our software, and we may not be
able to protect our intellectual property rights. Although we have registered a
version of our source code with the United States Copyright Office, we have no
patents on our software products, and we rely primarily on our nondisclosure
agreements with our employees and others to whom we have provided technical
proprietary information for protection of our software code. We also rely on
licensed software products in our operations. However, the steps we have taken
may not protect our intellectual property rights, and it is possible that third
parties may infringe upon our proprietary rights.
If our computer systems and software products are not year 2000 compliant,
our business could suffer. Although we have not incurred any significant
liability as a result of the change of the year to 2000, we may incur liability
if we discover problems in connection with the failure of our software or
software provided to us by our suppliers or used by users of our
three-dimensional environment to be Year 2000 compliant.
8
<PAGE>
RISKS RELATED TO THE INTERNET
If businesses do not accept three-dimensional Internet websites as a medium
for advertising and e-commerce, our ability to generate revenue may be limited.
If we cannot demonstrate to both advertisers and businesses that our
three-dimensional technology is viable and desirable as a medium for transacting
business, our ability to generate revenue from both advertising and licensing of
our technology will be limited.
Our systems may fail or experience a slow down and our users depend upon
others for access to our website. Substantially all of our communications
hardware and some of our other computer hardware operations are located at our
headquarters in Newburyport, Massachusetts. We do not have a back-up computer
system. Fire, floods, earthquakes, power loss, telecommunications failures,
break-ins and similar events could damage these systems. Any of these
occurrences could adversely affect our business. Our insurance policies may not
adequately compensate us for any losses that may occur due to any failures or
interruptions in our systems. Furthermore, if the response time of our website
is slow for some reason, users could abandon our website and cease in using our
products and services.
If we are unable to assure e-commerce vendors and users that we can provide
adequate security, our website may not be accepted. Our website is vulnerable to
physical or electronic break-ins, viruses or other problems that affect websites
and Internet communication and commerce generally. As e-commerce becomes more
prevalent, our customers may become more concerned about security. The
circumvention of our security measures may result in the misappropriation of
proprietary information, such as credit card information, or interruptions of
our operations. Any such security breaches could damage our reputation and
expose us to a risk of loss or liability.
9
<PAGE>
Government regulation and legal uncertainties could add additional costs to
doing business on the Internet. There are currently few laws or regulations that
specifically regulate communications or commerce on the Internet. However, in
the future, laws and regulations may be adopted and existing laws and
regulations may be interpreted in a manner that address issues such as user
privacy, pricing, defamation, taxation and the characteristics and quality of
products and services which may have an adverse effect on the number of users of
our technology.
RISKS RELATING TO THE OFFERING
Our common stock price has been and is likely to be highly volatile. Our
common stock is quoted on the OTC Bulletin Board. However, until January 1999,
there was no significant trading activity in our stock, and a regular and
established market may never be developed or maintained. In addition, we cannot
give you any assurance as to the liquidity of any market for the units or common
stock or the prices at which you may be able to sell units or common stock. The
market price of our common stock has been, and is likely to continue to be,
highly volatile as the stock market in general, and the market for
Internet-related and technology companies in particular, has been highly
volatile. You may not be able to sell your units or shares of our common stock
following periods of volatility because of the market's adverse reaction to the
volatility. In the past, following periods of volatility in the market price of
a company's securities, securities class action litigation has often been
instituted. Litigation could result in substantial costs and a diversion of
management's attention and resources. We cannot assure you that our stock will
trade at the same levels as other Internet stocks or that Internet stocks in
general will sustain their current market prices. Factors that could cause
volatility may include actual or anticipated fluctuations in our quarterly
operating results, announcements of technological innovations, changes in
financial estimates by securities analysts, conditions or trends in the Internet
industry and changes in the market valuations of other Internet companies.
The offering price of our units and the terms of the warrants were
arbitrarily determined. The initial public offering price and the composition of
the units and the exercise price and other terms of the warrants were determined
by negotiations between us and the underwriters and does not necessarily relate
to our book value, net worth, financial condition or other established criteria
of value. There is presently no market for our units.
Because the common stock and warrants comprising the units will not be
immediately transferable or separable, you will not be able to sell your common
stock or warrants as separate securities. If you buy units, you may not be able
to deliver shares of common stock included as part of the units in connection
with any sale by you of our common stock until the shares of common stock and
warrants are separately tradable. The common stock and warrants will not be
tradable except as units for one year from the date of this prospectus or
earlier at the discretion of the representatives of the underwriters. The
separation of the common stock and warrants may have an adverse effect upon the
price of the common stock.
We are unlikely to pay dividends on our common stock in the foreseeable
future. We have not paid any dividends on our common stock since our inception
and we do not anticipate paying any dividends in the foreseeable future. We plan
to retain earnings, if any, to finance the development and expansion of our
business.
By paying $5.00 per unit, you will incur immediate and substantial
dilution. On December 31, 1999, we had a net tangible book value of $.033 per
share of common stock. If you purchase units in this offering, you will sustain
a dilution in the net tangible book value per share of common stock of $ 4.41,
or 88.2% from the $5.00 initial public offering price of the units, without
allocating any value to the warrants.
The representatives of the underwriters may be a dominating influence on
the market for our units. A significant number of the units may be sold to
customers of the underwriters and, in particular, the representatives of the
underwriters. These customers may subsequently sell their units to and purchase
10
<PAGE>
units from the representatives. Although they have no obligation to do so, the
representatives may become market makers and otherwise effect transactions in
the units or our common stock and, if they participate in making a market, they
may be a dominating influence in the trading of our securities. The prices and
the liquidity of the units and common stock may be significantly affected by the
degree, if any, of the participation of the representatives in these markets,
should a market develop.
If our common stock is delisted from the Nasdaq SmallCap Market and the
Boston Stock Exchange, it will be subject to the penny-stock rules, which may
impair the market and market price of our common stock. We are applying for the
listing of our common stock on the Nasdaq SmallCap Market and the Boston Stock
Exchange. If our common stock is listed and does not meet Nasdaq's and the
Boston Stock Exchange's requirements for continued listing, our common stock may
be delisted from the Nasdaq SmallCap Market or the Boston Stock Exchange. If our
common stock is not listed on either the Nasdaq SmallCap Market or the Boston
Stock Exchange, our common stock will become subject to the Securities and
Exchange Commission's penny-stock rules, which impose additional sales practice
requirements on broker-dealers which sell our stock to persons other than
established customers and institutional accredited investors. The rules may
affect the ability of broker-dealers to sell our common stock and may affect
your ability to sell any common stock you purchase either pursuant to this
prospectus or in the open market.
We have broad discretion as to the use of the proceeds from this offering,
and you will have only limited information as to the manner in which we will use
the proceeds. The net proceeds of this offering are allocated to working capital
purposes, including marketing and research and development. Management will have
broad discretion with respect to the expenditure of the net proceeds of this
offering. If you purchase units in this offering, you will be entrusting your
funds to our management, upon whose judgment you must depend, with only limited
information concerning our specific plans or intentions. Furthermore,
circumstances may change which may result in a reallocation of our intended use
of proceeds.
Our stock price may be affected by shares of common stock becoming
available for public sale. We estimate that the public float for our common
stock presently consists of approximately 1,666,666 shares of common stock. This
number includes 1,333,333 shares which were issued in private placements in
January 1999 and may be sold subject to the volume limitations under Rule 144
commencing ninety days from the date of this prospectus until January 2001, at
which time they may be sold without limitation. In addition, the 105,597 shares
of common stock sold in a private placement in June 1999 may be sold pursuant to
Rule 144 commencing ninety days from the date of this prospectus. The shares of
common stock issued as part of the units may not be sold or otherwise
transferred except as part of a unit for one year from the date of this
prospectus, or earlier in the discretion of the underwriters. A total of 537,092
of the remaining shares of common stock will become eligible for sale under Rule
144 the earlier of ninety days following the effective date of this offering or
the date upon which we become a reporting company under the Securities Exchange
Act, subject to the Rule 144 volume limitations. Our officers, directors and 5%
stockholders have agreed not to sell an additional 5,011,718 shares publicly
without the consent of the representatives of the underwriters for six months
from the date of this prospectus. The availability of a significant number of
shares of common stock for public sale could adversely affect the market price
of our common stock and could impair our ability to raise capital through the
sale of additional equity securities.
We may issue preferred stock without approval of our stockholders which
could make it more difficult for a third-party to acquire us and depress our
stock price. We have the authority to issue preferred stock without a vote of
our stockholders. In the future, our board of directors may issue one or more
series of preferred stock that has more than one vote per share or which give
the holders other preferential rights which may dilute or impair the rights of
the holders of common stock. This could permit our board of directors to issue
such stock to investors who support our management and give effective control of
our business to our management. Furthermore, under some circumstances issuing
preferred stock may violate the rules of the Nasdaq SmallCap Market, which could
result in our common stock being delisted from that market. The delisting of our
common stock from the Nasdaq SmallCap Market could result in both a drop in the
stock price and decline in interest in our stock which could make it more
difficult for you to sell your shares.
11
<PAGE>
We are controlled by our management which means that management can prevent
a third party from acquiring us even if an acquisition is in the best interest
of our stockholders. Upon completion of this offering, Mr. Richard F. Noll, our
president and chief executive officer, and Mr. J.P. McCormick, our chairman of
the board and chief financial officer, together will own approximately 60% of
our outstanding common stock. As a result, they may be able to exercise control
over all matters requiring stockholder approval, including the election of
directors and approval of significant corporate transactions. Their voting
control could have the effect of delaying or preventing a change of control
which might benefit our stockholders. In addition, Mr. Noll and Mr. McCormick
were our only directors prior to November 1999. As a result, all actions taken
by or ratified by our board of directors during that period have been approved
solely by Mr. Noll and Mr. McCormick.
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that address, among
other things, our expectations with respect to the development of our business
and the market for three-dimensional technology for the Internet. In addition to
these statements, trend analysis and other information including words such as
"seek," "anticipate," "believe," "plan," "estimate," "expect," "intend" and
other similar expressions are forward looking statements. These statements may
be found in the sections of this prospectus entitled "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business." Some or all of the results anticipated by the
forward-looking statements will not occur as a result of various factors
including, but not limited to, all of the risks discussed in "Risk Factors" and
elsewhere in this prospectus.
DILUTION
The net tangible book value of our common stock at December 31, 1999 was
approximately $.033 per share. Net tangible book value represents the amount of
our tangible assets reduced by the amount of our liabilities. Without taking
into effect any change in our net tangible book value after December 31, 1999
other than as a result of the sale of the 1,200,000 shares of common stock
included in the units, after deducting fees and other estimated expenses of the
offering and ascribing no value to the warrants, our net tangible book value as
of December 31, 1999, would have been approximately $ 0.59 per share. This
amount represents an immediate increase in net tangible book value per share of
approximately $.557 to the present stockholders and an immediate dilution per
share of approximately $4.41 to the purchasers of the units. The dilution
represents the difference between the offering price per unit and the net
tangible book value per share after the offering.
The following table illustrates the dilution of one share of common stock
as of December 31, 1999:
Offering price per share of common stock ................................ $ 5.00
Net tangible book value per share at December 31, 1999 .... ............. $0.033
Increase per share attributable to sale of the units offered hereby ..... $0.557
Pro forma net tangible book value per share after offering .............. $ 0.59
Dilution to public investors ............................................ $ 4.41
If the underwriters exercise the over-allotment option in full, the pro
forma net tangible book value would be $0.671 per share of common stock,
resulting in an increase in the net tangible book value per share of $0.638 and
dilution to the public investors of $4.329 per share.
12
<PAGE>
MARKET FOR COMMON STOCK; DIVIDENDS
Our common stock has been traded on the OTC Bulletin Board under the symbol
AWLD since January 22, 1999. From January 13, 1996 until January 21, 1999, our
common stock was included in the OTC Bulletin Board under the symbol VANG.
During that period, our business was the business of Vanguard Enterprises. The
National Quotation Bureau, Inc. advised us that there was no trading in the
common stock during the period from January 1, 1997 until January 14, 1999.
The high and low closing prices for our common stock since January 1, 1997
are as set forth below.
<TABLE>
<CAPTION>
Period High Low
------ ---- ---
<S> <C> <C>
1999:
First Quarter (January 15 through January 21) ......... $ 6.00 $ 0.75
First Quarter (from January 22) ....................... $ 13.875 $ 6.00
Second Quarter ........................................ $ 12.5625 $ 6.9375
Third Quarter ......................................... $ 8.71875 $ 4.6875
Fourth Quarter ........................................ $ 6.375 $ 6.00
2000:
First Quarter (through March 9) $ 6.00 $ 5.0625
</TABLE>
The closing price for our common stock on March 9, 2000 was $ 5.2969 per
share. These quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions. These prices
have been adjusted from the actual prices for such periods to reflect the 2 for
3 reverse stock split which will take place on the effective date of this
registration statement.
As of March 9, 2000, we believe that there were approximately 69 record
holders of our common stock.
We have paid no dividends on our common stock since inception, and we do
not expect to pay any dividends for the foreseeable future.
USE OF PROCEEDS
We estimate that the net proceeds from the sale of the 1,200,000 units in
this offering will be approximately $4.8 million, based on an estimated initial
public offering price per unit of $5.00 per unit. Net proceeds are determined
after deducting underwriting discounts and commissions and the estimated
offering expenses payable by us.
We intend to use the net proceeds substantially as follows:
(a) approximately $3,000,000 million (63% of the net proceeds) for the
development and implementation of our marketing program;
(b) approximately $1.3 million (27%) for research and development to
enhance our three-dimensional environment, including the enhancement of
our website, which may include our purchasing content for our website
from third parties; and
(c) the balance of approximately $500,000 (10%)for working capital and
other corporate purposes, including the purchase or lease of capital
equipment.
13
<PAGE>
The above allocations represent our best estimate based upon our current
plans. Our management will have broad discretion in allocating the proceeds. Our
ability to hire the necessary marketing personnel as well as the success of our
marketing program and competitive technological developments, among other
reasons, may affect the money available or required for our marketing program.
Similarly, the amount we spend on research and development is based both on our
hiring the personnel to perform research and development and the success of our
research and development program. We may reallocate the net proceeds either
among the categories listed above or to uses not presently contemplated. Such
reallocation will be based upon a number of factors, including future revenue
growth, the cash generated or used by our operations and the progress of our
marketing and research and development efforts. Any reallocation will be
determined by us, in our sole discretion.
Although we are not contemplating any acquisitions at this time, we may use
a portion of the net proceeds of this offering to acquire other businesses or
software. Acquisition candidates may include other companies that would help us
expand our business in the area of three-dimensional Internet environments,
however, we may also acquire companies or businesses in other industries if we
are unable to develop our current business.
To the extent that the underwriters exercise the over-allotment option, the
net proceeds from the sale of these additional shares will be used for working
capital and other corporate purposes.
We believe the net proceeds of this offering will be sufficient to fund our
operations for at least the next twelve months, although it is possible that we
may require additional funds during the next twelve months if our marketing
program is not successful.
Pending application of the net proceeds as described above, we intend to
invest the net proceeds in short-term, interest-bearing investment grade
securities, money market accounts, certificates of deposit, or direct or
guaranteed obligations of the United States government.
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1999,
and as adjusted to reflect our receipt of the net proceeds from the sale of the
1,200,000 units in this offering.
<TABLE>
<CAPTION>
December 31, 1999
Actual As Adjusted
--------------- ---------------
<S> <C> <C>
Stockholders' equity
Preferred stock, par value $.001 per share, 500,000 shares authorized,
none issued or outstanding ............................................ -- --
Common stock, par value $.001 per share, 50,000,000 shares authorized,
7,342,762 shares issued and outstanding at December 31, 1999,
8,542,762 shares issued and outstanding, as adjusted .................. 7,343 8,543
Additional paid-in capital .............................................. 2,237,419 7,036,219
Note receivable for shares............................................... (6,500) (6,500)
Accumulated deficit ..................................................... (1,620,488) (1,620,488)
Total stockholders' equity .............................................. 617,774 5,417,774
</TABLE>
The number of shares of common stock outstanding prior to and after this
offering does not include 3,189,225 shares of common stock which we may issue as
follows:
14
<PAGE>
o 913,332 shares issuable upon exercise of stock options which are either
outstanding (including 246,667 options granted to directors outside of our
1999 stock plan) or which we may grant pursuant to our 1999 long-term
incentive plan;
o 475,893 shares issuable upon exercise of outstanding warrants;
o 1,200,000 shares issuable upon exercise of the warrants included in the units
offered by this prospectus;
o 360,000 shares issuable as part of the units issuable upon exercise of the
underwriters' over-allotment option and the underlying warrants; and
o 240,000 shares issuable upon exercise of the underwriters unit purchase
option and the underlying warrants.
For information relating to our long-term lease obligations, see "Business
- -- Property" and Note 8 of Notes to Consolidated Financial Statements.
SELECTED FINANCIAL DATA
Set forth below is selected financial data with respect to the year ended
December 31, 1999 and the year ended December 31, 1998. The selected statement
of operations information for 1999 and 1998 and the selected balance sheet
information for 1999 and 1998 has been derived from our audited financial
statements, which appear elsewhere in this prospectus.
15
<PAGE>
Statement of Operations Data:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1999 December 31, 1998
----------------- -------------------
<S> <C> <C>
Revenues................................ $ 808,933 $ 576,163
(Loss) from operations ................. (860,289) (69,533)
(Loss) before extraordinary item ...... (835,819) (69,533)
Extraordinary gain ..................... -- 109,807
Net income (loss) ...................... (835,819) 40,274
Net income (loss) per share:
basic and diluted .................... (.116) .007
Common stock outstanding:
basic ................................ 7,207,145 5,433,211
diluted .............................. 7,207,145 5,476,051
Balance Sheet Data:
December 31, 1999 December 31, 1998
----------------- -----------------
Current assets .... ..................... 621,250 148,847
Working capital (deficiency)............ 291,922 (410,934)
Short-term debt .... ................... -- 54,753
Accumulated deficit .................... (1,620,488) (784,669)
Stockholders' equity (deficiency) ...... 617,774 (393,946)
</TABLE>
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Year ended December 31, 1999 and 1998
Our principal source of revenue to date has been from the license of our
uniservers and galaxervers. We also generate revenue from the annual $19.95
registration fee, which is paid by our users who become citizens, and from
technical support services which we offer to our licensees. Revenue from
advertising has been nominal. We recognize revenue from licenses when the
license is granted. We recognize revenue from membership fees ratably over the
periods the memberships are in effect.
Revenue for the year ended December 31, 1999 increased approximately 40%,
to $809,000 from $576,000 in the year ended December 31, 1998. This increase
resulted from an increase in licensing of our uniservers and galaxervers.
Our selling, general and administrative expenses in the year ended December
31, 1999 increased approximately 182% to $1,288,000 from $456,000 in 1998. This
increase resulted principally from approximately $550,000 of professional fees,
consisting primarily of investor and public relations expenses and legal and
accounting expenses we incurred in connection with the Circle of Fire
Acquisition, as well as additional expenses resulting from our status as a
public company. Our selling, general and administrative expenses for 1999 also
included approximately $202,000 from the issuance of options and warrants as
compensation for services. The increase in selling, general and administrative
expenses also reflected an increase in executive compensation and increased
payroll expenses generally as we increased our staff. Prior to 1999, we did not
pay any compensation to Mr. J.P. McCormick, our chairman and chief financial
officer, or Mr. Richard F. Noll, our president and chief executive officer.
However, we accrued compensation to each of them at the annual rate of $50,000
in 1998. Since we had no obligation to pay this compensation, the amount of the
compensation is treated as an increase to additional paid-in capital. Since
January 1, 1999, we paid each of Messrs. McCormick and Noll a salary at the
annual rate of $140,000.
Research and development expenses in the year ended December 31, 1999
increased 101% to $381,000 from $190,000 in 1998. This increase reflected an
expansion of our research and development activities to enhance our technology
and the development effort relating to our new browser, which we introduced in
the spring of 1999.
Interest income of $24,000 in 1999 resulted from the investment of proceeds
of our January 1999 private placement. We have a net operating loss carry
forward in the amount of $1,221,000 as of December 31, 1999, which may be used
to reduce our income taxes in the future if we recognize a profit. We cannot
assure you we will make a profit.
As a result of the foregoing, we sustained a net loss of $836,000, or $.116
per share (basic and diluted), for the year ended December 31, 1999, as compared
with a net income of $40,000, or $.007 per share (basic and diluted), for 1998.
17
<PAGE>
During 1997, we entered into an agreement with two former
employee-stockholders settling claims asserted by those individuals against us.
Pursuant to the settlement agreement, we agreed to pay the claimants $500,000,
of which $385,000 was outstanding at December 31, 1998. The $500,000 settlement
was expensed in 1997. The settlement involved a repurchase of shares of the two
employee-stockholders and our grant to them of a security interest in certain of
our technology. In 1998, we brought an action in the United States District
Court for the District of Massachusetts seeking a declaratory judgment
concerning the scope of the security interest, and the two employee-stockholders
filed counterclaims. In one of these counterclaims, they alleged that we had
committed securities fraud due to our failure to disclose an existing security
interest in the technology when we repurchased their shares as part of the 1997
settlement. In settlement of the litigation, the two former
employee-stockholders accepted a reduction in the amount due to them and all
claims between the parties were dismissed with prejudice. The reduction in the
payments due by us in 1998 is reflected as an extraordinary gain from the
extinguishment of debt relating the prior litigation settlement.
As a result of the $110,000 extraordinary gain resulting from the
extinguishment of debt related to the 1998 litigation settlement, our net income
for 1998 was $40,000, or $.007 per share (basic and diluted).
Financial Condition
At December 31, 1999, we had working capital of $292,000, which included
cash of $481,000. The working capital reflected the remaining cash from the
January and June 1999 private placements, from which we received aggregate net
proceeds of approximately $1.5 million. We used the net proceeds from both
private placements for working capital, including a payment of $275,000 to
settle the litigation with the two former employee-stockholders. We have no bank
or credit facilities, and the private placements have been our sole source of
funds for operations. During the year ended December 31, 1999, we used $735,000
for our operations. Our cash balances represent substantially our only current
asset. At December 31, 1999, our accounts receivable were $83,000. At December
31, 1999, our working capital was sufficient to meet only our most immediate
cash requirements, and unless we complete this offering or raise sufficient
funds from another financing, we will not have sufficient cash for our
operations and we may have to suspend or reduce our operations. Our auditors'
report on our financial statements includes an explanatory paragraph as to our
ability to continue as a going concern.
Our principal cash requirements are for working capital, principally to
develop and implement an expanded marketing plan, research and development and
for our administrative infrastructure. We believe that the net proceeds from the
sale of the units in this offering will be sufficient to meet our anticipated
cash requirements for our operations for at least the twelve months following
this offering. However, to the extent that our marketing program is not
successful and these expenses exceed our expectations and we are unable to
generate cash flow from our operations, we may require additional funding during
the next twelve months. We may not be able to obtain financing when we require
it, and any financing may not be on terms which are acceptable to us and may
result in substantial dilution to our stockholders. If we are unable to raise
needed funds, we may have to reduce the scope or our marketing and development
activities, which would have a material adverse effect upon our business and
financial condition.
18
<PAGE>
We may also acquire other businesses or software, including other companies
that would help us expand our business in the area of the three-dimensional
Internet environments. However, we may acquire companies or businesses in other
industries if we are unable to develop our present business. To the extent that
we make any acquisition, we may require additional funds to be used for the
purchase price in the acquisitions, to integrate the acquired business with our
existing business and to fund the operations of the combined businesses. In
addition, we may incur expenses negotiating acquisitions which are not
consummated.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (FASB) issued
Reporting Comprehensive Income (SFAS No. 130), which establishes standards for
reporting and display of comprehensive income and its components in the
financial statements. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. SFAS No. 130 offers alternatives for presentation of
disclosures required by the standard. The adoption of SFAS No. 130 had no impact
on our results of operations, financial position or cash flows, as the amount of
comprehensive income (loss) is the same as the net income (loss) for all periods
presented.
In June 1997, the FASB issued Disclosures about Segments of an Enterprise
and Related Information (SFAS No. 131), which establishes standards for
reporting information about operating segments in annual financial statements.
It also establishes standards for related disclosures about products and
services, geographic areas and major customers. SFAS No. 131 is effective for
fiscal years beginning after December 15, 1997. The adoption of SFAS No. 131 had
no impact on our results of operations, financial position or cash flows.
In February 1998, the FASB issued Employers' Disclosures about Pension and
Other Post Retirement Benefits (SFAS No. 132), which revises employers'
disclosures about pension and other post-retirement benefit plans. SFAS No. 132
does not change the measurement or recognition of those plans. SFAS No. 132 is
effective for fiscal years beginning after December 15, 1997. The adoption of
SFAS No. 132 did not have an impact on our results of operations, financial
position or cash flows since we do not have any pension or post retirement
benefit plans.
In June 1998, the FASB issued Accounting for Derivatives and Hedging
Activities (SFAS 133) which establishes accounting and reporting standards for
derivative instruments, including derivative instruments embedded in other
contracts (collectively referred to as derivatives) and for hedging activities.
SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 2000. As we do not currently engage or plan to engage in
derivative or hedging activities, there will be no impact to our results of
operations, financial position or cash flows upon the adoption of this standard.
19
<PAGE>
BUSINESS
Our Business
We develop and license software products for use on the Internet which:
o enable us to create three-dimensional virtual environments, which we call
worlds, to which any visitor to our website can obtain access;
o permit licensees of our world server to create their own worlds, either
on our uniserver or their own uniserver or galaxerver, on which they can
control the content and access; and
o allow visitors to our website to enter, move about in and interact with
others in a computer-generated, three-dimensional virtual environment.
o Enable us to act as an application service provider and permit users to
license our technology for integration into their web applications, which
may be hosted on our server.
We also offer licensees of our world server technical services to assist
them in the development of their worlds or to develop their worlds for them.
Unlike a two-dimensional environment which permits movement on a computer
screen only along horizontal and vertical axes (up, down, left and right), a
three-dimensional virtual environment also enables users to move forward and
backward.
We generally grant our world server licensees a non-exclusive right to use
our uniserver or galaxerver software, which comes with the right to receive any
upgrades for a one-year period. Our galaxerver is similar to our uniserver but,
unlike the uniserver, which can support a large number of worlds, the galaxerver
only supports one world. Our world server licensees can develop their own worlds
or they can engage us to develop their worlds for them or assist them in the
development of their world. Our world server enables our licensees to create
unique three-dimensional objects for use in their worlds and to impose
limitations on both the nature of the structures which may be created and the
users who may either visit the world or create structures on the world.
20
<PAGE>
Those world server licensees whose worlds are supported by our uniserver
can place restrictions on those persons who may have access to their worlds or
they may permit any users to visit their world. For example, a university
licensee could restrict access to its world to its students. Our licensees may
name their worlds and control the content of their worlds. We do not constantly
monitor the content of worlds created by our licensees, but we do have access to
all worlds which reside on our uniserver and monitor the worlds from time to
time. As of December 31, 1999, there were approximately 1,000 worlds supported
by our uniserver, of which ten worlds are our worlds and the remaining worlds
were created by our users or licensees. Approximately 600 of these worlds are
running at any one time.
The Market for Three-Dimensional Technology
The substantial growth of the Internet is well known. The growth of the
Internet has been accompanied by a range of applications designed to facilitate
both business and personal communications. We believe the three-dimensional
multi-user Internet market is a rapidly growing market and a natural evolution
of the development of Internet communities. At present, a typical website uses
two-dimensional web pages and book-style interfaces, which require the visitor
to click to turn pages of a virtual book. We believe that the next stages of
development will include three-dimensional interactive environments, which
permit visitors to move about in the environment and interact with other users.
We believe that three-dimensional technology has a wide variety of
applications, including the following:
o The entertainment industry, which can use three-dimensional technology to
offer virtual settings that allow the user to interact with both the
environment and other visitors. We have created virtual worlds for the
feature films Godzilla and The 13th Floor. For The 13th Floor, we created
a virtual world that was used to launch a virtual premiere of the movie
which was attended by the virtual renditions of stars of the movie and
other well-known actors.
o The education industry, which can use three-dimensional technology as
part of course material. The University of Colorado used our technology
to develop a world which shows a three-dimensional representation of the
inside of a computer. This world is used as part of the university's
course material. We are dedicating a uniserver to worlds which are to be
developed for schools and universities.
o Distance learning, which can use our technology for training purposes. We
created for Earthweb a world to provide on-line training, including
information technology training.
o E-commerce, where our technology can be used to develop and implement an
electronic storefront in which visitors can interact and move about in a
manner similar to a retail store.
o Three-dimensional communities, such as our Alpha World, the most popular
world served by our uniserver. We have developed these communities, in
which citizens and tourists can build structures, move about and
communicate with each other. The presence of any visitor is shown by his
or her physical representation known as an avatar. For more information
concerning our worlds, see "Business -- The Active Worlds Worlds."
o Chat rooms, in which thousands of users can interact and chat with each
in the same shared virtual space. The chat rooms can be part of a
three-dimensional community or can be in separate worlds dedicated solely
to chat. In addition to the text messages common to two-dimensional chat
room, the three-dimensional capability permits visitors to see, move
around, and interact with another visitor through their avatars. The
three-dimensional capabilities include the ability of a citizen to
develop an avatar with his or her picture.
21
<PAGE>
The Active Worlds Worlds
A world is a defined segment of our virtual environment. On our uniserver,
we maintain our own worlds as well as worlds that are developed by our licensees
or by us pursuant to agreements with our licensees. The licensee may restrict
access to its world. Visitors can obtain access to our worlds by visiting our
website, www.activeworlds.com, downloading our browser at no charge, and using
the browser to visit one or more worlds that are maintained on our uniserver and
which are not owned by licensees which restrict access. Our licensees may
develop their worlds which are independent of our uniserver.
Once in one of our worlds, users can create virtual three-dimensional
structures, such as buildings, using our library of more than 3,000 computer
objects and textures. The design and texture of each world reflects the theme of
that world. The theme of a world is reflected in the particular type of building
objects that visitors can use to create structures. Thus, for example, Mars
world and Atlantis have themes and building materials that are consistent with
our vision of a world on Mars and an undersea world. Similarly, the user's
avatar, which is user's physical representation in the world, may vary from
world to world.
Any person who downloads our browser can visit our worlds and the worlds of
those of our licensees that permit access. A visitor may be a citizen, who pays
an annual fee, which is presently $19.95, or a tourist, who does not make any
payment. Any user can create a three-dimensional structure in our worlds,
however, the structures created by citizens are permanent. While we have the
ability and right to take down a structure created by a citizen who lets his or
her citizenship lapse, it has not been our practice to do so. If a tourist
constructs a structure in one of our worlds, a citizen can claim the space on
which the tourist's structure is situated and construct his or her own
structures. Our uniserver identifies those structures that are constructed by
citizens and those that are constructed by tourists. All users can add picture,
sound, music and information to their virtual structures through direct links to
anywhere on the Internet.
We operate one uniserver, which currently has a base of over 1,000,000
users. This Uniserver receives more than 1,000,000 hits per day, with each hit
representing an incidence of access to one of our ten company created worlds
such as downloading of building objects. Our primary method of delivering our
browser 2.2 is through the Internet.
When a user visits any of our worlds, his or her presence is immediately
indicated by his or her avatar and the user is greeted by his or her screen
name. Citizens can create avatars from a range of formats, while the avatar of a
tourist is limited to two forms which identify the visitor as a tourist. The
avatar's position is shown on the world which the user is visiting. Other users
in the same section of the world can see and converse with any user who is in
the area at the same time. At present, communication is made through text
messages which appear on each visitor's screen. Our server identifies, by screen
name, each person within the area of vision. The avatars can be viewed from
different angles and positions, including a view from above or from the eyes of
user's avatar.
Our worlds are under constant development by both citizens and tourists. By
creating an object on an empty piece of land, a visitor can stake a claim to
cyberspace. Our library of thousands of building objects contains the necessary
materials for constructing a home, store, convention center, car, maze or any
other kind of building or structure. Citizens, but not tourists, can customize
their buildings with signs of all shapes and sizes. Visitors have placed more
than 40 million virtual objects and structures in AlphaWorld, our most popular
world, and they have created virtual towns and cities, complete with traffic
signs, community artwork and parkland, in which visitors (through their avatars)
can stroll, explore and interact with other users. In one of these structures,
users have created a portrait gallery in which citizens have placed pictures of
themselves and others.
Citizens also have the ability to construct a transport, which, when
touched, moves a visitor to another destination in the same world, a different
world or another location on the Internet. We call the ability to transport
users in this manner teleporting.
Our worlds can have a commercial or non-commercial theme. Our most popular
world is AlphaWorld, a community which consists of virtual real estate on which
visitors can create virtual structures from our library of more than 3,000
computer objects and textures. As of December 31, 1999, users had placed more
22
<PAGE>
than 30 million building blocks on AlphaWorld. Other worlds are based on
specific themes or commercial applications, which are selected either by us or
by our licensees. These other worlds include:
o Theme Worlds, with themes such as underwater themes or space themes, in
which users can construct structures appropriate to those environments.
o @mart, which is a virtual shopping mall.
o Movie and entertainment worlds, such as The 13th Floor and Godzilla,
which we created for Centropolis Studios, a division of Columbia
pictures. These worlds reproduce selected aspects of the movies.
o Educational worlds, such as the University of Colorado's virtual
computer, which is a three-dimensional representation of the inside of a
computer and is used as part of the course material for the university's
business school.
o Business worlds, such as Earthweb's e-learning expo world. We created
this world for Earthweb to provide interactive on-line training in
various subjects, including information technology training.
o Game worlds, such as awbingo, which we developed to use artificial
intelligence capabilities for games such as bingo.
Our Objective
Our objective is to be the industry leader in three-dimensional Internet
technology platforms by:
o Enhancing and further developing the Active Worlds software and
technology.
o Providing services to three-dimensional Internet virtual environments.
o Licensing our technology to businesses who may want to develop one or
more unique worlds as part of their e-commerce strategy, which may be
used either for their internal use or for visits by the general public.
o Affording advertisers the ability to offer three-dimensional Internet
interactive advertising.
o Developing three-dimensional e-commerce solutions for businesses seeking
to sell goods and services throughout the Internet.
o Offering users a community in which they can create virtual structures,
move about and communicate with other users.
Our Strategy
We intend to seek to meet our objective by:
Licensing our technology to businesses
As three-dimensional Internet technology becomes more accepted, we intend
to market licenses to our uniserver and galaxerver software and our technical
services to businesses. In order to achieve this goal, we intend to expand
substantially our marketing effort directed at these businesses. As part of this
marketing effort, we will seek to develop strategic relationships with
businesses to develop commercial applications aimed at specific market segments.
23
<PAGE>
These relationships could take a number of forms and may involve the grant of an
exclusive or semi-exclusive license for a specific market or application. These
relationships may also involve a revenue-sharing arrangement and may provide us
with additional development revenue.
As part of this strategy, we are expanding our educational programs to
include a new uniserver dedicated to education. We are designing this universe,
which we call Education Universe, to enable schools, universities and non-profit
educational groups to explore the potential of learning through
three-dimensional worlds based on our technology.
Expanding our user base
We intend to develop a marketing program aimed at potential visitors to our
website by seeking to create awareness of the Activeworlds.com name and website
by promoting the website through traditional advertising media. In this manner,
we intend to create additional worlds and provide more content on the website.
We believe that in order to generate revenue from advertising and e-commerce on
our website, we must increase the number of members who visit the website and
remain on the website for an extended period. We believe that more than
1,000,000 users have accessed our website and that in a typical day there are
more than 1,000,000 hits to the three-dimensional website. We consider a user to
have accessed our website if the user has downloaded our browser and used the
browser to visit the website. We do not believe that this number is sufficiently
large to attract advertisers and e-commerce vendors to our website. Accordingly,
we believe that increasing our user base is critical to our ability to generate
revenue from advertising and e-commerce.
Marketing our website as a site for advertising
We intend to make our worlds attractive locations for both advertising and
e-commerce. We have developed a virtual mall, @mart, at which more than 100
companies have virtual stores. We intend to expand our effort to attract
e-commerce and advertising to our three-dimensional environment by seeking to
increase the number of virtual malls located at @mart, as well as market
separate worlds dedicated to products and services offered by one company.
Although we do not anticipate that revenue from @mart will represent a material
portion of our revenue, @mart is important for demonstrating to businesses the
application of our technology in an e-commerce environment and providing
three-dimensional content for visitors to our website.
We believe that we can make our worlds more attractive to advertising by:
o Increasing our user base to show sufficient interest in our worlds.
o Demonstrating the benefits which three-dimensional technology can offer
both advertisers and businesses, both in terms of visual effects and
technological features.
o Implementing an extensive advertising campaign, using print, radio and
television and the Internet.
o Implementing an extensive public relations effort involving speaking
tours with various news agencies.
Our Technology
The key element to our three-dimensional environment is our proprietary
uniserver software which stores subscriber information, permits world servers to
operate and enable:
o the creation of three-dimensional worlds;
o the communication of physical characteristics of three-dimensional
objects in each world, so that a visitor to any world served by the
uniserver can see the structures in the world, move about in the world
and create new structures;
o the ability to locate structures and other users throughout the world,
24
<PAGE>
o the transmission of messages among users to the world, and
o the transfer of information and files between any place on the Internet
and a specific location on a world.
The uniserver can operate on Unix, Linux or Windows 95, 98 or NT platforms.
Our galaxerver is similar to the uniserver except that unlike the uniserver,
which supports a large number of worlds, the galaxerver only supports one world.
We developed our proprietary three-dimensional browser, Active Worlds
Browser 2.2, which can be downloaded without charge. Users cannot access our
three-dimensional environment without the browser. The browser is a Windows
98/NT-based software product which allows users to:
o experience shared multi-user, multimedia and three-dimensional
environments in any of the worlds which are publicly accessible in our
universe.
o develop and build virtual structures in our worlds.
o access and display picture, sound or music files from anywhere on the
Internet.
o converse with other users by text-based chat, which can be directed to
everyone who is currently visiting the world or conducted through private
conversations through messaging to a specific user.
o interface and integrate with two-dimensional Internet browsers, by
permitting the three-dimensional window for Active Worlds to run side by
side with a two-dimensional web page, which enables users to use all
Internet-based technologies, including ActiveX and Java.
o move between worlds in our universe and websites outside our universe.
o automatically update our software.
o visit @mart, our three-dimensional virtual mall, which is designed to
resemble a modern shopping mall where a variety of vendors offer both
traditional and Internet products and services.
o register for citizen status.
Our platform offers true color graphics, with 16 million colors, frame
rates which could be in the range of ten to thirty frames a second and 16 bit
sound. Using the browser, a visitor can see and interact with other visitors and
the virtual environment. Our platform can accommodate thousands of simultaneous
users.
Using our software, servers and authoring tools, users can communicate,
play games, conduct business and otherwise interact "face-to-face" in our shared
three-dimensional worlds on the Internet.
Marketing and Sales
Since Active Worlds is an Internet-based platform, the potential market for
our products is global. Our present marketing effort is directed at:
o Businesses and educational institutions, to which we are seeking to
license our technology and assist them to develop three-dimensional
applications to meet their specific needs.
o Users, who we are trying to attract to our website by providing
interesting content and access to our technology.
o Advertisers, to whom we are trying to demonstrate a user base which meets
their demographic requirements.
25
<PAGE>
o Educational and non-profit institutions through Education Universe.
In seeking to address the needs of businesses and educational institutions,
we license our uniserver and galaxerver technology to others to allow our
licensees to establish their own three-dimensional universe, which can be either
on our uniserver or independent of our uniserver.
We have licensed uniservers to The Boeing Company, Carlsberg, A.S.,
Centropolis Studios, Philips Multimedia, NASA and an agency of the United States
Government, among others. Some of our world server licensees include Scandinavia
Online, A.S., the Canadian Ministry of Education, the University of Colorado,
the University of London, Telecom PTT Switzerland and the Amsterdam Stock
Exchange.
In April 1998, we entered into an agreement with the Tech Museum in San
Jose, California, to sell them our products and services which resulted in the
development of the first stage of its Internet Cafe project focusing on the
Active Worlds platform. The museum dedicated a whole section comprised of twelve
computers to showcase Active Worlds as a computer technology advance.
In October 1999, we entered into an agreement with Advanced Shopping Centre
Management Pty. Limited, an Australian company, pursuant to which we agreed to
develop for Advanced Shopping Centre a virtual mall prototype which is suitable
for applications for property developers, managers of retail shopping malls and
retail merchants. The agreement contemplates the development of enhancements to
our present software products and the grant to Advanced Shopping Centre of a
four-year exclusive license to these enhancements. For developing the
enhancements we will receive fees of between $1.0 million and $1.5 million,
payable in installments, based on a delivery schedule and acceptance testing. We
received the initial payment of $150,000 on December 19, 1999.
We distribute a monthly newsletter, which we deliver by e-mail. This
newsletter describes developments in our program.
We presently rely on third party marketing and advertising agencies to
market our website and our other services both domestically and internationally.
We use third parties to market our software and related products in the United
Kingdom, Scandinavia, Spain, Germany, France, Korea, Brazil, Taiwan and Russia.
Our international distributors have developed foreign language versions of our
browser and have performed limited marketing activities. Our revenue from
software sold through these distributors has not been significant.
We have marketing arrangements with two companies, neither of which has
generated significant revenue to date. In March 1997, we entered into an
agreement with Scandinavia Online SA, the largest Internet service provider in
Scandinavia, pursuant to which we gave Scandinavia Online a five-year exclusive
distribution right to our browser in Scandinavia. Scandinavia Online has
recently assigned distribution rights to Kilos AS, a Scandinavian-based company.
Scandinavia Online is a holder of shares of our common stock.
Our universe includes @mart, our virtual shopping mall. As of December 31,
1999, there were approximately 100 vendors offering products and services, which
included books, compact disks, clothes, tickets and computer products.
Approximately half of these vendors operate through affiliated merchant programs
and we receive a small percentage of any revenue derived from sales made through
our @mart link. The other vendors have no obligation to make any payment to us,
and they do not pay a fee to us at this time. To date, our revenue from goods
and services sold through @mart has not been significant, and we do not
anticipate that this revenue will be significant. Pursuant to our agreement with
Advanced Shopping Centre, we agreed that we will not directly operate any
virtual mall except @mart.
Competition
All aspects of the Internet market are new, rapidly evolving and intensely
competitive, and we expect competition to intensify in the future. Barriers to
entry are low, and current and new competitors can easily launch new websites at
26
<PAGE>
a relatively low cost using commercially-available software. Our present
competitors include nationally-known companies, including Microsoft, that have
expertise in computer and Internet technology, and a number of other small
companies, including those that serve specialty markets. Other major companies
have the financial and technical ability to compete aggressively in the market
for three-dimensional software products on the Internet. Many, if not all, of
these companies have longer operating histories, larger customer bases, greater
brand recognition in other business and Internet markets and significantly
greater financial, marketing, technical and other resources than we have.
Competitive pressures created by any one of these companies, or by our
competitors collectively, could have a material adverse effect on our business,
results of operations and financial condition, and we can give no assurance that
we will be able to compete successfully against current and future competitors.
In addition, other major software developers have the capability both to
develop three-dimensional software products, to market their products through
strong distribution channels and to package their software with other popular
products. To the extent that a significant market develops for three-dimensional
software, we anticipate that major software, computer and Internet companies
will develop competitive products. All of these companies are better known than
we are, and they have significantly greater resources. In addition, competitive
products may be under development by major software, computer and Internet
company of which we are unaware.
We believe that the market for three-dimensional interactive Internet
technologies is growing due to an increasing demand for interpersonal
interaction among Internet users, along with an exploding interest in
Internet-based applications generally. We also believe that the
three-dimensional aspects of our environment is a departure from most Internet
applications, which are two-dimensional and is a more aesthetically pleasing
manner of using the Internet. We believe that Active Worlds' robust
architecture, ease of use, speed, reliability and scalability have attracted and
will continue to attract users worldwide.
Companies, in addition to Microsoft, which offer three-dimensional Internet
technology include Blaxxun (formerly Black Sun Interactive), OZ Interactive,
Electric Communities (which merged with Onlive Technologies and The Palace) and
Platinum Technology.
Since the three-dimensional market is an emerging market, it is possible
that business may standardize on a technology which is not compatible with our
technology, and major software and hardware companies may have the market power
to impose on the marketplace an incompatible technology, and we may not have
access to that technology. If we cannot offer products that meet this standard,
whether imposed by a government agency or resulting from commercial preferences,
our business will suffer.
We believe that, at present, we may have a competitive advantage over our
competition in four fundamental areas:
o We use world wide web standards for the three-dimensional components that
make up our technology, and our technology permits the integration of
standard Internet protocols.
o We believe that our browser has smarter architecture and a more robust
engine than our competitors. The software upgrades itself automatically
upon entrance into the environment, making the upgrade process seamless.
o Users can integrate a two-dimensional browser within our browser to
provide a simultaneous two-dimensional and three-dimensional Internet
experience.
o Each environment is unique and multimedia enriched, offering the user an
almost unlimited combination of audio, video and graphical content
options.
Significant Customers
During each of 1999 and 1998, only one client accounted for 5% or more of
our revenue. In 1999, revenue from Advanced Shopping Centre Management Pty.
Limited amounted to $210,000 for the development and construction of a prototype
27
<PAGE>
virtual shopping mall for them which amounted to approximately 26% of our
revenue for that year. During 1998, our largest customer was The Tech Museum in
San Jose, which purchased a special browser for $48,000, or 8.3% of revenue. In
1997, our largest customer was Philips Multimedia, which generated revenue of
$250,000, or 59.6% of revenue, from a one-year license to use our source code
and a uniserver and a noncommercial research license. We also assisted Philips
Multimedia on its development of a website that provides an aerial view of Alpha
World.
Intellectual Property
All of our software was either developed by us or acquired from a third
party. We do not have any patents on any of our software. We have obtained
copyright registration for a version of our source code. We are developing and
upgrading our software on an ongoing basis and we do not have registered
copyrights for the most recent versions of our software. We rely upon
confidentially agreements signed by our employees. We have applied to the United
States Patent and Trademark Office for registration of Active Worlds and our AW
design as trademarks and service marks.
In March 1997, we purchased the Active Worlds software and AlphaWorld
content, as it existed at that time, including all object code, source code and
documentation, from Worlds, Inc. In connection with the purchase, we also
received the right to modify the software. We subsequently performed substantial
modifications to the acquired software. We hold a worldwide non-exclusive
license from Worlds, Inc. to certain other software to the extent that such
software is included in the Active Worlds and AlphaWorld software.
Government Regulations
We believe that no government approval is necessary for our principal
products or services and that there are no government regulations which
currently have a material effect on our operations. As Internet commerce
evolves, we expect that federal and state agencies may adopt legislation and
regulations covering issues such as user privacy, pricing, defamation, taxation,
content and quality of products and services and courts may interpret existing
laws and regulations in a manner which affects the Internet and e-commerce.
Although many of these regulations may not apply to our business directly, we
expect the future legislation and regulation could expose companies involved in
e-commerce and the sale of advertising over the Internet to liability which
could limit the growth of Internet commerce generally. We could face exposure to
liability resulting from allegations of defamation, breach of privacy or
inappropriate usage of e-mail by visitors to our website. In addition,
regulations which increase the cost of Internet access may have an effect on the
use of the Internet.
Research and Development
We spent approximately $381,000 on research and development in 1999, and
approximately $190,000 and $451,000 in 1998 and 1997, respectively. The research
and development expenses for 1997 included the $300,000 purchase price for the
Active Worlds technology, as it existed at the time of purchase, and rights to
related software. The balance of our research and development expenditures has
been used to develop and enhance our technology. All of our research and
development has been sponsored and paid for by us and was expensed as incurred.
Future Acquisition Strategies
Following this offering, we may acquire other companies either for cash,
notes, equity or combination. In addition, we may enter into joint ventures or
other relationships, including joint marketing agreements, which we believe
would further our growth. Although we anticipate that any acquisitions will be
related to three-dimensional Internet technology, we may acquire companies in
unrelated businesses. We may not generate net income from any future acquisition
or agreement. We have not identified any particular business that we may acquire
in the future, and we may not be able to make any acquisitions.
Prior Business of Vanguard Enterprises, Inc.
We were incorporated and conducted our initial public offering under the
name Vanguard Enterprises, Inc. Vanguard Enterprises was incorporated on
28
<PAGE>
September 5, 1995. Vanguard Enterprises was formed for the purpose of marketing
a patented hair care product produced by a hair products company, 21st Century
Hair Design, Inc. Vanguard Enterprises entered into one contract with 21st
Century Hair Design. Based upon this contract, Vanguard Enterprises raised
capital and used the funds to purchase cable TV airtime to broadcast
infomercials featuring the product. Vanguard discontinued all business
activities in 1996. From that time until January 1999, Vanguard Enterprises was
not engaged in any business activities and had no material assets.
Employees
As of December 31, 1999, we had ten full-time employees, including our two
officers, and one part-time employee. None of our employees are represented by a
labor union, and we believe that our employee relations are good.
Property
We lease approximately 4,500 square feet of office space at 95 Parker
Street, Newburyport, Massachusetts 01950, pursuant to a lease which expires on
February 28, 2002. Our present monthly rent is $2,625, which is subject to
standard escalation provisions. Our office facilities are adequate for our meet
our current needs, and we believe that, if additional space is required, we will
be able to obtain it on reasonable terms.
MANAGEMENT
Directors and Executive Officers
The following table names our directors and executive officers and their
ages.
Name Age Position
- ---- --- --------
Richard F. Nol(l) ............... 34 President, chief executive officer and
director
J.P. McCormick .................. 39 Chairman, chief financial officer,
secretary, treasurer and director
Alexander M. Adelson(1) .......... 69 Director
Sean Deson(1) .................... 36 Director
(1)Member of the Audit and Compensation Committees.
Richard F. Noll, our founder, has been president, chief executive officer
and a director of us and our predecessor, Circle of Fire Studios since its
organization in January 1997. From August 1995 until December 1996, Mr. Noll
operated the business of Circle of Fire Studios, Inc. as a sole proprietorship.
For more than five years prior to August 1995 he was an independent artist and
designer. Mr. Noll attended Massachusetts College of Art and majored in the Fine
Arts.
J.P. McCormick has been chairman of the board, chief financial officer and
a director of us and Circle of Fire Studios, Inc. since May 1997. He has been
our treasurer since May, 1997 and our secretary since July, 1997. From 1987
until May 1997 he was the president of Associated Corporate Services Ltd., a
company which owned and operated two staffing franchises for Norrell Corp. Mr.
McCormick is a graduate of Kent State University, Ohio.
Alexander M. Adelson has been a director since November 1999. He has 36
years experience as an applied physicist and businessman specializing in
technical marketing matters. Mr. Adelson is president, chief executive officer
and vice chair of Antaeus Research, LLC, an information technology company
dedicated to smart bridge management systems. Since 1974, he has led the
Technology Resource Group of RTS Research Lab, Inc. Through RTS he helped
conceive and develop the first portable bar code scanner. He also acted as
program manager for twelve years with Symbol Technologies, Inc. Mr. Adelson also
serves on and is the vice chairman of the board of directors of Base Ten
Systems, Inc., a software technology development company focused on
manufacturing execution and clinical supply systems and services for the
pharmaceutical, chemicals and medical products industries.
29
<PAGE>
Sean Deson has been a director since December 1999. Mr. Deson recently
became the managing partner of Deson & Co., a strategy development and
investment firm focused on internet companies. Prior to that, Mr. Deson was a
senior vice president in investment banking at Donaldson, Lufkin & Jenrette
where he was a senior banker in its Internet focus group. Mr. Deson is also a
director of Technology Flavors and Fragrances, Inc., a company which creates and
manufactures flavors and fragrances for consumer products. Mr. Deson received
his B.S. in computers and M.B.A. in finance, both from the University of
Michigan.
Directors are elected for a period of one year and thereafter serve
until the next annual meeting at which their successors are duly elected by the
stockholders. Officers serve at the will of the Board of Directors. Except as
noted herein, there are currently no arrangements or understandings regarding
the length of time each director is to serve in such a capacity. There is no
immediate family relationship between or among any of the Directors or executive
officers.
We have granted the representatives of the underwriters the right, during
the five-year period following the date of this prospectus, to designate one
member to our board of directors or an advisor to the board. As of the date of
this prospectus, the representatives have not designated any person.
Committees of the Board of Directors
In January 2000, our board of directors created audit and compensation
committees. All members of the audit and compensation committees are to be
independent directors. Messrs. Adelson and Deson are the members of both
committees.
The audit committee will review the scope of our audit, recommend to
the board the engagement of our independent auditors, review the financial
statements with the independent auditors and management, review any issues
relating to the independence of the independent auditors, review with the
independent auditors and the board of directors any matters discussed in the
management letter issued by the independent auditors, and review any
transactions between us and any of our officers, directors or other related
parties other than matters that are within the scope of the compensation
committee.
Our compensation committee will evaluate our compensation policies,
approve executive compensation and executive employment contracts and administer
our 1999 long-term incentive plan.
Executive Compensation
The following table sets forth information regarding compensation earned by
our president and chief executive officer, and our chief financial officer, from
our inception in 1997 to the end of our last fiscal year which includes the
period during which these individuals acted in these capacities for Circle of
Fire Studios, Inc. Except as set forth below, in 1999, 1998 and 1997 none of our
officers received compensation in excess of $100,000.
30
<PAGE>
SUMMARY COMPENSATION TABLE
Annual Compensation
--------------------------------------------
Long-Term
Compensation
(Awards,
Options, SARs
Name and Principal Position Year Salary Bonus (Number)
- --------------------------- ---- ------ ----- -----
Richard F. Noll, 1999 $140,000 -- 9,333
president and chief 1998 -- -- --
executive officer 1997 -- -- --
J.P. McCormick, 1999 $140,000 -- 9,333
chief financial officer 1998 -- -- --
1997 -- -- --
No stock options or other equity incentives were granted to either Richard
Noll or J.P. McCormick in 1998 or 1997.
During 1998, neither Mr. Noll nor Mr. McCormick received any compensation
from us. However, for financial statement purposes, we accrued compensation at
the rate of $50,000 for each of them in 1998. Since we have no obligation to pay
them the amount accrued, the amount of the compensation was treated as
additional paid-in capital. Messrs. Noll and McCormick have relinquished their
rights to collect this compensation at a later date.
In January 1999, we entered into three-year employment agreements with
Messrs. Noll and McCormick, pursuant to which they received an annual salary of
$57,000. These agreements were amended and restated in June 1999, at which time
their annual salaries were increased to $140,000, retroactive to January 21,
1999. Pursuant to the agreements, in January 1999, we granted each of them an
incentive stock option to purchase 9,333 shares of common stock at $.83 per
share, which was 110% of the fair market value of the common stock on the date
of grant. The fair market value was the price at which we sold common stock to
non-affiliated parties in the January 1999 private placement. The employment
agreements also provide that Messrs. Noll and McCormick will be eligible to
participate in a bonus pool of not more than 10% of our income before income
taxes in excess of $750,000. The amount of the bonus pool and the allocation of
the bonus pool among our senior executive officers will be determined by our
compensation committee. The agreements also provide Messrs. Noll and McCormick
with a $4,200 annual automobile allowance.
We pay an annual fee of $15,000 to Mr. Adelson and $24,000 to Mr. Deson for
each year of service as a director. In addition, we granted Mr. Adelson options
to purchase 100,000 shares of our common stock at $6.09 per share, and Mr. Deson
options to purchase 146,666 shares of our common stock at $6.09 per share. Mr.
Adelson's options vest annually in equal amounts over their five year term,
beginning on the date he became a director, provided that he is a director on
the vesting dates. Mr. Deson's options vest annually over their five year term
in the amount of 66,666 options at the end of his first year of service as a
director, followed by 20,000 options at the end of each of years two, three,
four and five for so long as he is a director. Neither Mr. Adelson's nor Mr.
Deson's options were granted pursuant to our 1999 long-term incentive plan.
31
<PAGE>
Stock Plan
In January 1999, we adopted our 1999 long-term incentive plan, pursuant to
which we are authorized to grant options to purchase up to 666,666 shares of
common stock to our key employees, officers, directors, consultants, and other
agents and advisors. Awards under the Plan may be either nonqualified stock
options or incentive stock options, as defined in Section 422 of the Internal
Revenue Code of 1986, as amended, restricted stock awards, deferred stock
awards, stock appreciation rights and other stock-based awards, as described in
the plan.
The plan is administered by a committee of our board of directors, which
will determine who will receive awards, the number of awards to be granted and
the specific terms of each grant, including vesting schedules, subject to the
provisions of our plan. If a committee is not appointed, the board of directors
performs the functions of the committee. Our compensation committee has been
appointed to administer the plan.
We cannot grant incentive stock options under the plan unless the exercise
price is at least equal to the fair market value of our common stock on the date
of grant. However, if the option holder owns more than 10% of our outstanding
stock, the exercise price of any incentive stock option granted to him or her
must be at least 110% of the fair market value on the date of grant.
Through December 31, 1999 we have granted options under the plan to
purchase an aggregate of 632,906 shares of common stock at exercise prices
ranging from $.645 to $13.125 per share. These options include options to
purchase 9,333 shares of common stock at $.83 per share, which we granted to
each of Messrs. Richard F. Noll and J.P. McCormick pursuant to their employment
agreements.
RELATED PARTY TRANSACTIONS
In connection with the organization of Circle of Fire Studios in January
1997, Mr. Richard F. Noll, our president and chief executive officer,
transferred his interest in the Circle of Fire Studios sole proprietorship to
Circle of Fire Studios in exchange for shares of its common stock, which, as a
result of the Circle of Fire Acquisition became 2,566,309 shares of our common
stock. When Mr. Noll formed Circle of Fire Studios, he invested nominal capital
in the business, and his capital account, at the time he transferred the Circle
of Fire assets to us, was not substantial. His effective purchase price of his
2,566,309 shares of common stock is less than $.01 per share.
In April 1997, when Mr. McCormick joined us, he was issued shares of Circle
of Fire Studios' common stock for $5,000, in consideration of his lending
certain amounts to us and his agreeing to become employed by us. In May 1997,
Associated Corporate Services, Ltd., a corporation of which Mr. McCormick was
then the president, purchased shares of Circle of Fire Studios for $50,000. As a
result of the Circle of Fire acquisition, the shares purchased by Mr. McCormick
became 2,489,479 shares of common stock and the shares purchased by Associated
Corporate Services became 76,829 shares of common stock. Mr. McCormick's
effective purchase price was a nominal amount, and his capital account, at the
time he transferred the Circle of Fire assets to us, was not substantial.
Associated Corporate Services' effective purchase price was $.645 per share.
Messrs. Noll and McCormick have transferred a portion of their shares to family
members and related parties.
During 1997 and 1998, Mr. McCormick lent us approximately $110,000. This
amount has been repaid in full with interest at 8% per annum.
We believe that the transactions described above between us and our
officers, directors and principal stockholders were on terms at least as fair to
us as had these transactions been concluded with unaffiliated parties. Since Mr.
McCormick and Mr. Noll were our only directors until November 1999, none of the
foregoing transactions were approved by any unaffiliated outside directors. We
intend that all future related party transactions, including any loans or
advances, will be for bona fide business purposes and approved by a majority of
our board which will include unrelated directors or by our audit committee, at
least a majority of whom are to be unrelated parties.
32
<PAGE>
1999 PRIVATE PLACEMENTS
In January 1999, we sold 1,333,333 shares of common stock for $.75 per
share to unaffiliated investors, from which we received net proceeds of
$940,000. The proceeds from this sale were used for working capital and other
corporate purposes, including payments due in connection with the settlement of
litigation.
In June 1999, we sold nine private placement units at $100,000 per unit to
four accredited investors, from which we received net proceeds of approximately
$780,000. Each private placement unit consisted of 11,733 shares of our common
stock and a Series A redeemable common stock purchase warrant to purchase 13,333
shares of common stock at $8.55 per share. The effective price per share of
common stock purchased by these investors was $8.52, assuming no value is
allocated to the warrants. The warrants also provides the holders with cashless
exercise rights, which is the right to convert the warrant into the number of
shares of common stock having a value equal to the amount by which the excess of
the market value of the common stock at the time the warrants are exercised
exceeds the exercise price per share. We used the proceeds from this sale for
working capital and other corporate purposes, including expenses relating to
this offering. In connection with this private placement, we engaged HD Brous &
Co., Inc., one of the representatives of the underwriters, as exclusive
placement agent. We paid HD Brous a fee of $90,000 and a non-accountable expense
allowance of $27,000. We also issued HD Brous a warrant to purchase one
placement agent's unit for $90,000. A placement agent's unit consists of 10,560
shares of our common stock and a Series A common stock purchase warrant to
purchase 12,000 shares of our common stock at $8.55. The warrant we issued to HD
Brous terminates on the date of this prospectus. In connection with the private
placement, we and our officers, directors and 5% stockholders gave HD Brous a
three-year right of first refusal with respect to public and private sales of
our securities, including sales pursuant to Rule 144 of the Commission pursuant
to the Securities Act.
PRINCIPAL STOCKHOLDERS
The following table sets forth information as of December 31, 1999, as to
the beneficial ownership of each director, each officer named in the Summary
Compensation Table and each person known by us to own at least 5% of the
outstanding shares of our common stock.
<TABLE>
<CAPTION>
Percentage of Shares
Amount and Nature of -------------------------------------
Name and Address of Beneficial Owner(1) Beneficial Ownership(2) Prior to Offering After Offering
- --------------------------------------- ----------------------- ------------------ --------------
<S> <C> <C> <C>
Richard F. Noll(3) ...................... 2,538,650 34.6% 29.7%
J.P. McCormick(4) ....................... 2,489,479 33.9% 29.1%
Alexander M. Adelson (5) ................ 20,000 * *%
Sean Deson(6) ........................... 0 -- --
All officers and directors as a group
(four persons)(3),(4),(5) and (6)....... 5,048,129 68.7% 59.1%
</TABLE>
* Less than 1%.
(1) The address of each person named is 95 Parker Street, Newburyport, MA 01950.
(2) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. Shares of common stock subject to options or
warrants are deemed to be currently exercisable if they are convertible or
exercisable within 60 days of the date as to which information is provided.
Except as indicated in the footnotes to this table, the persons named in the
table have sole voting and investment power with respect to all shares of common
stock beneficially owned.
(3) Shares beneficially owned by Mr. Noll include (a) 16,351 shares of common
stock owned by Mr. Noll's wife, as to which Mr. Noll disclaims beneficial
interest, and (b) 9,333 shares of common stock issuable upon exercise of
outstanding options held by Mr. Noll.
33
<PAGE>
(4) Shares beneficially owned by Mr. McCormick includes 9,333 shares of common
stock issuable upon exercise of outstanding options held by Mr. McCormick.
(5) The shares owned by Mr. Adelson represent shares of common stock issuable
upon exercise of options held by him.
DESCRIPTION OF SECURITIES
Capital Stock
We are authorized to issue 500,000 shares of preferred stock, par value
$.001 per share, and 50,000,000 shares of common stock, par value $.001 per
share. Holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of stockholders and share in dividends
which the board of directors, in its discretion, may declare from funds legally
available. In the event of liquidation, each outstanding share of common stock
entitles its holder to participate ratably in the assets remaining after payment
of liabilities and any preferences due to holders of preferred stock. At
February 29, 2000, there were 7,342,762 shares of common stock outstanding.
Stockholders have no preemptive or other rights to subscribe for or
purchase additional shares of any class of stock or of any of our other
securities, and there are no redemption or sinking fund provisions with regard
to the common stock. All outstanding shares of common stock are, and those
issuable as part of the units or upon exercise of the warrants will be, when
issued as provided in this prospectus, validly issued, fully paid, and
nonassessable. Stockholders do not have cumulative voting rights.
Our board of directors is authorized to issue, from time to time and
without further stockholder action, up to 500,000 shares of preferred stock in
one or more distinct series. The board of directors is authorized to fix the
following rights and preferences, among others, for each series:
o The rate of dividends and whether these dividends shall be cumulative.
o The price at and the terms and conditions on which shares may be
redeemed.
o The amount payable upon shares in the event of voluntary or involuntary
liquidation.
o Whether or not a sinking fund shall be provided for the redemption or
purchase of shares.
o The terms and conditions on which shares may be converted.
o Whether, and in what proportion to any other series or class, a series
shall have voting rights other than required by law, and, if voting
rights are granted, the number of voting rights per share.
We have no plans, agreements or understandings with respect to the
designation of any series or the issuance of any shares of preferred stock. We
have agreed with the underwriters that we will not create any series of
preferred stock or issue any shares of preferred stock without the consent of
the underwriters for two years from the date of this prospectus.
34
<PAGE>
Units
Each unit consists of one share of common stock and one Series B redeemable
common stock purchase warrant. The common stock and warrants comprising the
units are not separately transferable prior to one year from the date of this
prospectus, or earlier at the discretion of the underwriters.
Series B Redeemable Common Stock Purchase Warrants
Unless previously redeemed by us, you may, upon payment of the exercise
price of $5.00 per share, purchase one share of common stock during the period
commencing one year from the date of this prospectus, or earlier at the election
of the representative, and ending five years from the date of this prospectus.
You may only exercise the warrants if a current prospectus under the Securities
Act relating to the shares of common stock issuable upon exercise of the
warrants is then in effect, and such securities are qualified for sale or exempt
from qualification under the applicable securities laws of the state in which
you reside.
Commencing one year from the date of this prospectus, or earlier with the
consent of the underwriter, the warrants are subject to redemption by the
Company, at a price of $.10 per warrant, (i) if the underlying common stock is
listed on the Nasdaq System or the American or New York Stock Exchange, (ii) if
at such time there is a current and effective registration statement covering
the warrants and the shares of common stock issuable upon the exercise of the
warrants and (iii) if the closing price per share of common stock is at least
150% of the exercise price for at least 20 consecutive trading days ending not
earlier than three days prior to the date on which the warrants are called for
redemption. The warrants may not be called for redemption prior to the date the
warrants become exercisable. If we exercise our right to redeem the warrants,
you will automatically forfeit your right to exercise your warrants unless you
exercise the warrants before the close of business on the business day
immediately prior to the date set for redemption. If we redeem the warrants, we
must redeem all of the outstanding warrants.
In order for us to redeem the warrants, we must give you notice of
redemption by first class mail, postage prepaid, within five business days, or
such later date which the underwriters may consent, after the warrants are
called for redemption, but no earlier than 60 and no later than the 30 days
before the date fixed for redemption. The notice of redemption shall specify the
redemption price, the date fixed for redemption, the place where the warrant
certificates shall be delivered and the redemption price paid. The notice shall
also advise you that your right to exercise the warrants shall terminate at 5:00
p.m., New York City time, on the business day immediately preceding the date
fixed for redemption.
The warrants may be exercised upon surrender of the warrant certificate(s)
on or prior to 5:00 p.m., New York City time, on the expiration date of the
warrants or, if the warrants are called for redemption, the day prior to the
redemption date at the offices of the Company's warrant agent with the form of
an Election to Purchase on the reverse side of the certificate(s) filled out and
executed as indicated, accompanied by payment of the full exercise price for the
number of shares of common stock for which the warrants are being exercised.
The warrants contain provisions that protect the holders thereof against
dilution by adjustment of the exercise price, and the number of shares in
certain specified events, such as stock dividends, stock splits, mergers, sale
of substantially all of our assets, and for other similar events.
We are not required to issue fractional shares of common stock. We will pay
cash in lieu of fractional shares, based upon the current market value of such
fractional shares at the date of exercise. A holder of warrants will not possess
any rights as a stockholder unless and until he or she exercises the warrants.
In the event of any merger, consolidation, sale or lease of substantially
all of our assets or reorganization whereby we are not the surviving
corporation, we may provide in the agreement relating to the transaction that
each warrant shall be converted into such securities of the surviving or
acquiring corporation or other entity as has a value equal to the value of the
warrants, which shall not exceed the amount by which the consideration to be
received per share of common stock exceeds the exercise price of the warrant.
The value of the warrants and securities being issued in exchange therefor are
to be determined by our board of directors. In the event that, in such a
transaction, the value of the consideration to be received per share of common
stock is not greater than the exercise price of the warrants, the warrants shall
terminate and no consideration will be paid with respect to the warrants.
35
<PAGE>
Although the warrants have a fixed exercise price and a formula for
adjustments in certain events and have a fixed expiration date, it is possible
that in the future we may wish to reduce the exercise price or extend the
exercise period of the warrants. We have no plans to reduce such price or extend
the exercise period of the warrants. Any such change would be effected pursuant
to a post-effective amendment to the registration statement of which this
prospectus is a part or a new registration statement, and no warrants with
amended terms may be exercised unless and until such post-effective amendment or
new registration statement has been declared effective by the SEC.
The warrants are issued pursuant to a warrant agreement between us and
Interwest Transfer Company, as warrant agent.
Other Options and Warrants
In connection with the June 1999 private placement of private placement
units, we issued series A redeemable common stock purchase warrants to purchase
120,000 shares of common stock at an exercise price of $8.55 per share. These
warrants are exercisable until June 30, 2004 and give the holders certain
cashless exercise rights. These rights give the holders the ability to receive
from us the number of shares of common stock that equals the appreciation in the
value of the warrant with no cash payment by the holder. We have the right to
redeem the warrants commencing in June 2001 if the price of our common stock is
$12.83 per share, subject to adjustment, and the shares of common stock issuable
upon exercise of the warrants are registered with the SEC.
In connection with this private placement, we issued to HD Brous, one of
the underwriters, in its capacity as exclusive placement agent, a warrant
entitling the holder to purchase, for $90,000, a placement agent's unit
consisting of 10,560 shares of common stock and a series A redeemable common
stock purchase warrant to purchase 12,000 shares of our common stock. The
warrant issued to the underwriter may terminate on the date of this prospectus.
We also have outstanding a warrant to purchase 166,667 shares of common
stock at $8.55, which has cashless exercise rights, and an option to purchase
166,667 shares of common stock at $5.70, which does not have cashless exercise
rights.
We granted to our director Alexander M. Adelson options to purchase 100,000
shares of our common stock at $6.09 per share, and to our director Sean Deson
options to purchase 146,666 shares of our common stock at $6.09 per share. Mr.
Adelson's options vest annually in equal amounts over their five year term,
beginning on the date he became a director, provided that he is a director on
the vesting dates. Mr. Deson's options vest annually over their five year term
in the amount of 66,666 options at the end of his first year of service as a
director, followed by 20,000 options at the end of each of years two, three,
four and five for so long as he is a director.
Dividend Policy
We presently intend to retain future earnings, if any, in order to provide
funds for use in the operation and expansion of our business and accordingly we
do not anticipate paying cash dividends on our common stock in the foreseeable
future.
Shares Eligible for Future Sale
After this offering, there will be 8,542,762 shares of common stock
outstanding, of which 5,550,064 shares are restricted securities and are not
eligible for sale. The restricted securities will become eligible for sale as
follows:
Number of Shares Date Shares May be Sold
- ---------------- -----------------------
537,092 Ninety days from the date of this prospectus
5,011,719 Six months from the date of this prospectus, subject to the
Rule 144 limitation and January 2001 without limitation.
These shares are subject to a lock-up agreement with the
underwriters, who may give their consent to a sale commencing
on January 2000, subject to the Rule 144 limitations.
1,253 April 2000
Rule 144 permits the sale of restricted securities, subject to the Rule 144
volume limitations, one year after the date of issuance or the date the share
are acquired from one of our affiliates. Pursuant to the Rule 144 volume
36
<PAGE>
limitations, a holder of restricted securities held for one year may sell in any
three-month period the greater of 1% of the outstanding common stock or the
average weekly trading volume. A person who is not an affiliate of the Company
and who has held restricted securities for two years may sell such securities
without regard to the Rule 144 volume limitations. Our officers, directors and
5% stockholders have agreed not to publicly sell their shares during the
six-month period starting with the date of this prospectus, without the prior
consent of the underwriters.
We cannot predict the effect, if any, that the issuance of shares of common
stock upon exercise of options or warrants or the registration of such shares
will have on the market for and market price of the common stock.
Section 203 of the Delaware General Corporation Law
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law. That section provides that, with certain exceptions, a Delaware
corporation may not engage in any of a broad range of business combinations with
a person or affiliate or associate of such person who is an interested
stockholder for a period of three years from the date that such person became an
interested stockholder unless the transaction resulting in a person's becoming
an interested stockholder, or the business combination, is approved by the board
of directors of the corporation before the person becomes an interested
stockholder, the interested stockholder acquires 85% or more of the outstanding
voting stock of the corporation in the same transaction that makes it an
interested stockholder (excluding certain employee stock ownership plans) or on
or after the date the person becomes an interested stockholder, the business
combination is approved by the corporation's board of directors and by the
holders of at least 66 2/3% of the corporation's outstanding voting stock at an
annual or special meeting, excluding shares owned by the interested stockholder.
An "interested stockholder" is defined as any person that is the owner of 15% or
more of the outstanding voting stock of the corporation or an affiliate or
associate of the corporation and was the owner of 15% or more of the outstanding
voting stock of the corporation at any time within the three year period
immediately prior to the date on which it is sought to be determined whether
such person is an interested stockholder.
These provisions could have the effect of delaying, deferring or preventing
a change of control. Our stockholders, by adopting an amendment to our
certificate of incorporation or bylaws, may elect not to be governed by Section
203, effective twelve months after adoption. Neither our certificate of
incorporation nor our bylaws currently excludes us from the restrictions imposed
by Section 203.
Transfer Agent and Warrant Agent
The transfer agent for the common stock and the warrant agent for the
warrants is Interwest Transfer Company, P.O. Box 17136, Salt Lake City, Utah
84117.
UNDERWRITING
Our underwriters, for whom HD Brous & Co., Inc. and Solid ISG Capital
Markets, LLC are acting as the representatives, have agreed, severally, on the
terms and subject to the conditions of the underwriting agreement, to purchase
from us, and we have agreed to sell to the underwriters, 1,200,000 units as
follows:
HD Brous & Co., Inc.
Solid ISG Capital Markets, LLC
The underwriters are committed severally to purchase and pay for all of
the shares on a "firm commitment" basis if they purchase any shares.
The underwriters have advised us that they propose to offer the units to
the public at the initial public offering prices set forth on the cover page of
this prospectus. The underwriters may allow to certain dealers, who are members
of the National Association of Securities Dealers, Inc., concessions not
exceeding $ per unit, of which not more than $ per unit may be reallowed to
other dealers who are members of the National Association of Securities Dealers.
After the offering, the offering price, the concession and the reallowance may
be changed.
37
<PAGE>
We have granted an option to the underwriters, exercisable during the
45-day period from the date of this prospectus, to purchase up to a maximum of
180,000 additional units at the public offering price set forth on the cover
page of this prospectus, less the underwriting discount, for the sole purpose of
covering over-allotments of the units.
We have agreed to pay to the underwriters a non-accountable expense
allowance of 3% of the aggregate public offering price of all units sold,
including any units sold pursuant to the underwriters' over-allotment option. We
have paid the underwriters $25,000 to date.
The underwriting agreement also provides for us to pay an underwriter a fee
in the event that the underwriter introduces us to a party which enters into a
business combination or other business transaction with us.
All of our officers, directors and 5% stockholders have agreed not to sell
(including any short sale or sale against the box) publicly or otherwise
transfer, subject to certain exceptions for transfers to related parties, any of
their securities during the six month period commencing with the date of this
prospectus, without the written consent of the underwriter. A sale against the
box is similar to a short sale, except that the seller owns the shares but
delivers borrowed shares to effect the sale. We have also agreed that, during
the six-month period commencing with the date of this prospectus, we will not,
without the consent of the underwriters, publicly sell or register any
securities pursuant to the Securities Act without the consent of the
underwriter, except that such restrictions do not apply to our registration of
stock issuable pursuant to our present stock option plans on a Form S-8
registration statement. We have also agreed with the underwriters that we will
not create any series of preferred stock or issue any shares of preferred stock
without the consent of the underwriters for two years from the date of this
prospectus.
The underwriting agreement provides for reciprocal indemnification between
us and the underwriters against certain liabilities in connection with the
registration statement, including liabilities under the Securities Act.
In connection with this offering, we have agreed to sell to the
underwriters, for nominal consideration, a unit purchase option to purchase from
us up to 120,000 units at an exercise price equal to 165% of the offering price
of the units being sold in this offering. The units to be issued upon the
exercise of this unit purchase option are identical to the units being sold
pursuant to this prospectus. The warrants issuable upon exercise of these units
are identical to the warrants included in the units we are selling in this
offering. The underwriters' unit purchase option is exercisable for a five year
period commencing on the date of this prospectus, except that during the
one-year period commencing on the date of this prospectus, neither the unit
purchase option nor any securities issuable upon exercise of the unit purchase
option may be sold, transferred, assigned or hypothecated, except to the
officers or members of the underwriters or to other underwriters and selling
group members or officers, partners or members thereof, all of which shall be
bound by such restrictions. The holders of the unit purchase options have no
voting, dividend or other rights as our stockholders with respect to securities
issuable upon exercise of the unit purchase options until the unit purchase
options or the underlying warrants, as the case may be, are exercised. The
holders of the unit purchase options have been given the opportunity to profit
from a rise in the market for our securities at a nominal cost, with a resulting
dilution in the interests of stockholders. The holders of the unit purchase
options can be expected to exercise them at a time when we would, in all
likelihood, be able to obtain equity capital, if then needed, by a new equity
offering on terms more favorable to us than those provided by the unit purchase
options. Such facts may adversely affect the terms on which the company could
obtain additional financing. Any profit received by the underwriters on the sale
of the unit purchase options or the securities issuable upon exercise of the
unit purchase options may be deemed additional underwriting compensation.
We have agreed during the five-year period following the date of this
prospectus to, on up to two occasions, register the unit purchase option or the
units issuable upon the exercise of the unit purchase option upon the request of
the underwriters. We are required to file the first such registration statement
at our expense. We have agreed to cooperate with the holders of the unit
purchase options in filing a second registration at the expense of the holders
of the unit purchase options or underlying securities.
38
<PAGE>
In addition, for seven years following the date of this prospectus, we are
required to give advance notice to the holders of the unit purchase option or
underlying securities of our intention to file a registration statement (except
a registration statement filed on Form S-4 or S-8), and in such case, the holder
of the purchase option and underlying securities shall have the right to require
us to include the underlying securities in such registration statement at our
expense.
In June 1999, we engaged HD Brous, one of the underwriters, to serve as the
exclusive placement agent for the sale of nine private placement units at
$100,000 per unit. Each private placement unit consisted of 11,733 shares of our
common stock and a Series A common stock purchase warrants to purchase 13,333
shares of common stock at $8.55 per share. We paid HD Brous a fee of $90,000 and
a non-accountable expense allowance of $27,000. We also issued to HD Brous a
warrant to purchase one placement agent's unit for $90,000. A placement agent's
unit consists of 10,560 shares of our common stock and a Series A common stock
purchase warrant to purchase 12,000 shares of our common stock at $8.55 per
share. The warrant will terminate on the date of this prospectus. In connection
with the private placement, we and our officers, directors and 5% stockholders
gave HD Brous a three-year right of first refusal with respect to public and
private sales of our securities, including sales pursuant to Rule 144.
The underwriting agreement provides that, during the five-year period
following the date of this prospectus, the representatives will have the right
to designate one member to our board of directors or an advisor to the board.
The representatives have not designated such person and they do not expect to
exercise this right in the near future.
The underwriting agreement also requires us to maintain $1,000,000 of key
man life insurance on the lives of Messrs. Richard F. Noll and J.P. McCormick
during their respective terms of employment with us.
Prior to this offering, there has been no public market for the units or
warrants.
The representatives have informed us that sales to any account over which
the underwriter exercises discretionary authority will not exceed 1% of this
offering.
LEGAL MATTERS
The legality of the units offered by this prospectus will be passed upon
for us by Peabody & Arnold LLP, Boston, Massachusetts. Certain legal matters
will be passed upon for the underwriter by Esanu Katsky Korins & Siger, LLP, New
York, New York.
EXPERTS
Our consolidated financial statements at December 31, 1999 and December 31,
1998 appearing in this prospectus have been audited by Pannell Kerr Forster PC,
independent auditors, as set forth in their report appearing elsewhere in this
prospectus, and are included in reliance upon such report given on the authority
of such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
We will file annual, quarterly, and other reports, proxy statements and
other information with the Securities and Exchange Commission. These reports,
proxy statements and other information can be inspected and copied at the public
reference facilities maintained by the SEC, at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549 and at its regional offices located
at 7 World Trade Center, New York, New York 10048 and Northwest Atrium Center,
500 W. Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
material can be obtained from the Public Reference Section of the SEC Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed
rates. The SEC maintains a website that contains all information filed by us.
The address of the SEC website is www.sec.gov.
This prospectus constitutes a part of a registration statement on Form SB-2
filed by us with the SEC under the Securities Act with respect to the units
39
<PAGE>
offered by this prospectus. This prospectus does not contain all the information
which is in the registration statement. Certain parts of the registration
statement are omitted as allowed by the rules and regulations of the SEC. Please
refer to the registration statement and to the exhibits in the registration
statement for further information with respect to us and the units offered in
this prospectus. Copies of the registration statement are on file at the offices
of the SEC and may be obtained upon payment of the prescribed fee or may be
examined without charge at the public reference facilities of the SEC described
above. Statements contained in this prospectus concerning the provisions of
documents are necessarily summaries of the material provision of such documents,
and each statement is qualified in its entirety by reference to the copy of the
applicable document filed with the SEC.
REPORTS TO STOCKHOLDERS
We intend to distribute to our stockholders annual reports containing
audited financial statements, and we will make available to our stockholders
such other information as we deem appropriate.
40
<PAGE>
ACTIVEWORLDS.COM, INC.
Consolidated Financial Statements
at December 31, 1999 and for years ended
December 31, 1999 and 1998
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
Page
<S> <C>
Independent Auditors' Report F-2
Consolidated Financial Statements
Consolidated Balance Sheet - December 31, 1999 F-3
Consolidated Statement of Operations for Years Ended December 31, 1999 and 1998 F-4
Consolidated Statement of Changes in Stockholders' Equity (Deficiency) for Years
Ended December 31, 1999 and 1998 F-5
Consolidated Statement of Cash Flows for Years Ended December 31, 1999 and 1998 F-6
Notes to Consolidated Financial Statements F-7 to 18
</TABLE>
F-1
<PAGE>
Independent Auditors' Report
To the Stockholders
Activeworlds.com, Inc.
We have audited the accompanying consolidated balance sheet of Activeworlds.com,
Inc., as of December 31, 1999, and the related consolidated statements of
operations, changes in stockholders' equity (deficiency) and cash flows for each
of the two years in the period then ended. These consolidated financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Activeworlds.com, Inc. at December 31, 1999, and the consolidated results of
their operations and their consolidated cash flows for each of the two years in
the period then ended 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 1 to the
consolidated financial statements, the Company has suffered substantial
cumulative consolidated net losses and has net capital at December 31, 1999 in
an amount less than its net loss for 1999. These factors raise substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are also described in note 1. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ Pannell Kerr Forster, P.C.
------------------------------------
Boston, MA
February 8, 2000
F-2
<PAGE>
ACTIVEWORLDS.COM, INC.
Consolidated Balance Sheet
December 31, 1999
<TABLE>
<CAPTION>
Assets
<S> <C>
Current assets
Cash $ 481,408
Accounts receivable, trade - net of allowance for doubtful accounts of $20,000
82,519
Prepaid expenses 44,832
Advances to officer/stockholder/employees 12,491
-------------
Total current assets 621,250
-------------
Property and equipment
Leasehold improvements 27,334
Equipment and fixtures 107,284
-------------
134,618
Less: accumulated depreciation 35,475
-------------
Property and equipment, net 99,143
-------------
Other assets
Deferred offering costs 238,599
-------------
Total assets $ 958,992
-------------
Liabilities and Stockholders' Equity
Current liabilities
Current portion - capital lease $ 9,537
Accounts payable 163,821
Accrued liabilities 32,075
Deferred revenue 123,895
-------------
Total current liabilities 329,328
Capital lease, net of current portion 11,890
Commitments and contingencies
Total liabilities 341,218
-------------
Stockholders' equity
Preferred stock, $.001 par value, 500,000 shares authorized, no shares issued
or outstanding -
Common stock, $.001 par value, 50,000,000 shares authorized, 7,342,762 shares
issued and outstanding 7,343
Additional paid-in capital 2,237,419
Note receivable for shares issued (6,500)
Accumulated deficit (1,620,488)
-------------
Total stockholders' equity 617,774
-------------
Total liabilities and stockholders' equity $ 958,992
-------------
</TABLE>
See notes to consolidated financial statements
F-3
<PAGE>
ACTIVEWORLDS.COM, INC.
Consolidated Statement of Operations
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------
1999 1998
-------------- ---------
<S> <C> <C>
Revenues $ 808,993 $ 576,163
------------- -------------
Operating expenses
Selling, general and administrative expenses 1,288,089 455,710
Research and development expenses 381,193 189,986
------------- -------------
Total operating expenses 1,669,282 645,696
------------- -------------
(Loss) from operations (860,289) (69,533)
Interest income 24,470 -
------------- -------------
(Loss) before (provision for) benefit from income taxes
and extraordinary item (835,819) (69,533)
(Provision for) benefit from income taxes - -
------------- -------------
(Loss) before extraordinary item (835,819) (69,533)
Extraordinary item
Gain on extinguishment of debt related to litigation
settlement, net of tax effect of $-0- - 109,807
------------- -------------
Net income (loss) $ (835,819) $ 40,274
------------- -------------
Earnings per share of common stock - basic
(Loss) before extraordinary item $ (.116) $(.013)
Extraordinary item - .020
------- -------
Net income (loss) $ (.116) $ .007
------ ------
Earnings per share of common stock - assuming dilution
(Loss) before extraordinary item $(.013)
Extraordinary item .020
-------
Net income $ .007
------
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE>
<TABLE>
<CAPTION>
ACTIVEWORLDS.COM, INC.
Consolidated Statement of Changes in Stockholders' Equity (Deficiency)
Years Ended December 31, 1999 and 1998
Preferred Stock Common Stock Additional
Stockholders' --------------- ------------ Paid-In
Shares Amount Shares Amount Capital
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balances at January 1, 1998, as restated - $ - 5,433,211 $ 5,433 $ 218,482
Issuance of common stock in connection with acquisition
of net assets of Vanguard (note 1) 333,333 333 1,150
Stockholder/employee contributions 136,000
Contract service provider contribution 32,575
Issuance of stock options for compensation and services 3,250
Net income for year
----------- ----------- ----------- ----------- -----------
Balances at December 31, 1998 - - 5,766,544 5,766 391,457
Private placements of common stock, net of issuance costs 1,438,933 1,439 1,511,538
Issuance of common stock for goods and services 137,285 138 132,362
Issuance of stock options and warrants for services 202,062
Net (loss) for year
----------- ----------- ----------- ----------- -----------
Balances at December 31, 1999 - $ - 7,342,762 $ 7,343 $ 2,237,419
----------- ----------- ----------- ----------- -----------
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE>
<TABLE>
<CAPTION>
ACTIVEWORLDS.COM, INC.
Consolidated Statement of Changes in Stockholders' Equity (Deficiency)
Years Ended December 31, 1999 and 1998
Note Total
Receivable Stockholders'
Accumulated for Shares Equity
Deficit Issued (Deficiency)
------------ ----------- ------------
<S> <C> <C> <C>
Balances at January 1, 1998, as restated $ (824,943) $ (6,500) $ (607,528)
Issuance of common stock in connection with acquisition
of net assets of Vanguard (note 1) 1,483
Stockholder/employee contributions 136,000
Contract service provider contribution 32,575
Issuance of stock options for compensation and services 3,250
Net income for year 40,274 40,274
----------- ----------- -----------
Balances at December 31, 1998 (784,669) (6,500) (393,946)
Private placements of common stock, net of issuance costs 1,512,977
Issuance of common stock for goods and services 132,500
Issuance of stock options and warrants for services 202,062
Net (loss) for year (835,819) (835,819)
----------- ----------- -----------
Balances at December 31, 1999 $(1,620,488) $ (6,500) $ 617,774
----------- ----------- -----------
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE>
ACTIVEWORLDS.COM, INC.
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------
1999 1998
-------------- ---------
Operating activities
<S> <C> <C>
Net income (loss) $ (835,819) $ 40,274
Adjustment to reconcile net income (loss) to net cash provided (used)
by operating activities
Depreciation and amortization 29,429 7,526
Abandoned improvements - 9,661
Common stock issued for goods and services 132,500 -
Options issued for compensation and services 202,062 3,250
Services provided in lieu of payment on an account receivable 8,000 -
Officers'/employee's compensation waived and contributed to additional
paid-in capital - 136,000
Contract service provider payment waived and contributed to additional paid
in capital - 32,575
Gain on extinguishment of debt related to litigation settlement - (109,807)
Cash received in acquisition of Vanguard - 477
Changes in operating assets and liabilities which provided (used) cash
Accounts receivable (38,683) (23,662)
Prepaid expenses (44,832) -
Advances to officer/stockholder/employees (2,000) (10,491)
Accounts payable 103,621 (37,136)
Accrued liabilities (263,413) 20,492
Deferred revenue (20,445) 19,940
Customer deposit (5,000) 5,000
------------- -------------
Net cash provided (used) by operating activities (734,580) 94,099
------------- -------------
Investing activities
Purchases of equipment and leasehold improvements (82,496) (6,213)
------------- -------------
Net cash (used) by investing activities (82,496) (6,213)
------------- -------------
Financing activities
Payments on capital lease obligation (7,661) -
Net proceeds from sale of stock 1,512,977 -
Payments on 8% note payable to officer/stockholder (54,753) (20,100)
Deferred offering costs (238,599) -
------------- -------------
Net cash provided (used) by financing activities 1,211,964 (20,100)
------------- -------------
Net increase in cash 394,888 67,786
Cash at beginning of year 86,520 18,734
------------- -------------
Cash at end of year $ 481,408 $ 86,520
------------- -------------
Supplemental disclosure information
Cash paid for interest during the year $ 1,708 $ 6,075
------------- -------------
Cash paid for income taxes during the year $ - $ -
------------- -------------
Supplemental schedule of noncash investing activities
Equipment purchased under capital lease $ 29,088 $ -
------------- -------------
Noncash assets acquired in acquisition of Vanguard $ - $ 1,006
------------- -------------
</TABLE>
See notes to consolidated financial statements
F-6
<PAGE>
Note 1 - Organization and basis of presentation
On January 22, 1999, Activeworlds.com, Inc., a publicly traded
Delaware corporation then known as Vanguard Enterprises, Inc.
("Company"), acquired all of the issued and outstanding common
stock of Circle of Fire Studios, Inc., a Nevada corporation
("Circle of Fire"), in exchange for 5,433,211 shares of its common
stock (the "1999 Acquisition") pursuant to an Agreement and Plan
of Reorganization with Circle of Fire. As part of the 1999
Acquisition, outstanding options to acquire common stock of Circle
of Fire were exchanged for options to purchase 322,682 shares of
the Company's common stock. (See note 7.) At the time of the 1999
Acquisition, Vanguard had no significant operations.
Circle of Fire is accounted for as the acquiring party and the
surviving accounting entity because the former stockholders of
Circle of Fire received approximately 94% of the voting rights in
the combined corporation. The shares issued by Vanguard pursuant
to the 1999 Acquisition have been accounted for as if those shares
had been issued upon the organization of Circle of Fire. The
outstanding capital stock of Vanguard immediately prior to the
1999 Acquisition, has been accounted for as shares issued by
Circle of Fire to acquire the net assets of Vanguard as of
December 31, 1998.
Because Circle of Fire is the accounting survivor, the
consolidated financial statements presented for all periods are
those of Circle of Fire. All intercompany accounts and
transactions have been eliminated in consolidation.
The 1999 Acquisition is being accounted for as if it had taken
place on December 31, 1998. The consolidated financial statements
for the year ended December 31, 1998 reflect the consolidated
results of operations and cash flows of Vanguard and Circle of
Fire for the year ended December 31, 1998. The consolidated
financial statements are presented as those of Activeworlds.com,
Inc.
Immediately prior to the 1999 Acquisition, Vanguard effected a
one-for-two reverse split in its outstanding common stock, with no
change in the par value per share. In connection with the 1999
Acquisition, Vanguard also issued 133,333 shares of common stock
to a financial advisor and sold 1,333,333 shares of common stock
at $.75 per share in private placement.
All share and per share information in the consolidated financial
statements reflect (a) the consummation of the 1999 Acquisition
whereby shares and options issued by Circle of Fire were exchanged
for shares of the Company's common stock and options to purchase
shares of the Company's common stock, (b) the one-for-two reverse
split, and (c) the two-for-three reverse stock split approved by
the Company during March 2000 (see unaudited note 16).
Unless the context indicates otherwise, references in the
consolidated financial statements to the "Company" includes the
operations of Circle of Fire prior to the date of the 1999
Acquisition. References to "Vanguard" relate to the operations of
Vanguard Enterprises, Inc. prior to the date of the 1999
Acquisition.
The outstanding Circle of Fire common stock at the time of the
1999 Acquisition was held principally by officers.
<PAGE>
The accompanying consolidated financial statements have been
prepared in conformity with generally accepted accounting
principles, which contemplate that the Company will continue as a
going concern. However, the Company has suffered substantial
cumulative consolidated net losses and has net capital at December
31, 1999 in an amount less than its net loss for 1999.
In view of these matters, realization of a major portion of the
assets in the accompanying consolidated balance sheet is dependent
upon continued operations of the Company, which, in turn, is
dependent upon the Company's ability to meet its financial
requirements and the success of its future operations. The Company
has filed a registration statement with the Securities and
Exchange Commission with respect to a public offering of its
securities. If the offering is successful, the costs associated
with the registration (including $238,599 of deferred offering
costs reflected on the consolidated balance sheet as of December
31, 1999) will be charged against the additional paid-in capital
provided by the sale. If the offering is not successful, the
associated costs will be charged to expense in the period the
offering is terminated. The Company's continued existence is
dependent upon the receipt of sufficient proceeds from a public
offering, a private placement or other financing.
Note 2 - Summary of significant accounting policies
A. Nature of operations
Circle of Fire commenced operations on January 17, 1997. The
Company provides computer software products and on-line
services that permit users to enter, move about and interact
with others in computer-generated, three-dimensional virtual
environment using the Internet.
B. Depreciation and amortization
Equipment and fixtures are depreciated using accelerated
methods and estimated lives of five years. Leasehold
improvements are depreciated over six years, the period of the
lease. Depreciation and amortization expense of property and
equipment totaled $25,488 and $6,623 for 1999 and 1998,
respectively.
<PAGE>
Organization costs were being amortized over five years on a
straight-line basis. In accordance with American Institute of
Certified Public Accountants Statement of Position 98-5,
Reporting on the Costs of Start-Up Activities, $3,941, the
remaining balance as of January 1, 1999, was expensed in 1999.
Because of the immaterial amount, it was included in selling,
general and administrative expenses rather than being reported
as the cumulative effect of a change in accounting principle.
Amortization expense for 1998 was $903.
C. Income taxes
The Company reports income for tax purposes on the cash basis.
Deferred taxes result from temporary differences and net
operating loss carryforward. An allowance for the full amount
of the gross deferred tax asset has been established due to
the uncertainty of utilizing the deferred tax asset in the
future.
D. Accounting estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
E. Revenues
Memberships are recognized as revenue ratably over the periods
the memberships are in effect. Advances on royalties from
licensing agreements are recognized over the period the
royalties are earned. Revenue from licensing the Company's
uniservers, galaxservers and worlds is recognized when the
license is granted and the Company has performed all of its
obligations under the license agreement. Revenue from
technical services is recognized when the services are
performed. Revenue from long-term contracts is recognized on a
percentage-of-completion basis.
F. Significant customers
During 1999 and 1998, revenue from one customer amounted to
approximately 26.0% and 8.3%, respectively. The customer was
not the same in the two years.
G. Selling, general and administrative expenses
Selling, general and administrative expenses for 1998 include
the value of services rendered by the Company's chief
executive officer and chief financial officer, who received no
compensation during the year, and a key employee who received
stock options during such period in lieu of compensation. (See
note 7.) The value of the services is also reflected as
<PAGE>
additional paid-in capital. The value of services by the chief
executive and financial officers was $100,000 in the aggregate
for 1998. The value of the services by the employee, which is
equal to the value of the options granted to the employee, was
$36,000 for 1998. Both officers and the employee received
compensation for their services in 1999.
Selling, general and administrative expenses for 1998 also
include $32,575, the value of services rendered during 1998 by
a contract service provider who received shares during the
year in lieu of payment. The value of the services is also
reflected as additional paid-in capital for 1998. The related
shares issued at the time of the 1999 Acquisition are included
in the balances at January 1, 1998, as restated, on the
consolidated statement of changes in stockholders' equity
(deficiency).
H. Research and development of software
Research and development costs are expensed as incurred.
I. Earnings per share of common stock
Earnings per share of common stock is computed by dividing net
income (loss) by the weighted-average number of common shares
outstanding for the year. Earnings per common share of stock -
assuming dilution reflects the potential dilution that could
occur if securities or other contracts to issue common stock
were exercised or converted into common stock which would then
share in the net income of the Company. See also note 11.
Note 3 - Cash
Two checking accounts and one savings account are with the same
bank; total balances at that bank as of December 31, 1999,
exceeded the amount insured by the Federal Deposit Insurance
Corporation by approximately $431,000. The Company has not
experienced any losses on such balances.
Note 4 - Deferred revenue
Deferred revenue consists of the following at December 31, 1999:
Deferred memberships $ 98,668
Advances on royalties 25,227
-------------
$ 123,895
-------------
Note 5 - Capital lease
The Company leases equipment under a capital lease which will
expire in 2002. Annual payments are applicable first to interest
(at 6.3%) with the balance to principal.
<PAGE>
At December 31, 1999, future minimum payments are: 2000 - $10,587;
2001 - $10,587; and 2002 (final year) - $1,765. The amount
representing interest was $1,512, and the present value of net
minimum lease payments was $21,427.
At December 31, 1999, the cost and accumulated depreciation of the
leased equipment were $29,088 and $5,817, respectively.
Note 6 - Issuance of common stock
A. Private placement offerings
In connection with the 1999 Acquisition, Vanguard sold
1,333,333 shares of common stock at $.75 per share in a
private placement.
In June 1999, the Company sold nine private placement units at
$100,000 per unit. Each private placement unit consisted of
11,733 shares of common stock and a five-year warrant to
purchase 13,333 shares of common stock at $8.55 per share. The
price of the units reflects a price of $8.52 per share, with
no value being allocated to the warrants. In connection with
this private placement, the Company paid the placement agent
$117,000. The Company also issued the placement agent a
warrant to purchase one placement agent's unit for $90,000. A
placement agent's unit consists of 10,560 shares of common
stock and a warrant to purchase 12,000 shares of common stock
at $8.55 per share. The warrants may be redeemed commencing in
June 2001 if the price of the common stock is at least 150% of
the exercise price. The warrants also give the holders
cashless exercise rights. The warrants will terminate on the
date that the Company's public offering of its securities is
declared effective by the Securities Exchange Commission.
The net proceeds of these private placements, after deducting
costs of $387,023, were $1,512,977.
Reference is also made to notes 7 and 16.
B. Issuance of common stock for goods and services
In connection with the 1999 Acquisition, Vanguard issued
133,333 shares of common stock to an investment banker for
services with a value of $100,000.
In 1999, the Company also issued 1,253 shares of common stock
for purchases of furniture with a value of $8,500 and 2,698
shares of common stock for advertising services with a value
of $24,000.
Reference is also made to note 16.
Note 7 - Stock options and warrants
In 1999, the Company established a qualified Stock Incentive Plan
for its employees. Additionally, it issued non qualified stock
options and warrants to employees, independent contractors and
others during both 1999 and 1998.
<PAGE>
Statement of Financial Accounting Standards No. 123 ("SFAS 123")
allows the Company to account for stock-based compensation,
including options, granted to employees under the provisions of
Accounting Principles Board Opinion No. 25 ("APB 25") and disclose
in a footnote the pro forma effect on net income (loss) if the
fair value accounting method of SFAS 123 had been used.
The methodology used in estimating the fair value of the stock
options was the Minimum Value Method adjusted for the facts and
circumstances of the stock option agreements. Significant
assumptions included a risk free interest rate of 6% and an
expected life of one year. The value of the options issued after
January 22, 1999 is determined based on the fair value of the
stock traded at the date granted.
During 1999, the Company granted incentive stock options to
purchase 264,332 shares to employees under the 1999 Stock
Incentive Plan with an exercise price equal to the fair value of
the publicly traded stock at the date the options were granted.
Additionally, 18,667 incentive stock options were granted to
officers at 10% above fair value. The options expire ten years
from the grant date. During 1997 and 1998, the Company granted
307,316 non qualified stock options to employees which expire ten
years from the grant date.
During November and December 1999, the Company entered into
agreements with two individuals to become members of the Board of
Directors. By agreeing to serve as a member of the Board of
Directors, they were granted options to purchase 100,000 and
146,667 shares of the Company's common stock at an exercise price
of approximately $6.09.
In 1999, the Company cancelled a contract it had for a marketing
firm to provide advertising services with payment to be made in
stock options. At the time of cancellation, 166,667 stock options
had been granted at an exercise price of $5.70.
In May 1999, the Company issued to an investor a warrant to
purchase 166,667 shares of common stock at $8.55 per share. The
warrant was issued in consideration of the waiver by the investor
of registration and other rights the Company had granted in
connection with its services relating to the 1999 Acquisition.
In 1999 and 1997, the Company also granted stock options and
warrants to purchase a total of 27,224 shares and 15,366 shares,
respectively, in accordance with the terms of various agreements
with other contractors or others providing services. The options
and warrants were granted at the fair value of the stock at the
time the agreements were signed. The options and warrants
generally expire five years from the date of grant.
Under APB 25, no compensation was recognized in the consolidated
financial statements for the value of the stock options issued to
employees with an exercise price in excess of the estimated fair
value of the Company stock at the time of grant. In situations
where the fair value of the stock options was considered
compensation,
<PAGE>
compensation expense was recorded and a corresponding amount
recorded as additional paid in capital.
The estimated value of stock options and warrants during 1999
ranged between $.33 and $.48. The expense recognized for
compensation and services for these stock options and warrants
granted in 1999 and 1998 was $202,062 and $3,250, respectively.
The table below sets forth information as to options and warrants
granted in 1999:
<TABLE>
<CAPTION>
Number Weighted Number of Shares Weighted
of Shares Average Under Option in Average
Under Exercise Excess or Less Fair Value
Option Price Than Fair Value Price
<S> <C> <C> <C> <C>
Outstanding at January 1, 1999 322,682 $ .53 - $ -
Granted during the year 1,032,784 6.87 45,891 3.35
Exercised during the year - - - -
Expired during the year - - - -
Outstanding at December 31, 1999 1,355,466 4.14 45,891 3.35
Exercisable at December 31, 1999 845,800 1.80 27,225 2.85
</TABLE>
The shares under option and warrants at December 31, 1999 were in
the following exercise price ranges:
<TABLE>
<CAPTION>
Options Outstanding Options Currently Exercisable
--------------------------------------- -------------------------------
Weighted Weighted Weighted
Average Average Average
Number Exercise Contractual Number Exercise
Exercise Range of Options Price Life of Options Price
-------------------------- ------------- ----------- ----------- -------------- ----------
(in years)
<S> <C> <C> <C> <C> <C>
$ -0- - $ 6.75 910,339 $ 2.32 8 527,340 $ 2.07
$6.7 - $13.12 445,127 8.97 5 318,460 8.80
----------- -----------
1,355,466 845,800
----------- -----------
</TABLE>
<PAGE>
Reference is also made to note 16.
Note 8 - Operating leases
Through April, 1999 the Company leased office facilities in
Newburyport, Massachusetts under a tenant-at-will lease agreement
requiring sixty days' advance notice of vacancy. In March, 1999
the Company entered into a lease for office space with a 3 year
term and a 3 year renewal period. The annual minimum rental
payments under the lease will be approximately $31,500.
Additionally, the Company leased vehicles in 1999 on three year
operating leases.
The future minimum rental payment under all operating leases are
as follows (including the 3 year renewal period on the lease for
office space):
Year Ending
December 31 Amount
2000 $ 43,614
2001 40,491
2002 33,315
2003 31,500
2004 31,500
2005 (final year) 5,250
--------------
Total $ 185,670
--------------
Rent expense for 1999 and 1998 was $36,849 and $9,354,
respectively.
Note 9 - Litigation settlement
In July 1997, the Company entered into an agreement with two
former employee-stockholders settling certain claims by those
individuals against the Company. Pursuant to a settlement
agreement, the Company paid $10,000 and issued its non-interest
bearing notes for an aggregate of $490,000, of which $384,807 was
outstanding at December 31, 1998 (before adjustment for the
settlement). As a result of litigation concerning the parties'
rights under the settlement agreement, the Company entered into an
agreement in January 1999, with the two former
employee-stockholders pursuant to which its obligations under the
notes were reduced to $275,000, which was the amount included in
accrued liabilities at December 31, 1998 and which was paid in
1999. Accordingly, a partial extinguishment of debt was recorded
effective December 31, 1998 in the amount of $109,807 representing
the difference between the recorded liability and the amount of
the settlement in January, 1999 and is reflected on the 1998
consolidated statement of operations as an extraordinary item.
<PAGE>
Note 10 - Income taxes
At December 31, 1999, the Company has a net operating loss
carryforward of approximately $1,221,000 that may be used to
offset future taxable income. If not used, the carryforward will
expire with the year 2018. The temporary difference for income tax
reporting on a cash basis results in additional losses of
approximately $192,000.
An allowance has been established for the full amount of the gross
deferred tax asset due to the uncertainty of utilizing the
deferred taxes in the future.
The tax effect of each type of temporary difference and
carryforward is reflected in the following table as of December
31, 1999:
Net operating loss carryforward $ 489,000
Accrual basis versus cash basis tax reporting 77,000
-------------
Deferred tax asset before valuation allowance 566,000
Valuation allowance 566,000
-------------
Net deferred tax asset $ -
-------------
The effective combined Federal and State tax rate used in the
calculation of the deferred tax asset was 40%.
The operating loss carryforward is available to reduce Federal and
State taxable income and income taxes, respectively, in future
years, if any. The realizability of deferred taxes is not assured
as it depends upon future taxable income. However, there can be no
assurance that the Company will ever realize any future cash flows
or benefits from these losses.
Permanent book/tax differences result from the value of the
services of two officers and an employee which was accrued for
financial statement purposes but which is not deductible for
income tax purposes. These permanent book/tax differences are not
reflected in the net deferred tax asset.
<PAGE>
Note 11 - Earnings per share of common stock
The number of shares on which the basic earnings per share of
common stock has been calculated is as follows:
Weighted Average
Year Ended December 31, Number of Shares
1998 5,433,211
1999 7,207,145
The diluted earnings per share of common stock for 1998 has been
calculated using 5,476,051 weighted average number of shares for
the year. Diluted earnings per share of common stock has not been
presented for 1999 since the effect of including the stock options
and warrants outstanding during 1999 (note 7) would be
antidilutive.
Reference is also made to note 16.
Note 12 - Related party transactions
In 1997, an officer/stockholder provided $108,850 of working
capital funds to the Company. The unsecured loan payable bore
interest at 8%. The remaining outstanding principal balance was
repaid in early 1999. Amounts paid to the officer/stockholder
during 1999 and 1998 totaled $54,753 and $26,000 (including
interest expense of $400 and $5,900), respectively.
An officer/stockholder of the Company was also a member of the
board of directors of a company which purchased a uniserver in the
amount of $35,000 in 1998.
An officer/stockholder of the Company has received advances from
the Company during 1998. Advances to the officer/stockholder
outstanding at December 31, 1999 totaled $10,491.
Two members of the Board of Directors will receive annual
compensation of $15,000 and $24,000, respectively.
Reference is also made to notes 2G, 7 and 14.
Note 13 - Pro forma information
Pro Forma Compensation:
The Company granted nonqualified options to purchase 76,829 shares
of common stock to an employee. The fair value of these options
has been estimated at $.19 per share. During the period from June
1, 1997 to May 31, 1998, 38,415 of the options vested and the
remaining 38,414 options vested during the period June 1, 1998 to
May 31, 1999. Additionally, the Company granted 100,000 stock
options to a member of the Board of Directors upon joining the
Board (see note 7): 20,000 options vested immediately at the date
of grant; the remaining 80,000 options vest at the rate of 20,000
on each of the four succeeding anniversary dates. The fair value
of the vested options has been estimated at $.34 per share. (None
of the 146,667 stock options granted to the other member of the
Board vest until after services have been performed. No services
were performed during 1999.)
<PAGE>
SFAS 123 allows the Company to account for stock-based
compensation arrangements under the provisions of APB 25.
Accordingly, the proforma compensation for the stock options is
$9,996 and $7,433 for 1999 and 1998, respectively.
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------
1999 1998
--------------- -------------
<S> <C> <C>
Proforma information
(Loss) before (provision for) benefit from income taxes and
extraordinary item, per consolidated statement of operations $ (835,819) $ (69,533)
Proforma adjustment for fair value of stock options (9,996) (7,433)
--------------- -------------
Proforma (loss) before extraordinary item (845,815) (76,966)
Gain on extinguishment of debt related to litigation settlement, net of
tax effect of $-0- - 109,807
-------------- -------------
Proforma net income (loss) $ (845,815) $ 32,841
--------------- -------------
</TABLE>
Reference is also made to note 16.
Note 14 - Commitments
A. Software development
On October 9, 1999 the Company entered into an agreement with
a customer to develop software for use in operating a virtual
shopping mall. The term of the agreement is four years. The
total amount of the contract is for no less than $1,000,000
but no more than $1,500,000. Additionally, the Company will
receive a fee equal to 1% of the revenue collected by the
customer for the virtual shopping mall once it is operational.
In December 1999 the Company received the first installment
under the contract for $150,000 to begin development of the
software. The Company recognized $210,000 as revenue on the
contract in 1999.
B. Employment contracts
Effective January 21, 1999, the Company entered into
three-year employment agreements with its president and chief
financial officer. Under the agreements annual compensation
for each is $140,000. Additionally, the president and chief
financial officer each were granted options to purchase up to
9,333 shares of the Company's common stock at an exercise
price of $.83 per share. The agreements also provide for the
president and chief financial officer to be eligible to
participate in a bonus pool of not more than 10% of income
before taxes, in excess of $750,000. A compensation committee
will have sole discretion as to the allocation of the bonus
pool among the senior executives.
The bonus is not cumulative during any fiscal year.
<PAGE>
Each agreement contains a provision whereby if the Company
breaches the provisions of the agreement, if the employee
terminates the agreement for "good reason" or if the Company
terminates the employee other than for cause (as defined in
the agreement), the employee shall be entitled to payment
equal to the lesser of (a) one year's salary and bonus for the
period of employment prior to calendar year in which
termination occurred; or (b) the salary due for the balance of
the term plus a pro rata portion of the bonus paid to the
employee for the previous year.
Effective February 12, 1999, the Company entered into a
five-year employment agreement with the Company's lead
programmer. Under the agreement, annual compensation starts at
$100,000, increased annually by 10% of previous year's salary.
Additionally, the employee was granted options to purchase up
to 116,667 shares of the Company's common stock at an exercise
price of $9.19 per share. (See note 7.)
Reference is also made to note 16.
Note 15 - Reclassifications
Certain amounts in the 1998 consolidated financial statements have
been reclassified to conform to the 1999 presentation. These
reclassifications had no effect on 1998 consolidated net income.
Note 16 - Subsequent event (unaudited)
On February 29, 2000, the Company approved a two-for-three reverse
stock split of the Company's outstanding common stock, an action
which also resulted in adjustments to the Company's outstanding
stock options and warrants (which were also converted on a
two-for-three basis) and the related exercise prices (which were
increased accordingly by 50%). The reverse stock split will become
effective on the date that the Company's public offering of its
securities is declared effective by the Securities and Exchange
Commission. The accompanying financial statements and footnotes
have been restated to reflect this two-for-three reverse stock
split.
<PAGE>
No dealer, salesman or any other person has been authorized to give any
information or representations other than those contained in this Prospectus,
and if given or made, such information or representations must not be relied
upon as having been authorized by the Company or the underwriters. This
Prospectus does not constitute an offer to buy any security offered by this
Prospectus, or an offer to sell or a solicitation of an offer to buy any
security, by any person in any jurisdiction in which such offer or solicitation
would be unlawful. Neither the delivery of this Prospectus nor any sale made
hereunder shall under any circumstances, imply that the Information in this
Prospectus is correct as of any time subsequent to the date of this Prospectus.
-----------------------------------
TABLE OF CONTENTS
Page
-----
Prospectus Summary ..........................
Our Business ................................
The Offering ................................
Summary Financial Information ...............
Risk Factors ................................
Forward-Looking Statements ..................
Dilution ....................................
Market for Common Stock; Dividends ..........
Use of Proceeds .............................
Capitalization ..............................
Selected Financial Data .....................
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ...............................
Business ....................................
Related Party Transactions ..................
1999 Private Placements .....................
Principal Stockholders ......................
Description of Securities ...................
Underwriting ................................
Legal Matters ...............................
Experts .....................................
Additional Information ......................
Index to Financial Statements ...............
-----------------------------------
Until , 2000 (25 days from the date of this Prospectus), all dealers
effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[ACTIVEWORLDS.COM, INC. LOGO]
1,200,000 Units
ACTIVEWORLDS.COM, INC.
Each Unit Consisting of
One Share of Common Stock and
a Series B Redeemable
Common Stock Purchase Warrants
to Purchase One Share
of Common Stock
--------------------------------------------
PROSPECTUS
--------------------------------------------
HD BROUS & CO., INC.
SOLID ISG CAPITAL MARKETS, LLC
, 2000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
Item 24. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law and our Bylaws (Exhibit
3.6) provide us with broad power to indemnify our directors and officers.
Reference is made to Paragraph 7 of the Underwriting Agreement (Exhibit
1.1) with respect to indemnification of us and the underwriters.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, offices or controlling persons of the registrant,
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that, in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Securities Act, and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered hereunder, the registrant 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 and will be governed by
the final adjudication of such issue.
Item 25. Other Expenses of Issuance and Distribution
The following table sets forth the estimated expenses in connection with
the issuance and distribution of the securities being registered, excluding the
Representative's nonaccountable expense allowance, all of which expenses will be
paid by the Registrant:
SEC registration fee $4,458.89
NASD registration fee 2,189.00
Nasdaq listing fee 10,000.00*
Boston Stock Exchange Listing Fee 7,750.00
Printing and engraving 30,000.00*
Accountants' fees and expenses 75,000.00*
Legal fees and expenses 210,000.00*
Transfer agent's and warrant agent's fees and expenses 5,000.00*
Blue Sky fees and expenses 70,000.00*
Representative's non-accountable expense allowance 180,000.00*
Miscellaneous 5,602.11*
-----------
Total $ 600,000.00*
============
* Estimated
Item 26. Recent Sales of Unregistered Securities
During the past three years, we sold the following securities pursuant to
II-1
<PAGE>
exemptions from the registration requirements of the Securities Act of 1933, as
amended. All information reflects a one-for-two reverse split in our common
stock, which was effective on January 21, 1999, and a two-for-three reverse
split in our common stock, which was approved on March , 2000 and which will
take effect on the effective date of this prospectus.
1. In September 1995, the founders of Vanguard were issued 300,000 shares
of common stock for the amount of $25,000. The sale of these shares was exempt
from the registration provisions of the Securities Act pursuant to Section 4(2).
2. In January 1996, Vanguard completed a public offering of 33,333 shares
of our common stock for the amount of $10,000. The sale of these shares was
exempt from the registration requirements of the Securities Act pursuant to Rule
504. There was no underwriter for this sale.
3. On January 21, 1999, we issued to the ten former stockholders of Circle
of Fire Studios, Inc. an aggregate of 5,433,211 shares of common stock in
exchange for their shares of Circle of Fire Studios common stock. As part of the
acquisition, options to purchase shares of Circle of Fire Studios common stock
were exchanged for options to purchase 322,682 shares of our common stock. The
issuance of these shares and options was exempt from the registration
requirements of the Securities Act pursuant to Section 4(2). We also issued
133,333 shares of common stock to Baytree Capital Associates, LLC, for services
relating to this acquisition.
4. In January 1999, we sold 1,333,333 shares of common stock in a private
placement for $.75 per share to unaffiliated parties. The sale of these shares
was exempt from the registration requirements of the Securities Act pursuant to
Rule 504. No general solicitation was made in connection with this private
placement, and no underwriter was engaged for this sale.
5. Pursuant to an April 1999 agreement, we granted to a marketing firm
stock options to purchase 166,667 shares of common stock at $ 5.70 per share, in
consideration of advertising services. The issuance of the options was exempt
from registration pursuant to Section 4(2) of the Securities Act.
6. In January 1999, we sold 43,333 shares of common stock to Shamus Young,
who was an employee, for $6,500, which was paid by the issuance of a 8%
promissory note due December 31, 2000. Such sale was exempt from registration
pursuant to section 4(2) of the Securities Act. These shares were issued upon
exercise of an option.
7. During the period from January through June 1999, we granted options to
purchase 8,167 shares of common stock at $13.125 per share to a contractor for
services performed over such period and valued at approximately $12,250. The
issuance of the options was exempt from registration pursuant to Section 4(2) of
the Securities Act.
8. In April 1999, we issued 1,253 shares of common stock as payment for
furniture valued at $8,500. The issuance of the shares was exempt from
registration pursuant to Section 4(2) of the Securities Act.
9. In May 1999, we issued to Baytree Capital Associates, LLP, a warrant to
purchase 166,667 shares of common stock at $8.55 per share. The warrant was
issued in consideration of the waiver by Baytree Capital Associates of
registration and other rights we had granted to Baytree in connection with the
acquisition of Circle of Fire Studios. The issuance of this warrant was exempt
from registration pursuant to Section 4(2) of the Securities Act.
10. In June 1999, we sold nine private placement units at $100,000 per unit
to four accredited investors: SoundShore Holdings Ltd., SoundShore Opportunity
Holding Fund Ltd., Hull Overseas, Ltd. and Duck Partners, L.P. Each private
placement unit consisted of 11,733 shares of common stock and a Series A common
stock purchase warrants to purchase 13,333 shares of common stock at $8.55 per
share. The effective price per share of common stock purchased by these
investors was $8.52 per share, assuming that no value is allocated to the
warrants. In connection
II-2
<PAGE>
with this private placement, we engaged HD Brous & Co., Inc. as exclusive
placement agent. We paid HD Brous a fee of $90,000 and a non-accountable expense
allowance of $27,000. We also issued HD Brous a warrant to purchase one
placement agent unit for $90,000. A placement agent unit consists of 10,560
shares of our common stock and a Series A common stock purchase warrant to
purchase 12,000 shares of our common stock at $8.55 per share. The warrant to HD
Brous will terminate on the effective date of this registration statement.
In connection with the private placement, we and our officers, directors and 5%
stockholders gave HD Brous a three-year right of first refusal with respect to
public and private sales of our securities. The issuance of these securities was
exempt from registration pursuant to Rule 506 and Sections 4(2) and 4(6) of the
Securities Act.
Item 27. Exhibits
<TABLE>
<CAPTION>
<S> <C>
1.1 Form of Underwriting Agreement between the Issuer and the Underwriters.*
1.2 Form of Underwriters' Unit Purchase Option.*
2. Plan of reorganization between Vanguard Enterprises, Inc. and Circle of Fire Studios, Inc. dated
January 13, 1999.*
3.1 Certificate of Incorporation of the Issuer as filed with the Delaware Secretary of State on
September 5, 1995.*
3.2 Certificate of Amendment to Certificate of Incorporation of the
Issuer as filed with the Delaware Secretary of State on September 29,
1995.*
3.3 Certificate of Amendment to Certificate of Incorporation of the
Issuer as filed with the Delaware Secretary of State on October 12,
1995.*
3.4 Certificate for Renewal and Revival of Certificate of Incorporation
of the Issuer as filed with the Delaware Secretary of State on
September 10, 1997.*
3.5 Certificate of Amendment to Certificate of Incorporation of the
Issuer as filed with the Delaware Secretary of State on January 21,
1999.*
3.6 Bylaws of the Issuer.*
3.6.1 Restated Bylaws of Issuer.**
4.1 Form of Common Stock Certificate.*
4.2 Form of Warrant Agreement, including form of Series B Redeemable Common Stock Purchase
Warrant.*
4.3 Form of Series A Redeemable Common Stock Purchase Warrant.*
4.4 Form of Unit Certificate.***
5. Opinion of Peabody & Arnold LLP.***
10.1 Activeworlds.com, Inc. 1999 Long-term incentive plan.*
10.1.1 Activeworlds.com, Inc. Restated 1999 Long-term incentive plan.**
10.2 Lease Agreement dated February 27, 1999 between the Issuer and Robert L. Wood.*
10.3 Amended and Restated Employment Agreement, dated as of January 21, 1999, between the Issuer
and Richard F. Noll.*
10.4 Amended and Restated Employment Agreement, dated as of January 21, 1999, between the Issuer
and J. P. McCormick.*
10.5 Stock Option Agreement between the Issuer and Richard F. Noll.*
10.6 Stock Option Agreement between the Issuer and J. P. McCormick.*
10.7 Agreement dated October 1999, between the Issuer and Advance Shopping Centre Management Pty.
Limited.**
10.8 Agreement dated April 1998 between the Issuer and the Tech Museum in San
Jose, California**
23.1 Consent of Pannell Kerr Forster PC (included on Page II-7).**
23.2 Consent of Peabody & Arnold LLP (included in Exhibit 5).***
24. Power of Attorney (included on the Signature Page).**
27. Financial Data Schedule (for SEC purposes only)*
</TABLE>
- ------------
* Previously filed.
** Filed herewith.
*** To be filed by amendment.
Item 28. Undertakings
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended, may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by
II-3
<PAGE>
a director, officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of 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 and will be governed by the final adjudication
of such issue.
The Registrant hereby undertakes:
(1) To file during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended (the "Securities Act");
(ii) Reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement; notwithstanding the foregoing, any increase or
decrease in volume of securities offered 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 Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than 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 additional or changed material information on the plan of
distribution, and PROVIDED, HOWEVER, that paragraphs (a)(1)(i) and (a)(1)(ii)
do not apply if the registration statement is on Form S-8, and the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the registrant pursuant
to Section 13 or Section 15(d) of the Exchange Act that are incorporated by
reference in the registration statement.
(2) That for purposes of determining liability under the Securities Act,
treat each post-effective amendment as a new registration statement of 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.
(4) That for purposes of determining liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Company pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(5) That for purposes of determining any liability under the Securities Act
of 1933, as amended, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(6) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(7) To provide the underwriters, at the closing specified in the
Underwriting Agreement, certificates representing the units in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
II-4
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as
amended, the Registrant certifies it has reasonable grounds to believe it meets
all the requirements for filing on this Form SB-2 and authorized this Amendment
No. 2 to the registration statement to be signed on its behalf by the
undersigned, in the City of Newburyport, Commonwealth of Massachusetts, on this
14th day of March, 2000.
ACTIVEWORLDS.COM, INC.
By: /s/ Richard F. Noll
-----------------------------
Richard F. Noll, President
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS that each individual whose signature
appears below constitutes and appoints J.P. McCormick and Richard F. Noll, and
each of them, his true and lawful attorneys-in-fact and agents with full power
of substitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this Registration Statement, and to sign any registration statement for the
same offering covered by the Registration Statement that is to be effective upon
filing pursuant to Rule 462(b) promulgated under the Securities Act of 1933, as
amended, and all post-effective amendments thereto, and to file the same, with
all exhibits thereto and all documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he or she might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or any of them, or his, her or their substitute or substitutes, may
lawfully do or cause to be done or by virtue hereof. Pursuant to the
requirements of the Securities Act of 1933, as amended, this Registration
Statement has been signed by the following persons in the capacities and on the
date indicated.
Signatures Title Date
---------- ----- ----
/s/ Richard F. Noll President and chief executive March 14, 2000
- -------------------------- officer and director (principal
Richard F. Noll executive officer)
/s/ J.P. McCormick Chief financial officer and March 14, 2000
- -------------------------- director (principal financial and
J.P. McCormick accounting officer)
/s/ Alexander M. Adelson Director March 14, 2000
- --------------------------
Alexander M. Adelson
/s/ Sean Deson Director March 14, 2000
- --------------------------
Sean Deson
II-5
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
II-6
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description
--- -----------
<TABLE>
<CAPTION>
<S> <C>
1.1 Form of Underwriting Agreement between the Issuer and the Underwriters.*
1.2 Form of Underwriters' Unit Purchase Option.*
2. Plan of reorganization between Vanguard Enterprises, Inc. and Circle of Fire Studios, Inc. dated
January 13, 1999.*
3.1 Certificate of Incorporation of the Issuer as filed with the Delaware Secretary of State on
September 5, 1995.*
3.2 Certificate of Amendment to Certificate of Incorporation of the
Issuer as filed with the Delaware Secretary of State on September 29,
1995.*
3.3 Certificate of Amendment to Certificate of Incorporation of the
Issuer as filed with the Delaware Secretary of State on October 12,
1995.*
3.4 Certificate for Renewal and Revival of Certificate of Incorporation
of the Issuer as filed with the Delaware Secretary of State on
September 10, 1997.*
3.5 Certificate of Amendment to Certificate of Incorporation of the
Issuer as filed with the Delaware Secretary of State on January 21,
1999.*
3.6 Bylaws of the Issuer.*
3.6.1 Restated Bylaws of Issuer.**
4.1 Form of Common Stock Certificate.*
4.2 Form of Warrant Agreement, including form of Series B Redeemable Common Stock Purchase
Warrant.*
4.3 Form of Series A Redeemable Common Stock Purchase Warrant.*
4.4 Form of Unit Certificate.***
5. Opinion of Peabody & Arnold LLP.***
10.1 Activeworlds.com, Inc. 1999 Long-term incentive plan.*
10.1.1 Activeworlds.com, Inc. Restated 1999 Long-term incentive plan.**
10.2 Lease Agreement dated February 27, 1999 between the Issuer and Robert L. Wood.*
10.3 Amended and Restated Employment Agreement, dated as of January 21, 1999, between the Issuer
and Richard F. Noll.*
10.4 Amended and Restated Employment Agreement, dated as of January 21, 1999, between the Issuer
and J. P. McCormick.*
10.5 Stock Option Agreement between the Issuer and Richard F. Noll.*
10.6 Stock Option Agreement between the Issuer and J. P. McCormick.*
10.7 Agreement dated September , 1999, between the Issuer and Advance Shopping Centre Management
Pty. Limited.**
10.8 Agreement dated April 1998 between the Issuer and the Tech Museum in San
Jose, California**
23.1 Consent of Pannell Kerr Forster PC (included on Page II-7).**
23.2 Consent of Peabody & Arnold LLP (included in Exhibit 5).***
24. Power of Attorney (included in the Signature Page).**
27. Financial Data Schedule (for SEC purposes only).*
</TABLE>
- ------------
* Previously filed.
** Filed herewith.
*** To be filed by amendment.
<PAGE>
1,200,000 Units
ACTIVEWORLDS.COM, INC.
Each Unit consisting of one share of Common Stock and a Series B Redeemable
Common Stock Purchase Warrant to purchase one share of Common Stock
Underwriting Agreement
As of , 2000
HD Brous & Co, Inc.
Solid ISG Capital Markets, L.L.C.
As Representatives of the several
Underwriters named in Schedule I
annexed to this Agreement
40 Cuttermill Road
Great Neck, New York 11021
Dear Sirs:
Activeworlds.com, Inc., a Delaware corporation (the "Company"),
proposes to issue and sell to the several underwriters named in Schedule I to
this Agreement for whom HD Brous & Co., Inc., a New York corporation ("Brous"),
and Solid ISG Capital Markets, L.L.C. ("Solid ISG") are the representatives (the
"Representatives"). The Representatives, along with such other underwriters
named on Schedule I, are referred to in this Agreement collectively as the
"Underwriters." Upon the basis of the representations, warranties, and
agreements of the Company contained in this Agreement and, subject to the terms
and conditions of this Agreement, the Underwriters propose to purchase from the
Company, an aggregate of 1,200,000 Units, each Unit to consist of one (1) share
of the Company's common stock, par value $.001 per share ("Common Stock"), and a
Series B Redeemable Common Stock Purchase Warrant ("Warrant") to purchase one
(1) share of Common Stock at a price of $ per share, subject to
adjustment. The 1,200,000 Units are hereinafter collectively referred to as the
"Firm Units." The shares of Common Stock issuable upon exercise of the Warrants
are presently authorized but unissued shares of the Common Stock of the Company.
In addition, the Company proposes to grant the Underwriters the option to
purchase from the Company up to an additional 180,000 Units (collectively
"Option Units") solely for the purpose of covering over-allotments, if any, in
connection with the sale of the Firm Units. The Option Units may by purchased by
the Representatives for their own account or for the account of the several
Underwriters, as the Representatives may determine. The Company also proposes to
issue and sell to the Representatives or their designees, Unit Purchase Options
(collectively, the "Unit Purchase Option") to purchase 120,000 Units
(collectively the "Purchase Option Units") as more fully described in Paragraph
5(a) of this Agreement. The Warrants included in the Firm Units, the Option
Units and the Purchase Option Units are referred to in this Agreement
collectively as the "Warrants." The Firm Units, Option Units and Purchase Option
Units are referred to in this Agreement collectively as the "Securities."
- 1 -
<PAGE>
The Company hereby confirms the agreement made by it with respect to
the purchase of the Firm Units and the Option Units by the Underwriters, as
follows. The Representatives hereby represent and warrant that, if any
Underwriters other than the Representatives are named on Schedule I to this
Agreement, the Representatives are acting as the representatives of the several
Underwriters and you have been authorized by each of the other Underwriters to
enter into this Underwriting Agreement on its behalf and to act for it in the
manner herein provided.
1. Purchase, Sale, and Delivery of the Securities
(a) Purchase and Sale of Firm Units. Subject to the terms and
conditions of this Agreement, and upon the basis of the representations and
warranties contained in this Agreement, the Company agrees to issue and sell to
the Underwriters, and each of the Underwriters agrees, severally and not
jointly, to purchase from the Company, at a price of and /100
dollars ($ . ) per Unit, the number of Firm Units set forth opposite such
Underwriter's name on Schedule I to this Agreement. The Underwriters plan to
offer the Firm Units for sale to the public at the price and upon the terms set
forth in the Prospectus (the "Public Offering") as soon as practicable after the
date the Registration Statement, as hereinafter defined, is declared effective
(the "Effective Date") by the Securities and Exchange Commission (the
"Commission"). The Company acknowledges that the Underwriters shall have the
right to enter into agreements with co-underwriters and with selected dealers
for the sale of the Units to the public.
(b) Over-Allotment Option.
(i) The Company hereby grants to the Underwriters an option
(the "Over- Allotment Option") to purchase from the Company, solely for the
purpose of covering over-allotments in connection with the sale of Firm Units,
all or any portion of the Option Units for a period of forty-five (45) days from
the date of this Agreement at the same purchase price payable by the Underwriter
for Firm Units as provided in Paragraph 1(a) of this Agreement. The Option Units
shall be purchased from the Company, either for the accounts of the
Representatives on their own behalf or for the account of the several
Underwriters, severally and not jointly, in proportion to the number of Firm
Units set opposite the Underwriters' respective names in Schedule I to this
Agreement, as the Representatives shall determine, except that the respective
purchase obligations of each Underwriter shall be adjusted by the
Representatives so that no Underwriter shall be obligated to purchase fractional
Option Units.
(ii) The Over-Allotment Option may be exercised during the term
thereof by written notice to the Company from the Representatives. Such notice
shall set forth the aggregate number of Option Units as to which the option is
being exercised and the time and date of payment and delivery therefor. Such
time and date of delivery shall not be earlier than either the Closing Date (as
defined below) or the second business day after the day on which the option
shall have been exercised, nor later than the fifth business day after the date
of such exercise, as determined by the Representatives (the "Option Closing
Date"). Delivery and payment for such Option Units shall be at the offices set
forth below for delivery and payment of the Firm Units.
(iii) The obligation of the Underwriters to purchase and pay
for any of the Option Units is subject to the accuracy and completeness (as of
the date of this Agreement and as of the Option Closing Date) of and compliance
- 2 -
<PAGE>
in all material respects with the representations and warranties of the Company
in this Agreement, to the accuracy and completeness of the statements of the
Company or its officers made in any certificate or other documents to be
delivered by the Company pursuant to this Agreement, to the performance in all
material respects by the Company of its obligations hereunder, to the
satisfaction by the Company of the conditions as of the date of this Agreement
and as of the Option Closing Date set forth in Paragraph 1(c) of this Agreement
and to the delivery to the Underwriters of opinions, certificates and letters
dated the Option Closing Date substantially similar in scope to those specified
in Paragraph 6 of this Agreement, but with each reference to the "Closing Date"
being deemed to be the "Option Closing Date." Notwithstanding the exercise of
the Over-Allotment Option, the Underwriters may, at any time prior to the
payment for the purchase price of the Option Units, cancel, in whole or in part,
the exercise of the Over-Allotment Option, in which event, the Underwriters
shall only be obligated to purchase and pay for those only Option Units, if any,
remaining subject to the exercise of the Over-Allotment Option after such
cancellation.
(c) Delivery of and Payment for Securities.
(i) Delivery of the stock and warrant certificates representing
the securities comprising the Firm Units shall be made to the Underwriters at
the offices of Brous, 40 Cuttermill Road, Great Neck, New York 11021, or such
other location as you shall determine and advise the Company upon at least two
(2) full business days' notice in writing, against payment therefor by certified
or bank cashier's check drawn in New York clearing house funds or similar next
day funds or by wire transfer payable to the order of the Company, at 10:00
A.M., Eastern Time, on ____________, 2000, or at such other time and business
day (Saturdays, Sundays, and legal holidays in New York, New York not being
considered business days for the purposes of this Agreement), not later than the
10th business day following the Effective Date, as shall be determined by the
Representatives, which time and date are herein called the "Closing Date."
(ii) Delivery of certificates for the Common Stock and Warrants
comprising the Units shall be made in registered form in such name or names and
in such denominations as you shall specify to the Company upon at least two (2)
full business days' notice in writing prior to the Closing Date or the Option
Closing Date, as the case may be. The Company will make the certificates
available to the Underwriters for examination at the offices of Brous, 40
Cuttermill Road, Great Neck, New York 11021, Attention: Howard D. Brous,
Chairman, or at such other location as you shall specify to the Company, not
later than 2:00 P.M., Eastern Time, on the business day immediately preceding
the Closing Date or the Option Closing Date, as the case may be. At the request
of the Representatives, delivery of the Common Stock and Warrants comprising the
Units shall be made through the facilities of Depository Trust Company ("DTC").
(d) Use of Preliminary Prospectus. The Company hereby confirms its
authorization to the Underwriters to use, and to make available for use by
prospective dealers, the Preliminary Prospectus, and the Company hereby
authorizes the Underwriters, all selected dealers, and all other dealers to whom
any of the Securities may be sold by the Underwriters or selected dealers, to
use the Prospectus, as from time to time amended or supplemented, in connection
with the sale of the Securities in accordance with the applicable provisions of
the Securities Act of 1933, as amended (the "Securities Act"), the rules and
regulations (the "Regulations") of the Commission thereunder, and applicable
state law until completion of the Public Offering and for such longer period as
- 3 -
<PAGE>
an Underwriter may request if the Prospectus is required to be delivered in
connection with sales of the Securities by an Underwriter or a dealer.
2. Representations and Warranties of the Company. The Company
represents and warrants to, and agrees with, the Underwriters that:
(a) Filing of Registration Statement. The Company has prepared in
conformity with the requirements under the Securities Act and the Regulations,
and has filed with the Commission under the Securities Act, a registration
statement on Form SB-2, File No. 333-85095, including the related preliminary
prospectus, for the registration of the Securities. The conditions for the use
of a registration statement on Form SB-2 set forth in the General Instructions
thereto have been satisfied with respect to the Company, the transactions
contemplated by this Agreement, and the Registration Statement. As used in this
Agreement, the term "Registration Statement" means such registration statement
of the Company, as amended, on file with the Commission at the time the
registration statement becomes effective under the Securities Act (including all
financial statements and financial schedules, exhibits, all other documents
filed as a part thereof or incorporated by reference therein, and all the
information contained in any final prospectus filed with the Commission pursuant
to Rule 424(b) under the Securities Act or deemed by virtue of Rule 430A of this
Commission under the Securities Act to be part of the Registration Statement).
The term "Prospectus" as used in this Agreement means the final prospectus
included as part of the Registration Statement, including, if applicable, the
information contained in any final prospectus filed with the Commission pursuant
to Rule 424(b) of the Commission under the Securities Act or deemed by virtue of
Rule 430A of the Commission under the Securities Act to be part of the
Registration Statement. The term "Preliminary Prospectus" refers to and means
any prospectus included in the Registration Statement or any amendment thereto
prior to the Registration Statement becoming effective under the Securities Act.
(b) Use and Accuracy of Preliminary Prospectus. To the Company's
Knowledge, the Commission has not issued any order preventing or suspending the
use of any Preliminary Prospectus or any part thereof, and each Preliminary
Prospectus delivered to the Representatives for dissemination in connection with
the offering, at the time of filing thereof and delivery to the Representatives
for such dissemination, did not contain any 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; the foregoing shall not apply, however, to statements
in, or omissions from, any Preliminary Prospectus that are based upon and
conform to written information furnished to the Company with respect to any
Underwriter (or any affiliate or associate thereof) by or on behalf of the
Representatives or such Underwriter specifically for use in the preparation
thereof. As used in this Agreement, the term "the Company's Knowledge" or words
of like import shall mean and include (i) actual knowledge of the Company or any
executive officer or " of the Company and (ii) that knowledge which a prudent
businessperson could reasonably have obtained in the management of such person's
business affairs after exercising reasonable due diligence.
(c) Effectiveness and Accuracy of Registration Statement. The
Registration Statement and the Prospectus, from the Effective Date through the
Closing Date and, if Option Units are purchased, up to the Option Closing Date,
will comply as to form in all material respects with the applicable requirements
of the Securities Act and the Regulations, and neither the Registration
Statement nor the Prospectus will, on such dates, contain any untrue statement
- 4 -
<PAGE>
of a material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, and, on such dates, no
event will have occurred that should have been set forth in an amendment or
supplement to the Registration Statement or the Prospectus that has not then
been set forth in such an amendment or supplement; the foregoing shall not
apply, however, to statements in, or omissions from, the Registration Statement
or Prospectus that are based upon and conform to written information furnished
to the Company with respect to any Underwriter (or any affiliate or associate
thereof) by or on behalf of such Underwriter specifically for use in the
preparation thereof. The descriptions in the Registration Statement and the
Prospectus of contracts and other documents of the Company are accurate and
present fairly the information required to be disclosed, and there are no
contracts or other documents required to be described in the Registration
Statement or Prospectus or to be filed as exhibits to the Registration Statement
under the Securities Act or the Regulations which have not been so described or
filed as required.
(d) Independent Public Accountants. Panel Kerr Forrester, PC, the
accountants whose reports on the financial statements of the Company are filed
with the Commission as a part of the Registration Statement, are, and were
during the periods covered by its report, independent public accountants with
respect to the Company as required by the Securities Act and the Regulations.
(e) Organization and Qualification. Each of the Company and its
wholly-owned subsidiary, Activeworlds, Inc., a Nevada Corporation (the
"Subsidiary"), is (i) a corporation duly organized and existing in good standing
under the laws of the state of its incorporation and has the requisite corporate
power to own its properties and to carry on its business as now being conducted
and (ii) qualified to conduct business as a foreign corporation to do business
and in good standing in every jurisdiction in which the nature of the business
conducted by it makes such qualification necessary and where the failure so to
qualify would have a Material Adverse Effect. Other than the Subsidiary, the
Company has no subsidiaries and has no equity interest in, and, the Company has
no loans to or guarantee of obligations of, any other corporation, limited
liability company, partnership or other entity. As used in this Agreement, the
term "Material Adverse Effect" means any material adverse effect on (A) the
Common Stock and the Warrants; (B) the ability of the Company to perform its
obligations under this Agreement, the Warrant Agreement or the Unit Purchase
Option or (C) the business, operations, properties, financial condition or
prospects of the Company or the Subsidiary.
(f) No Other Interests of Investments. Except for the Company's
ownership of and advances to the Subsidiary, neither the Company nor the
Subsidiary controls, directly or indirectly, or has any direct or indirect
interest or investment in any corporation, firm, partnership, association,
limited liability company, business trust or other business organization, and
does not own any shares of stock or any other securities of (other than bank
certificates of deposit, shares or units of interest in "money market" funds, or
as set forth in the Prospectus) and, except as set forth in the Prospectus,
neither the Company nor the Subsidiary has made any loans (other than advances
to employees in the ordinary course of business, none of which are material or
made to officers or "s) to or guaranteed any obligations of, any other
corporation, firm, partnership, association, limited liability company, business
trust or other business organization.
(g) Capitalization and Legality of Securities. (i) The authorized,
issued and outstanding capital stock of the Company is as set forth in the
Prospectus under the caption "Capitalization." The capital stock and other
- 5 -
<PAGE>
securities of the Company conform to the descriptions thereof contained in the
Prospectus under the caption "Description of Capital Stock." Except as otherwise
set forth in the Prospectus, there are no outstanding options, warrants, or
other rights to purchase any shares of Common Stock or other capital stock, or
to purchase any other securities convertible into or exchangeable for Common
Stock. The outstanding securities of the Company and the outstanding securities
of the Subsidiary have been duly authorized and validly issued and are fully
paid and non-assessable. All the shares of Common Stock which are (i) registered
pursuant to the Registration Statement, (ii) issuable upon exercise of the
Warrants registered pursuant to the Registration Statement, and (iii) issuable
upon exercise of the Unit Purchase Option and the warrants issuable upon
exercise of the Unit Purchase Option have been duly authorized and, when issued
and delivered against payment therefor as provided in this Agreement, the
Prospectus, Warrant Agreement or the Unit Purchase Option, as applicable, will
be validly issued, fully paid and nonassessable.
(ii) The Company owns all of the issued and outstanding capital
stock of the Subsidiary. The Subsidiary has not granted any options, warrants or
rights or issued any convertible notes, debentures, preferred stock or other
securities or entered into any agreement or understanding upon the exercise or
conversion of which or pursuant to the terms of which any shares of any class or
series of capital stock of the Subsidiary may be issued.
(iii) This Agreement constitutes, and the Warrant Agreement,
the Warrants, Unit Purchase Option and the Warrants issuable upon exercise of
the Unit Purchase Option will constitute, when sold and delivered as
contemplated, valid and binding obligations of the Company enforceable in
accordance with their respective terms, except to the extent that enforcement
thereof may be limited by (A) bankruptcy, insolvency, reorganization,
moratorium, fraudulent conveyance, and similar laws and court decisions now or
hereafter in effect relating to or affecting creditors' rights and remedies
generally and (B) general principles of equity (regardless of whether such
enforcement is considered in a proceeding at law or in equity). A sufficient
number of shares of Common Stock have been reserved for issuance upon sale of
the Securities and Purchase Option Units and upon the exercise of all of the
above-referenced Warrants.
(h) Financial Statements. The financial statements (audited and
unaudited) of the Company and the related financial exhibits and schedules
included in the Prospectus or filed with and as part of the Registration
Statement present fairly the consolidated financial position of the Company (and
the Subsidiary) as of the balance sheet dates and the results of its
consolidated operations and cash flows for the respective periods then ended,
and such financial statements have been prepared in accordance with generally
accepted accounting principles applied on a consistent basis throughout the
periods involved; all adjustments that are necessary for a fair presentation of
the results for such periods have been made. The financial statements filed with
the Registration Statement or included in the Prospectus are the only financial
statements required under the Securities Act or the Regulations to be included
in the Registration Statement and Prospectus.
(i) Material Loss. Neither the Company nor the Subsidiary has,
since the date of the latest financial statements included in the Prospectus,
sustained any material loss or interference with its business from fire,
explosion, flood, or other calamity, whether or not covered by insurance, or
from any labor dispute or court or governmental action, order, or decree, other
- 6 -
<PAGE>
than as set forth in the Prospectus. Since the respective dates as of which
information is set forth in the Prospectus, and except as otherwise set forth
therein: (i) there has not been any change in the capital stock, or material
increase in the long-term debt, of the Company or the Subsidiary; (ii) there has
not been any material adverse change in the condition (financial or otherwise),
business, results of operations, general affairs, or management of the Company
or the Subsidiary, whether or not arising in the ordinary course of business;
(iii) no event has occurred that would result in a material write-down of assets
of the Company or the Subsidiary; (iv) neither the Company nor the Subsidiary
has incurred any material liability or obligation, direct or contingent, or
entered into any material transaction, other than those in the ordinary course
of business; (v) neither the Company nor the Subsidiary has purchased any of the
Company's outstanding capital stock; (vi) there has been no dividend or
distribution of any kind declared, paid, or made by the Company or the
Subsidiary in respect of the Common Stock; (vii) there has not been any material
interruption in the availability of materials, supplies, or equipment necessary
for the conduct of the business of the Company or the Subsidiary; and (viii)
there has not been any execution or imposition of any material lien, charge, or
encumbrance upon any property or assets of the Company or the Subsidiary.
(j) Compliance with Documents and Laws. Neither the Company nor the
Subsidiary is in violation of its certificate of incorporation, by-laws, or
other governing documents, or in material default in the due performance of any
material lease or other material contract, indenture, mortgage, deed of trust,
note, loan, or other material agreement or instrument to which the Company or
the Subsidiary is a party or by which it or any of its properties or businesses
are subject or bound, or, to the Knowledge of the Company, any applicable
material license, franchise, certificate, permit, authorization, statute, rule
or regulation of or from any public, regulatory, or governmental agency or
authority having jurisdiction over the Company or the Subsidiary or any of their
respective properties or assets, or any approval, consent, order, judgment or
decree, except such as could not reasonably be expected to have a Material
Adverse Effect. The execution and performance of this Agreement by the Company
will not conflict with or result in a breach or violation of, or default under,
any material lease or other material contract, indenture, mortgage, deed of
trust, note, loan, or other material agreement or instrument to which the
Company or the Subsidiary is a party or by which the Company, the Subsidiary or
any of their respective properties or businesses are subject, and no consent,
approval, authorization, or order of any court or governmental authority or
agency having jurisdiction over any of the Company, the Subsidiary or any of
their respective properties or assets is required to be obtained by the Company
for the consummation by the Company of the transactions contemplated by this
Agreement, except such as have been obtained or may be required under the
Securities Act, the Regulations, the Securities Exchange Act of 1934, as amended
(the "Exchange Act") and the regulations of the Commission thereunder or state
securities (or "Blue Sky") laws or the applicable rules and regulations
promulgated thereunder.
(k) Authorization of Agreements. Each of this Agreement, the
Warrant Agreement, the Warrant, the Unit Purchase Options, has been duly
authorized, executed and delivered by the Company and constitutes the valid,
binding and enforceable obligation of the Company. The execution, delivery and
performance of this Agreement, the Warrant Agreement, the Warrants, and the Unit
Purchase Options by the Company, the consummation by the Company of the
transactions herein and therein contemplated, and the compliance by the Company
with the terms of this Agreement, the Warrant Agreement, the Warrants, the Unit
Purchase Option have been duly authorized by all necessary corporate action and
- 7 -
<PAGE>
do not and will not, with or without the giving of notice or the lapse of time,
or both, (i) result in any violation of the certificate of incorporation and
by-laws of the Company, (ii) result in a breach of or conflict with any of the
terms or provisions of, or constitute a default under, or result in the
modification or termination of, or result in the creation or imposition of any
lien, security interest, charge or encumbrance upon any of the properties or
assets of the Company or the Subsidiary pursuant to any indenture, mortgage,
note, contract, commitment or other agreement or instrument to which the Company
or the Subsidiary is a party or which the Company or the Subsidiary or any of
their respective properties or assets are or may be bound or affected, (iii)
violate any existing applicable law, rule, regulation, judgment, order or decree
of any governmental agency or court, domestic or foreign, having jurisdiction
over the Company, the Subsidiary or any of their respective properties or
business, or (iv) violate any permit, certification, registration, approval,
consent, license or franchise applicable to the business or properties of the
Company or the Subsidiary.
(l) Title to Property. The Company has good title to, and valid and
enforceable leasehold estates in, all items of property described in the
Registration Statement or Prospectus as owned or leased by it, as the case may
be, or that are material to the conduct of the Company's businesses, free and
clear of all liens, encumbrances, claims, security interests, and other
restrictions, other than those described in the Prospectus and those that
individually or in the aggregate could not reasonably be expected to have a
Material Adverse Effect. The leases, licenses or other contracts or instruments
under which the Company leases, holds or is entitled to use any property, real
or personal, are valid, subsisting and enforceable as against the Company and,
to the Company's Knowledge, the other parties thereto, with only such exceptions
as are not material and do not interfere with the use of such property made, or
proposed to be made, by the Company, and all rentals, royalties or other
payments accruing thereunder which became due prior to the date of this
Agreement have been duly paid, and neither the Company nor, to its Knowledge,
any other party is in default thereunder and, to the Company's Knowledge, no
event has occurred which, with the passage of time or the giving of notice, or
both, would constitute a default thereunder. The Company has not received notice
of any violation of any applicable law, ordinance, regulation, order or
requirement relating to its owned or leased properties except any such violation
that could not reasonably be expected to have a Material Adverse Effect. The
Company has insured their respective properties against loss or damage by fire
or other casualty and maintain such other insurance which management of the
Company believes is adequate for the Company's present and proposed business
operations.
(m) Copyrights, Trademarks and Intellectual Property Rights. Except
as set forth in the Prospectus, the Company owns or possesses the requisite
licenses or rights to use all trademarks, copyrights, service marks, service
names, and trade names, if any, presently used in or necessary to conduct their
respective businesses as described in the Prospectus. To the Company's
Knowledge, neither the Company nor the Subsidiary has infringed the rights of
another in any patent, trademark, copyright, service mark, service name, trade
name, trade secret, confidential information, or any other such intellectual
property, and there is no outstanding claim of others alleging any such
infringement. To the Company's Knowledge, there is no claim or action by any
person pertaining to, or proceeding pending, or threatened, which challenges the
exclusive rights of the Company or the Subsidiary with respect to any
trademarks, copyrights, service marks, service names and trade names used in the
conduct of the Company's or the Subsidiary's business.
- 8 -
<PAGE>
(n) Litigation. There is no litigation or governmental or other
proceeding or investigation before any court or before or by any public,
regulatory, or governmental agency or authority (or any judgment, decree, or
order of such court, agency, or authority) pending or, to the Company's
Knowledge, threatened, to which the Company or the Subsidiary is a party or of
which the business or property of the Company is the subject that is material to
the Company and is not disclosed in the Prospectus. There are no outstanding
orders, judgments or decrees of any court, governmental agency or other tribunal
naming the Company or the Subsidiary and enjoining the Company or the Subsidiary
from taking, or requiring the Company or the Subsidiary to take, any action, or
to which the Company, the Subsidiary or their respective properties or
businesses are bound or subject.
(o) Prohibited Payments. Neither the Company nor the Subsidiary nor
any of their respective "s or officers acting in any capacity on behalf of the
Company or the Subsidiary nor, to the Company's Knowledge, any of the Company's
or the Subsidiary's sales agents, directly or indirectly, has used any corporate
funds for unlawful contributions, gifts, entertainment, or other unlawful
expenses relating to political activity; made any unlawful payment to foreign or
domestic government officials or employees or to foreign or domestic political
parties or campaigns from corporate funds; violated any provision of the Foreign
Corrupt Practices Act of 1977, as amended; or made any bribe, rebate, payoff,
influence payment, kickback, or other unlawful payment.
(p) Internal Accounting Controls. The Company and the Subsidiary
maintain a system of internal accounting controls which, taken as a whole, is
sufficient to meet the broad objectives of preventing and detecting errors or
irregularities in amounts that would be material to the Company's and the
Subsidiary's financial statements, and neither the Company nor the Subsidiary
has received any formal or informal notice from its independent accountants to
the contrary. Except as specifically disclosed in the Prospectus, neither the
Company nor any of its employees or agents has made any payment or transfer of
any funds or assets of the Company, conferred any personal benefit by the use of
the assets of the Company or received any funds, assets, or personal benefit in
violation of any law, rule, or regulation, which is required to be stated in the
Prospectus or necessary to make the statements therein not misleading.
(q) Tax Returns. The Company and the Subsidiary have filed all
Federal, state, and local tax returns required to be filed through the date of
this Agreement, including but not limited to franchise tax returns, or has
obtained valid extensions with respect to such filings not made; neither the
Company nor the Subsidiary is in default in the payment of any taxes or other
amounts that were payable pursuant to said returns or any assessments with
respect thereto; and neither the Company nor the Subsidiary is aware of any tax
or other payment deficiency outstanding, proposed, or assessed against the
Company or the Subsidiary that could, in the aggregate, have a Material Adverse
Effect. Except as disclosed in writing to the Representatives, neither the
Company nor the Subsidiary has executed or filed with any taxing authority,
foreign or domestic, any agreement extending the period for assessment or
collection of any income taxes and is not a party to any pending action or
proceeding by and foreign or domestic governmental agency for assessment or
collection of taxes; and no claims for assessment or collection of taxes have
been asserted against the Company or the Subsidiary.
(r) Employee Plans. Except as set forth in the Prospectus, the
Company does not have any employee benefit plans (including, without limitation,
pension, profit sharing, and welfare benefit plans, but excluding health and
- 9 -
<PAGE>
disability insurance plans and disability provisions of employment contracts) or
deferred compensation arrangements.
(s) Labor Disputes. No labor dispute exists or, to the Company's
Knowledge, is imminent with the employees or other persons engaged by the
Company or the Subsidiary which could reasonably be expected to result in a
Material Adverse Effect.
(t) Registration Rights. No person, firm or entity of any nature
whatsoever has any right to require the Company to register or attempt to
register under the Securities Act or any other securities law any shares of
Common Stock or securities convertible into or exchangeable or exercisable for
any shares of Common Stock, by reason of the filing of the Registration
Statement with the Commission, and, except as set forth in the Prospectus, no
person, firm or entity has any rights which may require the Company to file a
registration statement within eighteen (18) months from the Effective Date.
(u) Stabilization. Neither the Company nor any person that
controls, is controlled by or is under common control with the Company has taken
or will take, directly or indirectly, any action designed to, or that might
reasonably be expected to, cause or result in under the Exchange Act,
stabilization or manipulation of the price of any security in order to
facilitate the sale or resale of any of the Securities.
(v) Finder or Broker. The Company has not retained or dealt with
any broker or finder with respect to the transactions contemplated hereby, and
the Company knows of no outstanding claims for services in the nature of a
finder's fee or origination fee with respect to the sale of the Securities. The
Company will indemnify and hold harmless Underwriters with respect to any claim
for a finder's fee by any party claiming to be owed such fee based on contacts,
conversations or arrangements with the Company.
(w) Employment Agreements. The employment agreements between the
Company and its officers named under the caption "Management -- Employment
Agreements" in the Prospectus, are binding and enforceable obligations upon the
respective parties thereto in accordance with their respective terms, except as
such enforceability may be limited by applicable bankruptcy, insolvency,
moratorium or other similar laws or arrangements affecting creditors' rights
generally and subject to principles of equity, and public policy considerations.
(x) Contracts. Each material contract or other instrument (however
characterized or described) to which the Company or the Subsidiary is a party or
by which it or its property or business is or may be bound or affected and to
which reference is made in the Prospectus has been duly and validly executed by
the Company or by the Subsidiary, as applicable, is in full force and effect in
all material respects and, assuming that each other party has full power,
corporate or other, to execute, deliver and perform such contracts, is
enforceable against the parties thereto in accordance with its terms, and none
of such contracts or instruments has been assigned by the Company or the
Subsidiary, and neither the Company or the Subsidiary, nor, to the Company's
Knowledge, any other party is in default thereunder and, to the Company's
Knowledge, no event has occurred which, with the lapse of time or the giving of
notice, or both, would constitute a default thereunder. None of the material
provisions of such contracts or instruments violates any existing applicable
law, rule, regulation, judgment, order or decree of any governmental agency or
- 10 -
<PAGE>
court having jurisdiction over the Company or the Subsidiary or any of their
assets or businesses, where such violation or default would have a Material
Adverse Effect.
(y) Year 2000 Compliance. To the Company's Knowledge, except as
disclosed in the Prospectus, the Company's and the Subsidiary's computer systems
and products are designed to be year 2000 compliant, and the disclosure in the
Prospectus concerning Year 2000 compliance is true and correct in all material
respects.
3. Covenants of the Company. The Company covenants and agrees with the
Underwriters that:
(a) Effectiveness of Registration Statement. The Company will use
its best efforts to cause the Registration Statement and any subsequent
amendments thereto to become effective as promptly as possible. The Company will
notify you promptly (i) when the Registration Statement or any subsequent
amendment thereto has become effective or any supplement to the Prospectus has
been filed and (ii) of the receipt of any requests, and the nature and substance
thereof, by the Commission for any amendment or supplement to the Registration
Statement or Prospectus or for any other additional information. The Company
will prepare and file with the Commission, promptly upon your reasonable
request, any amendments or supplements to the Registration Statement or
Prospectus that may be necessary or advisable in connection with the
distribution of the Securities or any of the Securities. The Company will file
no amendment or supplement to the Registration Statement or Prospectus (other
than any document required to be filed under the Exchange Act that upon filing
is deemed to be incorporated by reference therein) to which you shall reasonably
object by notice to the Company after having been furnished a copy within a
reasonable time, but no later than three (3) business days, prior to the
proposed filing thereof. The Company will furnish to you at or prior to the
filing thereof a copy of any document that upon filing is deemed to be
incorporated by reference in whole or in part in the Registration Statement or
Prospectus.
(b) Notice of Stop Order. The Company will advise you promptly, and
confirm in writing, when and if it receives notice or obtains Knowledge of (i)
the issuance by the Commission of any stop order or other order preventing or
suspending the use of any Preliminary Prospectus or the Prospectus or the
effectiveness of the Registration Statement, (ii) the suspension of the
qualification of any of the Securities for offering or sale in any jurisdiction
in which they were previously qualified, or (iii) the initiation or threat of
any proceeding for that purpose. The Company will promptly use its best efforts
to prevent the issuance, and to obtain the withdrawal if such issuance is not
prevented, of any such stop order or other suspension.
(c) Compliance with the Securities Act and the Exchange Act. Within
the time during which a prospectus relating to the Securities is required to be
delivered under the Securities Act, the Company will use its best efforts to
comply with all requirements imposed upon it by the Securities Act and the
Exchange Act, as now and hereafter amended, and by the Regulations, as from time
to time in force to permit the continuance of sales of or dealings in the
distribution of the Securities as contemplated by the provisions therein, in
this Agreement, and in the Prospectus. If during such period any event as to
which the Company has Knowledge occurs as a result of which the Prospectus as
then amended or supplemented includes an untrue statement of a material fact or
omits to state a material fact necessary to make the statements therein, in the
light of the circumstances then existing, not misleading, or if during such
- 11 -
<PAGE>
period it is necessary to amend the Registration Statement or supplement the
Prospectus to comply with the Securities Act, the Company will notify you
promptly, will amend the Registration Statement or supplement the Prospectus to
comply with the Securities Act, the Company will notify you promptly, will amend
the Registration Statement or supplement the Prospectus (at the expense of the
Company) so as to correct such statement or omission or otherwise to effect such
compliance, and will furnish without charge to Underwriters and to any dealer in
securities as many copies of such amended or supplemented Prospectus as you may
from time to time reasonably request.
(d) Copies of Registration Statement. The Company will deliver to
Representatives, from time to time without charge, such number of copies of the
Registration Statement (at least one of which delivered to you shall be manually
signed and will include all exhibits), each Preliminary Prospectus, the
Prospectus, and all amendments and supplements thereto, in each case as soon as
available and in such quantities and to such persons as requested by you.
(e) Blue Sky Qualifications. The Company will use its best efforts,
in cooperation with you and your counsel, to register or qualify the Securities
for offering and sale under the securities laws of such jurisdictions as you
reasonably designate, and will continue such qualifications in effect for so
long as may be necessary to complete the distribution of such Securities;
provided that in no event shall the Company be required in connection therewith
to qualify to do business in any jurisdiction where it is not now so qualified
or to take any action which would subject it to general service of process in
any jurisdiction where it is not now so subject.
(f) Section 11(a) Earnings Statement. The Company will make
generally available to its security holders (within the meaning of Section 11(a)
of the Securities Act) and deliver to you as soon as practicable (but not later
than fifteen (15) months after the Effective Date), an earnings statement that
shall satisfy the requirements of Section 11(a) and Rule 158 under the
Securities Act, covering a period of at least twelve (12) consecutive months
after the Effective Date.
(g) Information to the Representatives. Until the earlier of the
third (3rd) anniversary of the Effective Date or such date as of which the
Warrants and the Unit Purchase Option have been exercised or have expired, the
Company will, at its cost and expense, furnish or cause to be furnished to you
and your counsel, with reasonable promptness, copies of (i) annual audited
balance sheets and audited statements of operations and changes in cash flows of
the Company, and quarterly balance sheets and statements of income of the
Company (which need not be audited), (ii) all reports, if any, to its
stockholders, (iii) all reports filed by the Company with the Commission, and
any securities exchange or the National Association of Securities Dealers, Inc.
("NASD") and (iv) such other material documents and information with respect to
the Company and its affairs as you may from time to time reasonably request and
which the Company can produce at reasonable cost; provided, however, that the
Company shall not be required to produce such information or documents if the
Company has received the opinion of its counsel that providing such information
to the Representatives is reasonably likely to create liability under applicable
Federal and state securities laws. Upon request, the Company shall also provide
the Representatives with current lists of its stockholders. In addition to the
foregoing, during the six months following the Effective Date, the Company
shall, at its cost and expense, furnish or cause to be furnished to the
- 12 -
<PAGE>
Representatives, (x) daily issuer transfer sheets by Depository Trust Company
("DTC"), which shall be transmitted to the Representatives by fax daily, and (y)
weekly transfer sheets provided by the Company's transfer agent, which shall be
provided to the Representatives at the end of each week. For the three years
subsequent to such six month period, upon request of the Representatives, the
Company shall furnish or cause to be furnished to the Representatives with
copies of the Company's monthly DTC transfer sheets and transfer sheets from the
Company's transfer agent.
(h) Listing in Securities Manual; Investor Relations Firm. The
Company shall, as soon as practicable after the Effective Date, use its best
efforts to obtain listing on an expedited basis in Standard and Poor's
Corporation Records or such other recognized securities manuals for which it may
qualify for listing, and the Company shall use its best efforts to maintain such
listings for at least three (3) years after the Closing Date. The Company
further agrees at any time during the three (3) year period following the
Closing Date, to engage within sixty (60) days of a written request by you, the
services of an investor relations firm reasonably acceptable to you, who will
act as investor relations liaison during such three (3) year period, which
spokesperson is not required to be the same person during the duration of the
three (3) year period, to consult with and advise the Company regarding
communications and relations with stockholders and the financial and investment
communities.
(i) Listing on Nasdaq. The Company shall apply for the inclusion of
the Units, Common Stock and Warrants on The Nasdaq SmallCap Market (the
"SmallCap Market") under the symbols AWLDU, AWLD and AWLDW or another symbol
acceptable to the Representatives, to take effect on the Effective Date;
provided, that if the Common Stock and Warrants are not separately transferable
on the Effective Date, then the Warrants need not be included in the SmallCap
Market at such date; provided, however, that, on the date on which the Common
Stock and Warrants first become separately transferable, the Warrants shall be
listed on the Small Cap Market. At such time as the Company meets the
eligibility requirements for the inclusion of the Common Stock on the Nasdaq
National Market ("NNM"), the Company shall use its best efforts to obtain such
listing. The Company shall use its best efforts to maintain the Nasdaq listing
provided for in this Paragraph 3(i) for at least three (3) years after the date
of this Agreement.
(j) Exchange Act Filings. The Company shall file such registration
statement and take such other reasonable action, including the filing of a
registration statement on Form 8-A and requesting effectiveness not later than
the date the Registration Statement becomes effective, to register Common Stock
and the Warrants pursuant to Section 12(g) of the Exchange Act, such
registration statement to become effective simultaneously with the effectiveness
of the Registration Statement, and shall thereafter use its best efforts to keep
such registration effective. The Company shall comply with the Securities Act,
the Regulations, the Exchange Act and the rules and regulations promulgated
Commission under the Exchange Act, the applicable rules and regulations of the
Nasdaq, and applicable state securities laws so as to permit the continuance of
sales of and dealings in the Securities in compliance with applicable provisions
of such laws, rules, and regulations, including the filing with the Commission
and the Nasdaq of all reports required to be so filed, and the Company will
deliver to the holders of the Securities all reports required to be provided to
such holders pursuant to such laws, rules, or regulations.
(k) Use of Proceeds. The Company shall apply the net proceeds
received from the sale of the Securities in the manner set forth under the
caption "Use of Proceeds" in the Prospectus. The Company shall report the use of
- 13 -
<PAGE>
proceeds from the Offering in accordance with the Regulations and will provide a
copy of each such report to you and your counsel.
(l) Board Meetings and Membership.
(i) For a period of five (5) years commencing on the Closing
Date, the Representatives shall have the right to designate one nominee
(reasonably acceptable to the Company based on the designee's character and
reputation) for election to the Company's Board of Directors. The Company shall
initially elect such designee as soon as possible after the identity of such
designee is provided to the Company and thereafter shall include the
Representatives' designee as a member of the board of directors' slate.
Following the election of such nominee as a director, such person shall receive
the same compensation, including options, that is paid to other non-employee
directors of the Company and shall be entitled to receive reimbursement for all
reasonable costs incurred in attending such meetings including, but not limited
to, food, lodging and transportation. The Company agrees to indemnify and hold
such director harmless to the maximum extent permitted by law, against any and
all claims, actions, awards and judgments arising out of his or her service as a
director and, in the event the Company maintains a liability insurance policy
affording coverage for the acts of its officers and directors, to include such
director as an insured under such policy. Such director shall also serve on the
Company's audit, compensation and, if such committees are appointed, nominating
and executive committees. The rights and benefits of such indemnification and
the benefits of such insurance shall, to the extent possible, extend to the
Representatives insofar as it may be or may be alleged to be responsible for
such director, without additional cost to the Company.
(ii) In lieu of designating a member of the board of directors
pursuant to Paragraph 3(l)(i) of this Agreement, the Representatives shall have
the right, during the five-year period commencing on the Closing Date, to have
one observer to attend all meetings of the Board of Directors of the Company and
its executive, audit, compensation and such other committees as shall be
designated by the Representatives. Such observer shall be entitled to the same
compensation and reimbursement for expenses of attending meetings as is provided
to non-employee directors and committee members and, to the extent it may
legally do so, such indemnity as is provided to the Company's non-employee
directors.
(m) Future Sales. Except for the permitted issuances described
below, for a period of one (1) year from the Effective Date, the Company shall
not sell or otherwise dispose of any Common Stock (or securities convertible
into or exercisable for Common Stock) or Preferred Stock of the Company or any
subsidiary of the Company without the Representatives' prior written consent.
Permitted issuance shall mean shares of Common Stock issuable (i) upon the
exercise or conversion of options or warrants specifically contemplated in the
Prospectus or provided for in this Agreement, (ii) pursuant to and in order to
consummate a merger with or acquisition of an unaffiliated party in a
transaction negotiated at arms' length and approved by (A) a majority of the
Company's Board of Directors, and (B) all of the non-employee directors; (iii)
in a public offering approved by the Representatives, and (iv) pursuant to a
private placement, at a price per share, or, with respect to convertible
securities and warrants, having an exercise or conversion price, not less than
80% of the average of the closing bid prices of the Common Stock for ten (10)
consecutive trading days ending not earlier than three (3) days prior to the
date of such sale or on other terms acceptable to the Representatives.
- 14 -
<PAGE>
(n) Preferred Stock. The Company shall not create any series of
preferred stock or issue any shares of preferred stock for two years from the
Effective Date without the consent of the Representatives.
(o) Press Releases. Prior to the later of the Closing Date or the
Option Closing Date, if any, the Company will not issue, directly or indirectly,
without your prior written consent (which consent shall not be unreasonably
withheld), any press release or other public communication or hold any press
conference with respect to the Company, its activities, or the public offering,
other than trade releases in the ordinary course of the Company's business.
(p) Undertakings. The Company will comply with the provisions of
all undertakings contained in the Registration Statement or made in connection
with any application to register or qualify any of the Securities under blue sky
laws.
(q) Certain Deliveries to the Representatives. The Company will
obtain from its officers, counsel, and accountants those certificates, opinions,
and letters referred to in Paragraph 6 of this Agreement.
(r) Key Man Life Insurance. The Company will obtain on or before
the Closing Date, and use its best efforts to maintain thereafter for the term
of their respective employment with the Company, key man life insurance policies
in the amount of $1,000,000 insuring the lives of Richard F. Noll and J. P.
McCormick, with the Company named as sole beneficiary.
(s) Employment Agreements. The Company has entered into employment
agreements with Richard F. Noll and J. P. McCormick on the terms that are
disclosed in the Prospectus.
(t) Redemption and Dividends. For a period of two (2) years from
the Closing Date, the Company shall not redeem any of its securities and shall
not pay any dividends or make any other cash distribution without obtaining the
Representatives' prior written consent. The Representatives shall either approve
or disapprove such contemplated redemption of securities or dividend payment or
distribution within ten (10) business days from the date the Representatives
receives written notice of the Company's proposal with respect thereto; a
failure of the Representatives to respond within the ten (10) business day
period shall be deemed approval of the transaction. Nothing in this Paragraph
3(t) shall be construed to prohibit the Company from calling the Warrants for
redemption subsequent to one year from the Effective Date.
(u) Restrictions on Sales, Options by Affiliates. The Company will
cause each of its officers, directors, five percent (5%) stockholders to agree
in writing that such person will not, during the six (6) month period
immediately following the Effective Date (the "Lockup Period"), offer, pledge,
sell (which term includes a short sale or sale against the box), contract to
sell, grant any option for the sale of, or otherwise transfer or dispose of,
directly or indirectly, any shares of the Company's Common Stock without
obtaining the Representatives' prior written approval; provided that such
persons may transfer such securities in a private transaction to a person who
agrees to be subject to these restrictions.
- 15 -
<PAGE>
(v) Outstanding Warrants, Options and Other Rights. There shall not
be outstanding on the Closing Date any warrants, options, or other rights to
purchase any shares of Common Stock, except as otherwise set forth in the
Prospectus. During the two (2) years following the Effective Date, the Company
shall not, without the prior written consent of the Representatives, grant
options, rights or warrants or sell any securities to its officers, directors,
employees or consultants under its stock option plan as described in the
Prospectus or otherwise except at an exercise, purchase or conversion price
which is not less than the market price of the Common Stock on the date of
grant, issuance or sale, as the case may be.
(w) Restrictions on Filing Registration Statements. During the
eighteen (18) months following the Effective Date, the Company will not, without
the prior written consent of the Representatives, register any securities
pursuant to the Securities Act, except that such restriction shall not apply to
the registration of Common Stock issuable pursuant to the Company's present
stock option plan, as described in the Prospectus, on a Form S-8 registration
statement.
(x) Waiver of Registration Rights. The Company shall obtain a
waiver of so-called "piggy-back" registration rights from any holders of any
securities of the Company who have the right to require inclusion of any or all
of their securities in the Registration Statement contemplated by this
Agreement.
(y) Directors and Officers Liability Insurance. Within ninety (90)
days after the effective date of the Registration Statement, the Company will
use its best efforts to obtain Directors and Officers Liability Insurance in an
amount no less than $5,000,000 per occurrence.
(z) Accounting Firm. The Company shall retain an independent public
accounting firm reasonably acceptable to the Representatives for a period of
three (3) years from the Effective Date. The Representatives agree that the firm
of Panel Kerr Forrester, PC, is acceptable to the Representatives. In addition,
for a period of two years from the Effective Date, the Company, at its expense,
shall cause its independent accounting firm to review, but not audit, the
Company's financial statements for each of the first three fiscal quarters prior
to the announcement of quarterly financial information, the filing of the
Company's quarterly report on Form 10-QSB and the mailing of quarterly financial
information to stockholders, if applicable.
(aa) Restrictions on Acquisitions. During the one (1) year
following the Closing Date, without the prior consent of the Representatives,
the Company shall not enter into any agreement to acquire any other business or
the assets of any other business. The term "acquire" shall be broadly construed
and shall include the acquisition of assets, the merger with or into another
corporation or entity, whether directly by the Company or through a subsidiary,
or the acquisition of stock or other equity interests, however defined, of
another corporation, partnership, limited liability company, business trust,
sole proprietorship or other entity of any kind or description.
4. Offering Expenses and Related Matters
(a) General. Whether or not the Public Offering is consummated, the
Company will pay all costs and expenses incident to the performance of the
obligations of the Company hereunder, including without limiting the generality
of the foregoing, (i) the preparation, printing, filing, and copying of the
Registration Statement, Prospectus, this Agreement, blue sky memoranda, the
- 16 -
<PAGE>
Agreement Among Underwriters, if any, a selected dealers agreement, if any, and
other underwriting documents, if any, and any drafts, amendments or supplements
thereto, including the cost of all copies thereof supplied to the Underwriters
in such quantities as reasonably requested by the Representatives, the costs of
mailing Prospectuses to offerees and purchasers of the Securities, and the
out-of-pocket travel expenses of the Representatives and counsel to the
Representatives or other professionals designated by the Representatives to
visit the Company's facilities or its counsel's offices for purposes of
discharging due diligence responsibilities; (ii) the printing, engraving,
issuance and delivery of certificates representing Common Stock and Warrants,
including any transfer or other taxes payable thereon; (iii) the registration or
qualification of the Securities under state securities or "blue sky" laws,
including the reasonable fees and disbursements of counsel (regardless of
whether such counsel is also counsel to the Representatives, subject to the
limitation set forth in Paragraph 4(c) of this Agreement) and filing fees in
connection therewith; (iv) all reasonable fees and expenses of the Company's
counsel and accountants; (v) all filing fees in connection with review of the
terms of the Public Offering by the NASD; (vi) all costs and expenses of any
listing of the Securities, Common Stock and Warrants on the SmallCap Market or
the NNM and/or any other stock exchange and/or in Standard and Poor's Stock
Guide and/or any other securities manuals; (vii) all costs and expenses of four
(4) bound volumes provided to the Representatives and their counsel of all
closing documents, paper exhibits, correspondence and records forming the
materials included in the Public Offering; (viii) the reasonable costs and
expenses of all pre-closing and post-closing advertisements relating to the
Public Offering (such as tombstone adds), in addition to fifteen (15) lucite
cubes;(ix) all costs of holding informational meetings and "road shows;" and (x)
all other costs and expenses incurred or to be incurred by the Company in
connection with the transactions contemplated by this Agreement. The obligations
of the Company under this Paragraph 4(a) shall survive any termination or
cancellation of this Agreement.
(b) Non-Accountable Expense Allowance. In addition to the Company's
responsibility for payment of the foregoing expenses, the Company shall pay to
the Representatives a non-accountable expense allowance equal to three percent
(3%) of the gross proceeds of the Public Offering, including in such amount the
proceeds from any sale of Option Units. The non-accountable expense allowance
due shall be paid at the Closing Date and any Option Closing Date, as
applicable, and shall include fees and disbursements of Representatives counsel
(exclusive of legal fees for state registration and qualification as provided in
Paragraph 4(c) of this Agreement), but shall not include fees of the Company's
counsel, state registration filing fees, NASD filing fees, Nasdaq listing fees,
printing and mailing to members of the underwriting or selling group, and any
and all other expenses customarily paid by the issuer in a public offering of
securities.
You hereby acknowledge your prior receipt from the Company of $25,000,
which amount shall be applied to the non-accountable expense allowance due when
and if the Public Offering is closed. If the Public Offering does not close,
then any portion of such amount in excess of your actual out of pocket expenses
shall be returned promptly by you to the Company.
(c) Compliance with Blue Sky Laws. You shall determine in which
states or jurisdictions the Securities shall be registered or qualified for
sale. Copies of all applications and related documents for the registration or
qualification of securities (except for the Registration Statement and
Prospectus) filed with the various states shall be supplied to the Company's
- 17 -
<PAGE>
counsel not later than one business day following their transmission to the
various states, and copies of all comments and orders received from the various
states shall be made available promptly to the Company's counsel. Immediately
prior to the Effective Date, counsel for the Representatives shall advise
counsel for the Company in writing of all states in which the offering has been
registered or qualified for sale or has been canceled, withdrawn, or denied, the
date of each such event, and the number of Securities registered or qualified
for sale in each such state. The Company shall be responsible for the cost of
state registration or qualification filing fees and the legal fees of
Representatives' counsel in connection with such filings, which filing fees are
payable to Representatives' counsel in advance of such filings. The legal fees
payable by the Company with respect to blue sky filings by Representatives'
counsel shall be fifty thousand dollars ($50,000), of which twenty five thousand
dollars ($25,000) has been paid. The Company hereby acknowledges that any
remaining balance with respect to legal fees or blue sky filing fees is
immediately due and payable.
5. Unit Purchase Option; Other Financial Arrangements
(a) Unit Purchase Option. On the Closing Date, the Company will
sell to the Representatives, for an aggregate price of $10, the Unit Purchase
Option to purchase an aggregate of one hundred twenty thousand (120,000) Units
from the Company at an exercise price equal to one hundred sixty five percent
(165%) of the public offering price of the Units. The Unit Purchase Option and
the underlying securities shall be non-transferable (other than to officers or
partners of members of the underwriting or selling group or as otherwise may be
permitted by the NASD) during the one (1) year period commencing on the
Effective Date. The Unit Purchase Option and the terms of the underlying
securities shall be exercisable for a period of four (4) years commencing one
(1) year from the Effective Date. The Unit Purchase Option shall be in
substantially the form provided by the Representatives and filed as an Exhibit
to the Registration Statement.
(b) M/A Agreement.
(i) The Company hereby agrees that if, during the five (5) year
period commencing on the Effective Date, the Representatives shall introduce to
the Company another party or entity (the "Introduced Party"), and, as a result
of such introduction, a Transaction is consummated with such Introduced Party,
the Company shall pay to the Representatives a finder's fee (the "Fee") equal to
six percent (6%) of the first five million dollars ($5,000,000) of the
consideration paid or received in such Transaction; plus five percent (5%) of
the consideration in excess of five million dollars ($5,000,000) and up to six
million dollars ($6,000,000); plus four percent (4%) of the consideration in
excess of six million dollars ($6,000,000) and up to seven million dollars
($7,000,000); plus three percent (3%) of the consideration in excess of seven
million dollars ($7,000,000) and up to eight million dollars ($8,000,000); plus
two percent (2%) of the consideration in excess of eight million dollars
($8,000,000). As used in this Paragraph 5(b), a "Transaction" shall mean any of
the following (i) the sale of all or substantially all of the assets and
properties of the Company or all or substantially all of the stock of the
Company, (ii) the merger or consolidation of the Company with or into any other
corporation or other entity (other than a merger with a company owned or
controlled by the Company), (iii) the acquisition by the Company of the assets
or stock of another business entity in which the Company may be involved, or
(iv) a joint venture, licensing or marketing agreement or arrangement, however
structured.
- 18 -
<PAGE>
(ii) The Fee shall be paid in cash at the closing of the
particular Transaction, regardless of whether the Transaction involves
installment payments or the consideration paid includes securities or a
combination of securities and cash; provided, however, that in the event that
the Transaction is a marketing or license or other agreement pursuant to which a
stream of revenue or cash receipts may be generated or other Transaction where
it is impossible to determine the value of the consideration to be paid or
received or in the event that there are contingent payments, the Fee shall be
paid with respect to each payment at the same time as the payment is made or
received, as the case may be, regardless of when the payment is received as long
as the original agreement pursuant to which the payment is made was entered into
during the five (5) year period commencing on the Effective Date. No
modification of payment or other terms of any agreement shall impair the
Representatives' right to the Fee. In the event that the Transaction involves a
merger or sale of assets or tender offer or sale of stock where the
consideration is paid to any or all of the Company's stockholders, the
consideration paid to such stockholders shall be included in the consideration
paid or received for purposes of computing the Fee. All references to the
Company in the context of a Transaction shall include Activeworlds.com, Inc.,
any of its present or future subsidiaries or any affiliate of the Company,
regardless of whether such party shall pay or receive the consideration paid in
the Transaction.
(iii) In determining the value of the consideration paid or
received, the following provisions shall apply:
(A) Any securities which are regularly traded on a
securities exchange or in the over-the-counter market shall be valued at the
average of the closing prices in the case of securities listed on the New York
or American Stock Exchange or the Nasdaq Stock Market (or the closing bid price
if there are no transactions on any of such days) or the average of the closing
bid prices, as reported by Nasdaq or the National Quotation Bureau, Inc. or
similar recognized reporting agency, in the case of securities not traded on
such exchanges or in such markets on the ten (10) trading days prior to the
earlier of (I) the date of the agreement or (II) in the event that a press
release or other announcement is made by the Company and/or the Introduced Party
concerning the Transaction and the consideration provided for in the agreement
includes the transfer of a fixed number of securities, the date of such press
release or announcement.
(B) Any debt securities which are not regularly traded on
a securities exchange or on the over-the-counter market shall be valued at the
principal amount thereof if such obligations bear a stated interest rate or, if
no interest rate is stated, at the present value of the payments due, discounted
using an interest rate equal to the prime rate of Chemical Bank in effect on the
second business day prior to the closing date.
(C) The consideration received in a joint venture shall
be based on the consideration paid to the joint venture by the Introduced Party
plus any additional consideration paid by or on behalf of the joint venture
partner to the Company.
(D) In the event that the Transaction involves the
receipt by the Company of property or equipment the consideration shall be fair
value of the property and equipment.
- 19 -
<PAGE>
(E) In the event that the fair market value of any
property cannot be determined pursuant to the application of Paragraph 5(b)(iii)
of this Agreement and the Company and the Representatives shall not be able to
agree on a value, the value shall be determined by an appraiser jointly selected
by the Company and the Representatives.
(iv) Notwithstanding anything in this Paragraph 5(b) to the
contrary, if the Company shall, within one hundred eighty (180) days immediately
following the expiration of five (5) years from the Effective Date, consummate a
Transaction with an Introduced Party which was introduced by the Representatives
to the Company during such five (5) year period, the Company shall pay the
Representatives the Fee in the same manner as is otherwise provided in this
Paragraph 5(b).
6. Conditions to the Obligations of the Underwriters. The obligation
of Underwriters to purchase and pay for the Securities shall be subject to the
accuracy in all material respects, as of the date of this Agreement and each
Closing Date (whether the Closing Date with respect to the Firm Units or an
Option Closing Date with respect to the Option Units), as if made on such
Closing Date, of the representations and warranties of the Company contained in
this Agreement and the following additional conditions:
(a) Effectiveness of Registration Statement.
(i) The Registration Statement shall have become effective not
later than 5:30 P.M., Eastern Time, on the date of this Agreement, or such later
time or date as shall have been consented to by you in writing (the "Effective
Date").
(ii) On the Closing Date, no stop order suspending the
effectiveness of the Registration Statement or the qualification or registration
of the Securities under the blue sky laws of any jurisdiction (whether or not a
jurisdiction specified by the Underwriters) shall have been issued, and no
proceeding for that purpose shall have been initiated or shall be threatened or
contemplated by the Commission or the authorities of any such jurisdiction.
(iii) Any request of the Commission or any such authorities for
additional information to be included in the Registration Statement or
Prospectus or otherwise shall have been complied with to the reasonable
satisfaction of counsel for the Underwriters.
(b) Representations; Compliance with Agreement. The representations
and warranties of the Company in this Agreement shall be true and correct on and
as of the Closing Date, with the same effect as if made on the Closing Date, and
the Company shall have complied with all the agreements and satisfied all the
obligations required to be performed or satisfied by it at or prior to the
Closing Date.
(c) No Untrue Statements. The Registration Statement and the
Prospectus shall contain all statements required to be stated therein in
accordance with the Securities Act and the Regulation and the Registration
Statement and the Prospectus shall not contain any 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 not misleading, and, since the
Effective Date, there shall not have occurred any event required to be set forth
in an amended or supplemented Prospectus that has not been so set forth (except
any such statement or omission based upon information furnished in writing by or
on behalf of the Underwriters for inclusion in the Registration Statement).
- 20 -
<PAGE>
(d) No Material Change. Subsequent to the respective dates as of
which information is given in the Registration Statement and Prospectus, and
except as set forth or contemplated in the Prospectus, (i) there shall have been
no material adverse changes with respect to the officers, directors, operations,
capitalization, contractual obligations, legal proceedings, proposed use of
proceeds from the sale of the Securities, business, plans or prospects, net
assets or liabilities or obligations, properties, or any other aspect of the
financial condition or results of operations of the Company or the Subsidiary,
(ii) neither the Company nor the Subsidiary shall have entered into any material
transaction not in the ordinary course of business, (iii) neither the Company
nor the Subsidiary shall have paid or declared any dividends or other
distributions on its capital stock, (iv) the conduct of the business and
operations of the Company and the Subsidiary shall not have been materially
interfered with by strike, fire, flood, hurricane, accident or other calamity
(whether or not insured), or by any court or governmental action, order or
decree, and the properties of the Company and the Subsidiary shall not have
sustained any material loss or damage (whether or not insured) as a result of
any such occurrence, and (v) except as set forth in the Prospectus, there are no
actions, suits, proceedings or investigations pending before any arbitrator,
court or governmental agency, authority or body or, to the Company's Knowledge,
threatened, to which the Company or the Subsidiary is a party or of which the
business or property of the Company or the Subsidiary is the subject and which,
if adversely decided, could reasonably be expected to have a material adverse
affect on the business, property, condition (financial or otherwise), results of
operations or general affairs of the Company or the Subsidiary, and there have
been no material adverse development in any such suits, actions, proceedings or
investigations.
(e) NASD. The NASD shall have indicated that it has no objection to
the underwriting arrangements pertaining to the sale of the Securities by the
Underwriters. No action shall have been taken by the Commission or the NASD the
effect of which would make it improper, at any time prior to the Closing Date,
for any member firm of the NASD to execute transactions (as principal or as
agent) in the Securities, Common Stock or Warrants and no proceedings for the
purpose of taking such action shall have been instituted or shall be pending,
or, to the Representatives' or the Company's Knowledge, shall be contemplated by
the Commission or the NASD. The Company represents at the date of this
Agreement, and shall represent as of the Closing Date or Option Closing Date, as
the case may be, that it has no Knowledge that any such action is in fact
contemplated by the Commission or the NASD.
(f) Certificates, Bylaws and Proceedings. The Company's Certificate
of Incorporation and By-Laws, and all proceedings taken in connection with the
authorization, issuance, or sale of the Securities as herein contemplated, shall
be reasonably satisfactory in form and substance to you.
(g) Officers' Certificate. The Company shall have furnished to the
Representatives a certificate of the President and of the Chief Financial
Officer of the Company, dated the day of the Closing Date, to the effect that
each signer of such certificate has examined the Registration Statement, the
Prospectus, and this Agreement, and confirming, in form satisfactory to the
Representatives, that the compliance by the Company of the conditions set forth
in Paragraphs 6(a) through (d) of this Agreement have been satisfied.
- 21 -
<PAGE>
(h) Opinion of Company Counsel. The Company shall have furnished to
the Representatives the opinion of Pepe and Hazard, LLP, counsel for the
Company, dated the Closing Date, in form and substance reasonably satisfactory
to counsel to the Representatives and substantially in the form of Exhibit A
attached hereto. In rendering the opinion, such counsel may rely as to matters
of fact, to the extent they deem proper, upon certificates of the Company's
officers and governmental officials.
(i) Accountants' Letter. At the time this Agreement is executed and
as of the Closing Date, Panel Kerr Forrester, PC, independent public accountants
for the Company, shall have furnished to you a letter addressed to the
Representatives and dated the date of this Agreement or the Closing Date, as
applicable, in form and substance previously approved by the Representatives and
its counsel.
(j) Agreements with Stockholders. The Representatives shall have
received the agreements, in form and substance satisfactory to the
Representatives, as contemplated by Paragraph 3(u) of this Agreement.
(k) Change in Capitalization. Subsequent to the respective dates as
of which information is given in the Registration Statement and the Prospectus,
there shall not have been any material adverse change or decrease in the capital
stock or long-term debt obligations of the Company or any decreases in
stockholders' equity, net assets or current net assets of the Company or any
material adverse change in the financial position, revenues, expenses or results
of operations of the Company or the Subsidiary, each as compared with the
amounts shown in the most recent financial statements included in the
Registration Statement, except as disclosed in the Prospectus, that makes it
impractical or inadvisable in the reasonable judgment of the Representatives to
proceed with the Public Offering or the delivery of the Securities, as the case
may be, as contemplated in the Prospectus.
(l) Other Agreements. The Company shall have executed and delivered
to the Representatives the Warrant Agreement and the Unit Purchase Option to
purchase one hundred twenty thousand (120,000) Units.
(m) Opinion of Representatives' Counsel. The Representatives shall
have received an opinion from Esanu Katsky Korins & Siger, LLP, counsel for the
Representatives, as to the organization of the Company, the validity of the
Securities, the form of the Registration Statement and the Prospectus, and such
other related matters as you may request, and such counsel shall have been
furnished by the Company such papers and information as they request to enable
them to pass upon such matters. It is understood that such counsel will express
no opinion with respect to the financial statements and other financial,
accounting, and statistical data included in the Registration Statement and the
Prospectus. In rendering the foregoing opinion, such counsel shall be entitled
to rely upon the opinion delivered to the Representatives pursuant to Paragraph
6(h) of this Agreement as to matters of Federal securities law, and may rely as
to matters of fact upon such certificates and other documents and information as
they may reasonably request for purposes of such opinion.
(n) Other Information. Prior to the Closing Date, the Company shall
have furnished to the Representatives such further information, certificates,
and documents in connection with the Company's obligations set forth in this
Agreement as you may reasonably request.
- 22 -
<PAGE>
If any of the conditions specified in this Paragraph 6 shall not have
been fulfilled when and as required by this Agreement, this Agreement and all
obligations of the Underwriters hereunder may be terminated by you at, or at any
time prior to, the Closing Date. Notice of such termination shall be given to
the Company in writing, or by facsimile transmission or telephone and confirmed
in writing.
7. Indemnification
(a) Indemnification by the Company. The Company agrees to indemnify
and hold harmless each Underwriter and each person who controls any Underwriter
within the meaning of the Securities Act, from and against any and all losses,
claims, damages or liabilities, joint or several, to which they or any of them
may become subject under the Securities Act, the Exchange Act, or other Federal
or state statutory law or regulation, at common law or otherwise, insofar as
such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon (i) any untrue statement or alleged untrue
statement of a material fact made by the Company in this Agreement, (ii) any
untrue statement or alleged untrue statement of a material fact made by the
Company contained in the Registration Statement, or any amendment thereof, or in
any Preliminary Prospectus or the Prospectus, or any amendment thereof or
supplement thereto, or in any blue sky application or other document executed by
the Company specifically for that purpose (or based upon written information
furnished by the Company) filed in any state or other jurisdiction in order to
qualify any of the Securities or other Securities under the securities laws
thereof (any such application, document or information being referred to as a
"Blue Sky Application"); or (iii) the omission or alleged omission to state in
any such Registration Statement, Preliminary Prospectus or Prospectus, or
amendment thereof or supplement thereto, or Blue Sky Application a material fact
required to be stated therein or necessary to make the statements made therein
not misleading, and agrees to reimburse each such indemnified party for any
legal or other expenses reasonably incurred by it in connection with
investigating or defending against any such loss, claim, damage, liability or
action; provided, however, that the Company will not be liable in any such case
to the extent that any such loss, claim, damage, or liability arises out of or
is based upon any such untrue statement or alleged untrue statement or omission
or alleged omission made therein or omitted therefrom in reliance upon and in
conformity with written information furnished to the Company by or on behalf of
you or such Underwriter specifically for use in connection with the preparation
thereof, and further provided, however, that the foregoing indemnity with
respect to any untrue statement, alleged untrue statement, omission, or alleged
omission contained in any Preliminary Prospectus shall not inure to the benefit
of any Underwriter from whom the person asserting any such loss, claims any of,
damage, or liability purchased any of the securities that are the subject
thereof (or to the benefit of any person who controls such Underwriter), if a
copy of the Prospectus was not delivered to such person with or prior to the
written confirmation of the sale of such security to such person. This indemnity
agreement will be in addition to any liability that the Company may otherwise
have.
(b) Indemnification by Underwriters. Each Underwriter, severally,
but not jointly, agrees to indemnify and hold harmless the Company, each of its
directors, each of its officers who has signed or signs the Registration
Statement, and each person who controls the Company within the meaning of the
Securities Act, from and against any and all losses, claims, damages or
- 23 -
<PAGE>
liabilities, joint or several, to which they or any of them may become subject
under the Securities Act, the Exchange Act, or other Federal or state statutory
law or regulation, at common law or otherwise, insofar as such losses, claims,
damages, or liabilities (or actions in respect thereof) arise out of or are
based upon (i) any untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement, or any amendment thereof, or in
any Preliminary Prospectus or the Prospectus, or any amendment thereof or
supplement thereto, or in a Blue Sky Application, or (ii) the omission or the
alleged omission to state in any such Registration Statement, Preliminary
Prospectus or Prospectus, amendment thereof or supplement thereto, or Blue Sky
Application a material fact required to be stated therein or necessary to make
the statements made therein not misleading, in each case to the extent, but only
to the extent, that the same was made therein or omitted therefrom in reliance
upon and in conformity with written information furnished to the Company by or
on behalf of you or such Underwriter specifically for use in the preparation
thereof, and agrees to reimburse each such indemnified party for any legal or
other expenses reasonably incurred by it in connection with investigating or
defending against any such loss, claim, damage, liability or action. This
indemnity agreement will be in addition to any liability that the Underwriters
may otherwise have.
(c) Claims. Within five (5) days after receipt by an indemnified
party under Paragraph 7(a) or (b) of this Agreement of notice of the
commencement of any action, such indemnified party shall, if a claim in respect
thereof is to be made against an indemnifying party under such subsection,
notify the indemnifying party in writing of the commencement thereof; the
failure so to notify the indemnifying party shall relieve the indemnifying party
from any liability under this Paragraph 7 as to the particular item for which
indemnification is then being sought, unless such indemnifying party has
otherwise received actual notice of the action at least thirty (30) days before
any answer or response is required by the indemnifying party in its defense of
such action, but will not relieve it from any liability that it may have to any
indemnified party otherwise than under this Paragraph 7. If any such action is
brought against any indemnified party and it notifies the indemnifying party of
the commencement thereof, the indemnifying party will be entitled to participate
therein and, to the extent that it may elect by written notice delivered to the
indemnified party promptly after receiving the aforesaid notice from such
indemnified party, to assume the defense thereof; provided, that if the
defendants in any such action include both the indemnified party and the
indemnifying party and either (i) the indemnifying party or parties agree, or
(ii) representation of both the indemnifying party or parties and the
indemnified party or parties by the same counsel is inappropriate under
applicable standards of professional conduct because of actual or potential
conflicting interests between them, then the indemnified party or parties shall
have the right to select separate counsel to assume such legal defense and to
otherwise participate in the defense of such action. The indemnifying party will
not be liable to such indemnified party under this Paragraph 7 for any legal or
other expenses subsequently incurred by such indemnified party in connection
with the defense thereof unless (i) the indemnified party shall have employed
counsel in connection with the assumption of legal defenses in accordance with
the proviso to the immediately preceding sentence (it being understood, however,
that the indemnifying party shall not be liable for the expenses of more than
one separate counsel approved by the indemnifying party for all indemnified
parties), (ii) the indemnifying party shall not have employed counsel to
represent the indemnified party within a reasonable time after notice of
commencement of the action, or (iii) the indemnifying party has authorized the
employment of counsel for the indemnified party at the expense of the
indemnifying party. In no event shall an indemnifying party be liable under this
Paragraph 7 for any settlement,
- 24 -
<PAGE>
effected without its written consent, which consent shall not be unreasonably
withheld, of any claim or action against an indemnified party.
(d) Contribution. In order to provide for just and equitable
contribution under the Securities Act in any case in which (i) an indemnified
party makes a claim for indemnification pursuant to Paragraphs 7(a) or (b) of
this Agreement (subject to the limitations thereof) but is judicially
determined, by the entry of a final judgment or decree by a court of competent
jurisdiction and the expiration of time to appeal or the denial of the last
right of appeal, that such indemnification may not be enforced in such case
notwithstanding that the provisions of this Paragraph 7 provide for
indemnification in such case, or (ii) contribution under the Securities Act may
be required on the part of any indemnified or indemnifying party in
circumstances for which indemnification is provided under Paragraphs 7(a) or (b)
of this Agreement, then, and in each such case, the Company and the Underwriters
shall contribute to the aggregate losses, claims, damages, or liabilities to
which they may be subject (after contribution from all others) in such
proportion so that the Underwriters is responsible for that portion represented
by the percentage that the underwriting discount appearing on the cover page of
the Prospectus bears to the Public Offering Price appearing thereon, and the
Company is responsible for the remaining portion; provided, however, that if
such allocation is not permitted by applicable law, then the relative fault of
the Company and the Underwriters in connection with the statements or omissions
that resulted in such losses, liabilities, claims, and damages and other
relevant equitable considerations shall also be considered. The relative fault
shall be determined by reference to, among other things, whether in the case of
an untrue statement of a material fact or the omission to state a material fact,
such statement or omission relates to information supplied by the Company or by
the Underwriters and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such untrue statement or
omission. The Company and the Underwriters agree that it would not be just and
equitable if the respective obligations of the Company and the Underwriters to
contribute pursuant to this Paragraph 7(d) were to be determined by pro rata or
per capita allocation of the aggregate damages (even if the Underwriters and
their respective controlling persons in the aggregate were treated as one entity
for such purpose) or by any other method of allocation that does not take
account of the equitable considerations referred to in the first sentence of
this Paragraph 7(d). For purposes of this Paragraph 7(d), the term "damages"
shall include any legal or other expenses reasonably incurred by the indemnified
party in connection with investigating or defending against or appearing as a
third party witness in any action or claim that is the subject of the
contribution provisions of this Paragraph 7(d). Notwithstanding the provisions
of this Paragraph 7(d), an Underwriter and its controlling persons collectively
shall not be required to contribute any amount in excess of the difference
between the total price of the Securities purchased by the Underwriter, directly
or indirectly, from the Company pursuant to this Agreement and the amount of any
damages that such Underwriter and its controlling persons collectively have been
required to pay by reason of such untrue statement or omission other than
pursuant to this Paragraph 7(d). No person guilty of a 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. For the purposes of this Paragraph 7(d), any
person who controls an Underwriter within the meaning of Section 15 of the
Securities Act or Section 20(a) of the Exchange Act shall have the same rights
to contributions as the Underwriter and each director of the Company, each
officer of the Company who signed the Registration Statement, and each person,
if any, who controls the Company within Section 15 of the Securities Act or
Section 20(a) of the Exchange Act shall have the same rights to contribution as
the Company.
- 25 -
<PAGE>
The foregoing contribution agreement shall in no way affect the
contribution liabilities of any person having liability under Section 11 of the
Securities Act other than the Company and the Underwriters and persons
controlling the Company or the Underwriters.
After receipt by any party to this Agreement of notice of the
commencement of any action, suit, or proceeding, such person will, if a claim
for contribution in respect thereof is to be made against another party (the
"contributing party"), notify the contributing party of the commencement thereof
within a reasonable time thereafter, but the failure so to notify the
contributing party will not relieve the contributing party from any liability
that it may have to any party other than for contribution pursuant to this
Paragraph 7(d). Any notice given pursuant to any other provision of this
Paragraph 7 shall be deemed to be like notice pursuant to this Paragraph 7(d).
If any such action, suit or proceeding is brought against any party, and such
person notifies a contributing party of the commencement thereof, the
contributing party will be entitled to participate therein with the notifying
party and any other contributing party similarly notified, subject to the
provisions of Paragraph 7(c) of this Agreement.
(e) Survival. The respective indemnity and contribution agreements
by the Underwriters and the Company contained in this Paragraph 7, and the
covenants, representations and warranties of the Company set forth in this
Agreement, shall remain operative and in full force and effect regardless of (i)
any investigation made by the Underwriters or on their behalf or by or on behalf
of any person who controls any Underwriter, by the Company or any controlling
person of the Company or any director or any officer of the Company, (ii)
acceptance of the Securities and payment therefor, or (iii) any termination of
this Agreement, and shall survive the delivery of the Securities, and any
successor to the Company or to any Underwriter or any person who controls any
Underwriter or the Company, as the case may be, shall be entitled to the benefit
of such respective indemnity and contribution agreements.
8. Effectiveness. This Agreement shall become effective
contemporaneously with the effectiveness of the Registration Statement, or at
such date after the effective time of the Registration Statement as you, in your
discretion, shall first release the Securities for sale to the public; provided,
however, that the provisions of Paragraphs 4, 6, and 7 of this Agreement shall
at all times be in full force and effect. For the purposes of this Paragraph 8,
the Securities shall be deemed to have been released for sale to the public upon
release by you after effectiveness of the Registration Statement of a newspaper
advertisement relating to the Securities or upon release by you thereafter of
telegrams advising securities dealers of the effectiveness of the Registration
Statement, whichever shall first occur.
9. Termination. This Agreement may be terminated, in your absolute
discretion, by notice given to the Company prior to the Closing Date if the
Company shall have failed, refused, or been unable, prior to the Closing Date,
to perform any material agreement required to be performed by it hereunder, or
if any other condition of the Underwriters' obligations hereunder required to be
fulfilled by the Company is not fulfilled. In addition, this Agreement may be
terminated, as set forth above, if, prior to the Closing Date, any of the
following shall have occurred: (a) material governmental restrictions (not in
force and effect on the date of this Agreement) have been imposed on trading in
securities on the New York Stock Exchange or American Stock Exchange or in the
over-the-counter market; (b) the determination by you that there shall have
occurred a material adverse change, beyond normal fluctuations, in general
financial market or economic conditions from such conditions on the date of this
Agreement; (c)
- 26 -
<PAGE>
a material interruption in mail or telecommunications service or other general
means of communications within the United States after the execution and
delivery of this Agreement; (d) a banking moratorium has been declared by
Federal or New York state authorities; (e) an outbreak of major international
hostilities or other national or international calamity has occurred; (f) the
passage by the Congress of the United States or by any state legislative body of
any act or measure, or the adoption of any orders, rules, or regulations by any
governmental body or executive or any authoritative accounting institute or
board, that you believe will have a Material Adverse Effect on the business,
financial condition, or financial statements of the Company or the distribution
of the Securities or market for the Securities; or (g) any material adverse
change has occurred, since the respective dates of which information is given in
the Registration Statement and Prospectus, in the condition of the Company,
financial or otherwise, whether or not arising in the ordinary course of
business. Any such termination shall be without liability of any party to any
other party, except as provided in Paragraph 7 in this Agreement and except that
the Company shall remain obligated to pay costs and expenses pursuant to
Paragraph 4 in this Agreement. If you elect to prevent this Agreement from
becoming effective, or to terminate this Agreement, as provided in this
Paragraph 9, you shall promptly notify the Company by telecopier or telephone,
and confirm by letter, and the Underwriters shall not be under any liability to
the Company.
10. Default by One or More Underwriters or Selected Dealers.
(a) If one or more of the Underwriters or selected dealers shall
fail at the Closing Date to purchase the Firm Units that it or they are
obligated to purchase pursuant to this Agreement or a selected dealers agreement
(the "Defaulted Securities"), the Representatives shall have the right, within
24 hours thereafter, to make arrangements for one or more of the non-defaulting
Underwriters or selected dealers, to purchase all, but not less than all, of the
Defaulted Securities in such amounts as may be agreed upon and upon the terms in
this Agreement set forth; if, however, the Representatives shall not have
completed such arrangements within such 24-hour period, then:
(i) If the number of Defaulted Securities does not exceed 10%
of the total number of Firm Units, the non-defaulting Underwriters and the
non-defaulting selected dealers shall be obligated to purchase the full amount
thereof in the proportions that their respective underwriting obligations bear
to the underwriting obligations of the non-defaulting Underwriters and selected
dealers.
(ii) If the number of Defaulted Securities exceeds 10% of the
total number of Firm Units, this Agreement shall terminate without liability on
the part of any non-defaulting Underwriter or selected dealer.
(b) In the event of any such default that does not result in a
termination of this Agreement, either the Representatives or the Company shall
have the right to postpone the Closing Date for a period not exceeding seven
days in order to effect any required changes in the Registration Statement or
Prospectus or in any other documents or arrangements.
(c) Any action taken under this Paragraph 10 shall not release any
defaulting Underwriter or selected dealer from liability in respect of such
default.
- 27 -
<PAGE>
11. Survival of Representations, Warranties, and Indemnities. The
respective agreements, representations, warranties, and indemnities contained in
this Agreement will remain in full force and effect regardless of any
investigation made by or on behalf of you, any Underwriter or the Company, or
any of your or their respective officers or directors or controlling persons,
and will survive delivery of and payment for the Securities and the Unit
Purchase Option.
12. Notices. All notices and other communications hereunder (unless
otherwise expressly provided for in this Agreement) shall be in writing and
shall be deemed given when delivered in person or by overnight courier service
or Express Mail, on the business day (before 5:00 P.M.) transmitted if sent by
facsimile transmission or similar means of communication if receipt if confirmed
or if transmission is confirmed as otherwise provided in this Paragraph 12, or
the fifth (5th) day after mailing if mailed if sent by registered or certified
mail (return receipt requested) to the party to receive the same at the
following addresses (or at such other address for a party as shall be specified
by like notice):
If to the Company: Activeworlds.com.,Inc.
95 Parker Street
Newburyport, MA 01950
Facsimile: (978) 499-0221
Attention: Richard F. Noll, President
With a copy to: Peabody & Arnold, LLP
50 Rowes Wharf
Boston, MA 02110-1745
Facsimile: (617) 951-2125
Attention: John A. Kostrubanic, Esq.
If to the Underwriters: HD Brous & Co., Inc.
40 Cuttermill Road
Great Neck, New York 11021
Facsimile: (516) 773-1805
Attention: Mr. Howard D. Brous, Chairman
and
Solid ISG Capital Markets, L.L.C.
1114 Avenue of the Americas
New York, NY 10036
Facsimile: (212) 221-7073
Attention: Mr. Averell Satloff
Senior Executive Vice President
With a copy to: Esanu Katsky Korins & Siger, LLP
605 Third Avenue
New York, New York 10158
Facsimile: (212) 953-6899
Attention: Asher S. Levitsky P.C.
- 28 -
<PAGE>
13. Successors. This Agreement will inure to the benefit of and be
binding upon the parties hereto and their respective successors. Except as to
the several Underwriters for whom you are acting as their representative, and
except and only to the extent stated in Paragraph 7 of this Agreement with
respect to the officers, directors and controlling persons referred to in such
Paragraph 7, no person other than the parties hereto and their respective
successors will have any right or obligation hereunder. The terms "successor"
and "successors and assigns" as used in this Agreement shall not include any
buyer, as such, of any of the Securities from the Underwriters.
14. Entire Understanding. This Agreement contains the entire
understanding between the parties to this Agreement and supersedes any prior or
contemporaneous oral or prior written agreement, understandings or letter of
intent, and may not be modified or amended nor may any right be waived except by
a writing signed by all parties in the case of a modification or amendment or
the party to be charged in the case of a waiver. No course of conduct or dealing
and no trade custom or practice shall be construed to modify any of the
provisions of this Agreement.
15. Counterparts. This Agreement may be executed in multiple
counterparts, each of which shall be an original but all of which taken together
shall constitute one and same agreement.
16. Governing Law. This Agreement shall be governed by and construed
and enforced in accordance with the laws of the State of New York applicable to
agreements executed and to be performed wholly within such State.
[Signatures on following page]
- 29 -
<PAGE>
Please confirm, by signing and returning to the Company counterparts of
this Underwriting Agreement, that the foregoing correctly sets forth the
understanding between the Company and you, whereupon this Agreement will
constitute a binding agreement among us.
Very truly yours,
ACTIVEWORLDS.COM, INC.
By:___________________________
Richard F. Noll, President
Confirmed and Accepted as of
the date first above-written:
HD BROUS & CO, INC.
By:________________________________
Howard D. Brous, Chairman
SOLID ISG CAPITAL MARKETS, L.L.C.
By:________________________________
Averell Satloff, Senior Executive Vice President
- 30 -
<PAGE>
Exhibit A
Opinion of Company Counsel
1. The Company and the Subsidiary (a) has been duly incorporated and
is a validly existing corporation in good standing under the laws of the state
of its incorporation, with full corporate power and authority to own and operate
its properties and to carry on its business as set forth in the Registration
Statement and Prospectus; (b) on the Effective Date has authorized and
outstanding capital stock as set forth in the Prospectus, and (c) is duly
licensed or qualified as a foreign corporation in Massachusetts and all other
jurisdictions in which by reason of owning or leasing real property in such
jurisdiction it is required to be so licensed or qualified except where failure
to be so qualified or licensed would have no Material Adverse Effect.
2. All of the outstanding shares of Common Stock are duly and validly
authorized and issued and outstanding, fully paid and non-assessable, conform to
the description set forth in the Prospectus and do not have any, and were not
issued in violation of any, preemptive rights under the Company's certificate of
incorporation or by-laws or any other agreement known to such counsel.
3. The Company has authorized and reserved for issuance the shares of
Common Stock issuable (a) upon exercise of the outstanding options or warrants
(other than the Warrants) in accordance with the terms of the applicable options
or warrants, (b) upon exercise of the Warrants, including Warrants issued upon
exercise of the Unit Purchase Option, pursuant to the terms of the Warrants and
the Warrant Agreement, and (c) upon exercise of the Unit Purchase Option, and
when issued upon such exercise, such shares of Common Stock will be duly and
validly authorized and issued, fully paid and non-assessable and not subject to
any preemptive rights or rights of first refusal pursuant to the Company's
certificate of incorporation or by-laws or other agreement known to such
counsel.
4. The shares of Common Stock included in the Units offered pursuant
to the Prospectus (a) are duly and validly authorized and issued, fully paid and
non-assessable, (b) have not been issued in violation of the pre-emptive rights
or rights of first refusal pursuant to the Company's certificate of
incorporation or any agreement known to such counsel and (c) are not subject to
any liens, encumbrances, claims, security interests, stockholders agreements,
voting trusts or restrictions on voting or transfer other than as disclosed in
the Prospectus or as may be imposed under Federal and state securities laws.
5. The Warrants and the Unit Purchase Option, when issued as provided
in this Agreement and/or the Unit Purchase Option, will constitute the valid,
binding and enforceable obligations of the Company, subject to bankruptcy,
insolvency and other laws of general applications affecting the enforceability
of creditors' rights and subject to the discretionary nature of any remedies in
the nature of equitable relief and except that no opinion is given with respect
to the indemnification and contribution provisions of the Representatives'
Warrants.
6. The shares of Common Stock and Warrants included in the Units
offered pursuant to the Prospectus, when issued pursuant to this Agreement upon
payment of the consideration provided for in this Agreement, will, to such
counsel's knowledge, be free of all liens, encumbrances, claims, security
interests, restrictions (other than those disclosed in the
A-1
<PAGE>
Prospectus or imposed by Federal or state securities laws), stockholders'
agreements and voting trusts resulting from agreements known to such counsel to
which the Company is a party.
7. The shares of Common Stock issuable upon exercise of the Unit
Purchase Option and upon exercise of the Warrants issuable upon exercise of the
Unit Purchase Option have been duly and validly authorized for issuance, and
when issued pursuant to the terms of the Unit Purchase Option and/or the Warrant
Agreement, as the case may be, will be validly issued, fully paid and
non-assessable; the Warrants issuable upon exercise as provided in the Unit
Purchase Option, will constitute the valid and binding obligations of the
Company, subject to bankruptcy, insolvency and other laws of general
applications affecting the enforceability of creditors' rights and subject to
the discretionary nature of any remedies in the nature of equitable relief in
any legal or equitable action.
8. Except as set forth in or contemplated by the Prospectus, to such
counsel's knowledge, as of the date of this Agreement, there were no outstanding
options, warrants or other rights providing for the issuance of any class of
capital stock of the Company, or any security convertible into, or exchangeable
for, any shares of any class of capital stock of the Company.
9. To such counsel's knowledge, neither the filing of the Registration
Statement nor the offering of the Units as contemplated by this Agreement gives
rise to any registration rights or other rights, other than those which have
been waived or satisfied, relating to the registration under the Act of any
shares of Common Stock.
10. The certificates evidencing the shares of Common Stock and Warrants
are in proper legal form.
11. To such counsel's knowledge, no consents, approvals, authorizations
or orders of agencies, officers or other regulatory authorities are necessary
for the valid authorization, issue or sale of the Securities pursuant to this
Agreement, except such as may be required under the Securities Act, the Exchange
Act or state securities or blue sky laws or pursuant to the NASD's rules,
regulations and policies or as required under the regulations of the Nasdaq
SmallCap Market.
12. This Agreement, the Warrant Agreement and the Unit Purchase Option
have been duly authorized and executed by the Company and constitute the valid
and binding agreements of the Company, enforceable in accordance with their
respective terms, subject to bankruptcy, insolvency and other laws of general
applications affecting the enforceability of creditors' rights and subject to
the discretionary nature of any remedies in the nature of equitable relief and
except that no opinion is given with respect to the provisions of Paragraph 7 of
this Agreement.
13. The Company has corporate power and authority to authorize, issue
and sell the Securities on the terms and conditions set forth in this Agreement,
the Warrant Agreement, the Unit Purchase Option, as the case may be, and in the
Registration Statement and in the Prospectus, and the execution and delivery of
this Agreement, the consummation of the transactions contemplated by this
Agreement, the Warrant Agreement and the Unit Purchase Option and compliance by
the Company with the terms of this Agreement, the Warrant Agreement and the Unit
Purchase Agreement will not conflict with, or constitute a default under, the
certificate of incorporation or by-laws of the Company or any indenture,
mortgage, deed or trust, note or any
A-2
<PAGE>
other agreement or instrument known to such counsel to which the Company or the
Subsidiary is a party or by which they or their respective businesses or their
properties are bound, or, to such counsel's knowledge, any law, order, rule or
regulation, writ, injunction or decree of any government, governmental
instrumentality, or court having jurisdiction over the Company, the Subsidiary
or their respective businesses or properties.
14. Such counsel knows of no actions, suits or proceedings at law or in
equity of a material nature pending, or to such counsel's knowledge, threatened,
against the Company before or by any state commission, regulatory body, or
administrative agency or other governmental body, wherein an unfavorable ruling,
decision or finding would materially adversely affect the business or financial
condition of the Company or which question either (a) the validity of the
issuance of the Securities, the execution of the Underwriting Agreement, the
Warrant Agreement or the Unit Purchase Option by the Company, or (b) any action
taken or to be taken by the Company pursuant to the Underwriting Agreement, the
Warrant Agreement or the Unit Purchase Option, which are not disclosed in or
contemplated by the Prospectus.
15. The Registration Statement has become effective under the Act.
Furthermore, the Registration Statement and the Prospectus (except as
to the financial statements and other financial, statistical and accounting
information contained therein or omitted therefrom, as to which no opinion is
expressed), comply as to form in all material respects with the requirements of
the Act and the rules and regulations (the "Rules") of the Commission under the
Securities Act. In passing upon the form of such documents, such counsel has
assumed the correctness and completeness of the statements made or included
therein by the Company and take no responsibility for the accuracy, completeness
or fairness of the statements contained therein except insofar as such
statements relate to the description of the Securities or relate to such
counsel. However, in the course of the preparation by the Company of the
Registration Statement and the Prospectus, such counsel had conferences with
officers and directors of the Company in connection with the preparation of the
Registration Statement and Prospectus, and, without independently verifying the
accuracy, completeness or fairness of the statements contained in the
Registration Statement and the Prospectus and relying on the Company's officers
regarding materiality, no facts have come such counsel's attention which gave
such counsel reason to believe that the Registration Statement, as of the
effective date thereof (except as to the financial statements and other
financial, statistical and accounting information contained therein or omitted
therefrom, as to which no opinion is expressed), contained any untrue statement
of a material fact or omitted to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading; or that the Prospectus
(except as to the financial statements and other financial, statistical and
accounting information contained therein or omitted therefrom, as to which no
opinion is expressed) contained any untrue statement of a material fact or omits
to state a material fact necessary to make the statements therein, in the light
of the circumstances under which they were made, not misleading. Such counsel
does not know of any documents which are required to be filed as exhibits to the
Registration Statement which have not been so filed.
A-3
<PAGE>
SCHEDULE I
Underwriting Agreement Dated ___________, 2000
Underwriter Number of Firm
Units to be Purchased
HD Brous & Co., Inc.
Solid ISG Capital Markets, L.L.C.
A-4
<PAGE>
UPO- Option to Purchase
Units
ACTIVEWORLDS.COM, INC.
Unit Purchase Option
--------------------
Dated: , 2000
THIS CERTIFIES THAT and its registered assigns (herein
sometimes called the "Holder") is entitled to purchase from Activeworlds.com,
Inc., a Delaware corporation (hereinafter called the "Company"), at the price
and during the period as hereinafter specified, up to Units
("Units"), each Unit consisting of one share of the Company's Common Stock, par
value $.001 per share ("Common Stock"), and one Series B Redeemable Common Stock
Purchase Warrant of the Company (a "Warrant" and collectively, the "Warrants")
to purchase one (1) share of Common Stock. Each Warrant to purchase one share of
Common Stock entitles the holder to purchase one share of Common Stock at an
exercise price of and /100 dollars ($ ) per share, subject to
adjustment as provided in the Warrant Agreement, as hereinafter defined.
1. This option (this "Option"), together with options of like tenor,
constituting in the aggregate options (the "Options") to purchase an aggregate
of one hundred twenty thousand (120,000) Units, was originally issued pursuant
to an underwriting agreement (the "Underwriting Agreement") between the Company
and the several underwriters (the "Underwriters"), of which HD Brous & Co., Inc.
("Brous") and Solid ISG Capital Markets, LLC ("Solid ISG") are the
representatives (the "Representatives"), in connection with a public offering of
one million two hundred thousand (1,200,000) Units, at an aggregate price of $10
for the Options. Except as specifically otherwise provided in this Option, the
Common Stock and the Warrants issued upon exercise of the Option shall bear the
same terms and conditions as described under the captions "Description of
Securities" and "Underwriting" in the Company's Registration Statement on Form
SB-2, File No. 333-85095 (the "Registration Statement") which was declared
effective by the Securities and Exchange Commission (the "Commission") on ,
2000 (the "Effective Date"). Pursuant to the Underwriting Agreement, Options to
purchase one hundred twenty thousand (120,000) Units are being issued to the
Representatives, the Underwriters and/or
<PAGE>
selected dealers, as the Representatives shall determine. The Holder shall have
registration rights under the Securities Act of 1933, as amended (the
"Securities Act"), for this Option, the Units issuable upon exercise of this
Option, the Common Stock and the Warrants included in the Units issuable upon
exercise of this Option and the shares of Common Stock issuable upon exercise of
the Warrants, as more fully described in Paragraph 7 of this Option. The
Warrants issuable upon exercise of this Option shall be issued pursuant to the
warrant agreement (the "Warrant Agreement") dated as of , 2000, between the
Company and , as warrant agent.
2. During the five-year period commencing on the Effective Date until
5:30 P.M., New York City time, on , 2005, inclusive (the "Term"), the Holder
shall have the option to purchase the Units pursuant to this Option at a price
of and /100 dollars ($ ) per Unit (the "Initial Exercise Price"),
representing 165% of the initial public offering price of the Units offered
pursuant to the Registration Statement.
3. This Option may be exercised at any time during the Term, in whole
or in part, by the surrender of this Option (with the purchase form at the end
of this Option properly executed) at the principal executive office of the
Company (or such other office or agency of the Company as it may designate by
notice in writing to the Holder at the address of the Holder appearing on the
books of the Company) accompanied by payment to the Company of the Option
Exercise Price, as hereinafter defined, for the number of Units specified in the
above-mentioned purchase form together with applicable stock transfer taxes, if
any, and delivery to the Company of a duly executed agreement (an "Assumption
Agreement"), which may be incorporated in the purchase form, signed by the
person(s) designated in the purchase form as the person in whose name the
underlying securities are to be issued (the "Purchaser") to the effect that such
person(s) agree(s) to be bound by the provisions of Paragraphs 8(b), (c) and (d)
of this Option. This Option shall be deemed to have been exercised, in whole or
in part to the extent specified in said purchase form, immediately prior to the
close of business on the date this Option is surrendered and payment is made in
accordance with the foregoing provisions of this Paragraph 3, and the person or
persons in whose name or names the certificates for shares of Common Stock and
Warrants shall be issuable upon such exercise shall become the holder or holders
of record of such Common Stock
- 2 -
<PAGE>
and Warrants at that time and date. The Common Stock and Warrants and the
certificates for the Common Stock and Warrants so purchased shall be delivered
to the Holder or other Purchaser within a reasonable time, not exceeding ten
(10) days, after this Option shall have been so exercised; provided, that the
Company shall not be required to deliver certificates for the securities unless
the Purchaser shall have delivered the Assumption Agreement to the Company. If
the Option is exercised subsequent to expiration or redemption of the Warrants
(including any extensions thereof), the Holder of the Option shall exercise the
Warrants contemporaneously with the exercise of the Option.
4. Neither this Option nor the Common Stock or Warrants comprising the
Units issuable upon exercise of this Option nor the Common Stock issuable upon
exercise of such Warrants shall be transferred, sold, assigned, or hypothecated
during the one-year period commencing on the Effective Date, except that such
securities may be transferred during such period to successors of the Holder,
and may be assigned in whole or in part to any person who is an officer or
member of either of the Representatives, a member of the underwriting or selling
group or any officer, partner or member of the underwriting or selling group.
Any person who is a permitted transferee may transfer the Option by will or
trust or pursuant to the laws of descent and distribution. Commencing one year
from the Effective Date, this Option and the securities issuable upon exercise
of this Option may be transferred without restriction as long as such transfer
is in compliance with applicable Federal and state securities laws. Any such
assignment during such period shall be effected by the Holder executing the form
of assignment at the end of this Option and surrendering this Option for
cancellation at the office of the Company or other office or agency as provided
in Paragraph 3 of this Agreement accompanied by a certificate (signed by an
officer of the Holder if the Holder is a corporation), stating that each
transferee is a permitted transferee under this Paragraph 4; whereupon the
Company shall issue, in the name or names specified by the Holder (including the
Holder) a new Option or Options of like tenor and representing in the aggregate
rights to purchase the same number of Units as are purchasable hereunder.
5. The Company covenants and agrees that all shares of Common Stock
which are sold as part of the Units purchased pursuant to this Option, and all
shares of Common Stock
- 3 -
<PAGE>
which may be issued upon exercise of the Warrants have been, and will be, duly
authorized and, will, upon issuance, be duly and validly issued, fully paid and
nonassessable and no personal liability will attach to the holder thereof. The
Company covenants and agrees that the Warrants which are issued as part of the
Units purchased pursuant to this Option have been duly authorized and, when
issued and delivered, will have been duly executed, issued and delivered and
will constitute the valid and legally binding obligations of the Company
enforceable in accordance with their terms. The Company further covenants and
agrees that during the period within which this Option may be exercised, the
Company will at all times have authorized and reserved a sufficient number of
shares of its Common Stock to provide for the exercise of this Option and that
it will have authorized and reserved a sufficient number of shares of Common
Stock for issuance upon exercise of the Warrants.
6. This Option shall not entitle the Holder to any voting rights or
other rights as a stockholder of the Company.
7. (a) The Company shall advise the Holder, whether the Holder
holds this Option or has exercised this Option and holds Units or any of the
underlying securities, as hereinafter defined, by written notice (certified or
registered mail) at least twenty (20) days prior to the filing of any
post-effective amendment to the Registration Statement or of any new
registration statement or post-effective amendment thereto under the Securities
Act covering any securities of the Company (other than a registration statement
on Form S-8, S-4 or subsequent similar forms), and will during the term of the
Option and for a period of two years thereafter, upon the request of the Holder,
at the Company's cost and expense, include in any such post-effective amendment
(if permitted by law) or registration statement, such information as may be
required to permit a public offering of all or any of the Units underlying this
Option, the Common Stock or Warrants issued as part of the Units, or the Common
Stock issuable upon the exercise of the Warrants (collectively "underlying
securities"). In connection with any such registration statement, the Company
shall supply prospectuses, use its best efforts to qualify any of the described
securities for sale in such states as such Holder reasonably designates and
furnish indemnification in the manner provided in Paragraph 8 of this Option.
The Holder(s) participating
- 4 -
<PAGE>
in any such registration shall furnish information and indemnification as set
forth in said Paragraph 8.
(b) In connection with any underwritten public offering
relating solely to an offering of the Company's securities by the Company, the
Holder will agree to defer any sale of such securities for up to ninety (90)
days from the effective date of the applicable registration statement, unless
the applicable registration statement is filed pursuant to Paragraph 7(c) of
this Option, provided that the Representatives have requested such deferral on
the grounds that the offering by the Company would be materially adversely
affected by the earlier sale of such securities and the Company agrees to keep
the registration statement current for nine (9) months after the effective date
of the registration statement or such longer period as such registration
statement is otherwise being kept effective. This Paragraph 7(b) shall not be
applicable with respect to any registration statement filed pursuant to
Paragraph 7(c) of this Option.
(c) If any majority holder (as defined below) shall give
notice to the Company at any time to the effect that such holder desires to
register under the Securities Act the Units or any of the underlying securities
under such circumstances that a public distribution (within the meaning of the
Securities Act) of any such securities will be involved then the Company will
promptly, but no later than thirty (30) business days after date such notice is
given (the "Notice Date"), time being of the essence, file a post-effective
amendment to the Registration Statement or a new registration statement pursuant
to the Securities Act, to the end that the Units and/or any of the underlying
securities, as the Holder shall determine, may be publicly sold under the
Securities Act as promptly as practicable thereafter and the Company will use
its best efforts to cause such registration to become effective; provided, that
such holder shall furnish the Company with appropriate written information as to
the Holder and the proposed plan of distribution and indemnification as set
forth in Paragraph 8. The majority holder may, at its option, request the filing
of a post-effective amendment to the Registration Statement or a new
registration statement under the Securities Act on two occasions during the term
of the Option. Within ten (10) business days after receiving any such notice
pursuant to this Paragraph 7(c), the Company shall give notice to the other
Holders of the Options, advising that the Company is proceeding with such
post-effective amendment or registration statement and offering to include
therein the Units and/or the underlying securities of the other Holders,
provided that they shall furnish the Company with such appropriate information
(relating to the intentions of such holders) in connection therewith
- 5 -
<PAGE>
as the Company shall request in writing. The costs and expense of the first such
post-effective amendment or new registration statement shall be borne by the
Company, except that each Holder shall bear the fees of his own counsel and/or
accountants and any underwriting discounts or commissions applicable to any of
the securities sold by him. The costs and expenses of the second such
registration statement shall be borne by the Holders. The Company will maintain
and keep such registration statement current under the Securities Act for a
period of at least nine (9) months from the effective date of such registration
statement. The Company shall supply prospectuses, use its best efforts to
qualify any of the described securities for sale in such states as such holder
reasonably designates and furnish indemnification in the manner provided in
Paragraph 8 of this Agreement.
(d) If, on the date of receipt by the Company of notice from
any majority holder requesting registration of Units and/or any of the
underlying securities pursuant to Paragraph 7(c) of this Option, the Company has
previously notified the Holder pursuant to Paragraph 7(a) of this Option that
the Company intends to file a post-effective amendment to the Registration
Statement or a new registration statement under the Securities Act covering any
securities of the Company and offering to include the Units and/or the
underlying securities of the Holder in such Registration Statement or provides
notice to the Holder pursuant to Paragraph 7(a) of this Option within seven (7)
days after receipt of such notice from any majority holder, the Holder agrees
that the demand registration request shall be withdrawn and that if he so
elects, he may participate in the Registration Statement filed by the Company
pursuant to Paragraph 7(a) of this Option; provided that (x) the Registration
Statement or post-effective amendment to the Registration Statement covering the
Holder's Units and/or underlying securities is filed within sixty (60) days and
declared effective within one hundred fifty (150) days after the earlier of the
date of such notice to the Company from the majority holder pursuant to
Paragraph 7(c) or the date of such notice to the Holder from the Company
pursuant to Paragraph 7(a); and (y) the majority holder will not be deemed to
have exercised any demand registration right pursuant to Paragraph 7(c) of this
Option.
(e) The term "majority holder" as used in this Paragraph 7
shall mean the holder of at least a majority of the Common Stock (including the
Common Stock issued or issuable upon exercise of the Warrants) for which the
Options (considered in the aggregate) are exercisable and shall include any
owner or combination of owners of such securities, which ownership shall be
- 6 -
<PAGE>
calculated by determining the number of shares of Common Stock held by such
owner or owners resulting from the exercise of any Option after giving effect to
any stock dividend, split, reverse split or other recapitalization, the number
of shares of Common Stock issuable upon exercise of any unexercised Option, the
number of shares of Common Stock issuable upon exercise of any then outstanding
Warrants issued upon exercise of any Option, and the number of shares of Common
Stock issuable upon exercise of any Warrants issuable upon exercise of any
Option.
(f) In connection with any registration described in Paragraph
7(a) of this Option, the Holder may request inclusion of the Option in such
registration statement; provided, however, that the Company shall not be
required to maintain any public market in the Options.
8. (a) Whenever, pursuant to Paragraph 7 of this Option, a
registration statement relating to this Option or any underlying securities is
filed under the Securities Act or is amended or supplemented, the Company will
indemnify and hold harmless each holder of the securities covered by such
registration statement, amendment or supplement (such holder being hereinafter
called the "Distributing Holder"), and each person, if any, who controls (within
the meaning of the Securities Act) the Distributing Holder, and each underwriter
(within the meaning of the Securities Act) of such securities and each person,
if any, who controls (within the meaning of the Securities Act) any such
underwriter, against any losses, claims, damages or liabilities, joint or
several, to which the Distributing Holder, any such controlling person or any
such underwriter may become subject, under the Securities Act or otherwise,
insofar as such losses, claims, damages or liabilities (or action in respect
thereof) arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in any such registration statement or
any preliminary prospectus or final prospectus constituting a part thereof or
any amendment or supplement thereto, or arise out of or are based upon the
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading; and will reimburse the Distributing Holder
and each such controlling person and underwriter for any legal or other expenses
reasonably incurred by the Distributing Holder or such controlling person or
underwriter in connection with investigating or defending any such loss, claim,
damage, liability or action; provided, however, that the Company will not be
liable in any such case to the extent that any such loss, claim, damage or
liability arises out of or is based upon an untrue statement or alleged
- 7 -
<PAGE>
untrue statement or omission or alleged omission made in said registration
statement, said preliminary prospectus, said final prospectus or said amendment
or supplement in reliance upon and in conformity with written information
furnished by such Distributing Holder or for any other Distributing Holder,
expressly for use in the preparation thereof.
(b) The Distributing Holder will indemnify and hold harmless
the Company, each of its directors, each of its officers who have signed said
registration statement and such amendments and supplements thereto, each person,
if any, who controls the Company (within the meaning of the Securities Act) and
each underwriter participating in such offering (within the meaning of the
Securities Act) and each person, if any, who controls (within the meaning of the
Securities Act) any such underwriter, against any losses, claims, damages or
liabilities to which the Company or any such director, officer, controlling
person or underwriter may become subject, under the Securities Act or otherwise,
insofar as such losses, claims, damages or liabilities arise out of or are based
upon any untrue or alleged untrue statement of any material fact contained in
said registration statement, said preliminary prospectus, said final prospectus,
or said amendment or supplement, or arise out of or are based upon the omission
or the alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, in each case
to the extent, but only to the extent, that such untrue statement or alleged
untrue statement or omission or alleged omission was made in said registration
statement, said preliminary prospectus, said final prospectus or said amendment
or supplement in reliance upon and in conformity with written information
furnished by such Distributing Holder expressly for use in the preparation
thereof; and will reimburse the Company or any such director, officer or
controlling person for any legal or other expenses reasonably incurred by them
in connection with investigating or defending any such loss, claim, damage,
liability or action.
(c) Promptly after receipt by an indemnified party under this
Paragraph 8 of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against any indemnifying
party, give the indemnifying party notice of the commencement thereof.
(d) In case any such action is brought against any indemnified
party, and it notifies an indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate in, and, to the extent that
it may wish, join with any other indemnifying party similarly
- 8 -
<PAGE>
notified to assume the defense thereof, with counsel reasonably satisfactory to
such indemnified party, and, after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party will not be liable to such indemnified party under this
Paragraph 8 for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof other than reasonable
costs of investigation; provided, that if the defendants in any such action
include both the indemnified party and the indemnifying party and either (i) the
indemnifying party or parties agree, or (ii) representation of both the
indemnifying party or parties and the indemnified party or parties by the same
counsel is inappropriate under applicable standards of professional conduct
because of actual or potential conflicting interests between them, then the
indemnified party or parties shall have the right to select separate counsel to
assume such legal defense and to otherwise participate in the defense of such
action. The indemnifying party will not be liable to such indemnified party
under this Paragraph 8 for any legal or other expenses subsequently incurred by
such indemnified party in connection with the defense thereof unless (i) the
indemnified party shall have employed counsel in connection with the assumption
of legal defenses in accordance with the proviso to the immediately preceding
sentence (it being understood, however, that the indemnifying party shall not be
liable for the expenses of more than one separate counsel approved by the
indemnifying party for all indemnified parties), (ii) the indemnifying party
shall not have employed counsel to represent the indemnified party within a
reasonable time after notice of commencement of the action, or (iii) the
indemnifying party has authorized the employment of counsel for the indemnified
party at the expense of the indemnifying party. In no event shall an
indemnifying party be liable under this Paragraph 8 for any settlement, effected
without its written consent, which consent shall not be unreasonably withheld,
of any claim or action against an indemnified party.
9. The number and kind of securities purchasable upon the exercise of
the Option shall be subject to adjustment from time to time upon the happening
of certain events as hereinafter provided, except that, unless the Company
elects to issue additional Warrants pursuant to Paragraph 9(i) of the Warrant
Agreement, the provisions of this Paragraph 9 shall not apply to the Warrants
issuable upon exercise of this Option. The number and kind of securities
purchasable upon exercise of the Option shall be subject to adjustment (with no
change in the Option Exercise Price) as follows:
- 9 -
<PAGE>
(a) In case the Company shall pay a dividend or make a
distribution or a split with respect to its shares of Common Stock in shares of
Common Stock, subdivide or reclassify its outstanding Common Stock into a
greater number of shares, or combine or reclassify its outstanding Common Stock
into a smaller number of shares or otherwise effect a reverse split, the number
of shares of Common Stock issuable upon exercise of this Option shall, as of the
time of the record date for such dividend or distribution or of the effective
date of such subdivision, combination or reclassification, be proportionately
adjusted so that the Holder of any Option exercised after such date shall be
entitled to receive the aggregate number and kind of shares which, if such
Option had been exercised immediately prior to such time, he would have owned
upon such exercise and such shares as he would have been entitled to receive
upon such dividend, subdivision, combination or reclassification. Such
adjustment shall be made successively whenever any event listed in this
Paragraph 9(a) shall occur.
(b) No adjustment in the Option Exercise Price shall be
required unless such adjustment would require an increase or decrease of at
least five cents ($.05) in such price; provided, however, that any adjustments
which by reason of this Paragraph 9(b) are not required to be made shall be
carried forward and taken into account in any subsequent adjustment. All
calculations under this Paragraph 9 shall be made to the nearest cent or to the
nearest one-hundredth of a share of Common Stock as the case may be. Anything in
this Paragraph 9 to the contrary notwithstanding, the Company shall be entitled,
but shall not be required, to make such changes in the Option Exercise Price, in
addition to those required by this Paragraph 9, as it in its discretion shall
determine to be advisable in order that any dividend or distribution in shares
of Common Stock, subdivision, reclassification or combination of Common Stock,
issuance of warrants to purchase Common Stock or distribution of evidences of
indebtedness or other assets (excluding cash dividends) referred to hereinabove
in this Paragraph 9 hereafter made by the Company to the holders of its Common
Stock shall not result in any tax to the holders of its Common Stock or
securities convertible into Common Stock.
(c) Whenever the Option Exercise Price is adjusted, as herein
provided, the Company shall promptly cause a notice setting forth the adjusted
Option Exercise Price and adjusted number of shares of Common Stock issuable
upon exercise of the Option as to each
- 10 -
<PAGE>
Unit to be mailed to the Holders at their last address appearing in the Option
register maintained by the Company, and shall cause a certified copy thereof to
be mailed to its transfer agent. The Company may retain a firm of independent
public accountants of recognized standing selected by the Board of Directors
(who may be the regular accountants employed by the Company) to make any
computation required by this Paragraph 9, and a certificate signed by such firm
shall be evidence of the correctness of such adjustment.
(d) In the event that at any time, as a result of an
adjustment made pursuant to Paragraph 9(a) of this Option, the Holder of any
Option thereafter shall become entitled to receive any shares of the Company,
other than Common Stock, thereafter the number of such other shares so
receivable upon exercise of any Option shall be subject to adjustment from time
to time in a manner and on terms as nearly equivalent as practicable to the
provisions with respect to the Common Stock contained in this Paragraph 9.
(e) Irrespective of any adjustments in the Option Exercise
Price or the number or kind of shares purchasable upon exercise of Options,
Options theretofore or thereafter issued may continue to express the same price
and number and kind of shares as are stated in the similar Options initially
issuable pursuant to this Agreement.
IN WITNESS WHEREOF, the Company has caused this Option to be signed by
its duly authorized officers this day of , 2000.
ACTIVEWORLDS.COM, INC.
Attest:
By:______________________
Richard F. Noll
President
_______________________________
, Secretary
- 11 -
<PAGE>
PURCHASE FORM
(To be signed only upon exercise of Option)
The undersigned, the holder of the foregoing Option, hereby irrevocably
elects to exercise the purchase rights represented by such Option for, and to
purchase thereunder, Units of Activeworlds.com, Inc., each Unit consisting of
one share of Common Stock and one Series B Redeemable Common Stock Purchase
Warrant (the "Warrants") to purchase one (1) share of Common Stock and herewith
makes payment of $ thereof, agrees to be bound by the provisions of Paragraphs
8(b), (c) and (d) of the Option, and requests that the certificates for shares
of Common Stock and Warrants be issued in the name(s) of, and delivered to
__________________________________________whose address(es) is
(are)_________________________________________________________________________
______________________________________________________________________________
_______.
Dated: , 20
_________________________
By:______________________
Address:____________________________________
____________________________________
- 12 -
<PAGE>
TRANSFER FORM
(To be signed only upon transfer of the Option)
For value received, the undersigned hereby sells, assigns, and
transfers unto the right to purchase Units represented by the foregoing Option
to the extent of Units, and appoints attorney to
transfer such rights on the books of ACTIVEWORLDS.COM, INC. with full power of
substitution in the premises.
Dated: , 20
__________________________________
By:_____________________________
Signature Medallion Guaranteed
___________________
- 13 -
<PAGE>
EXHIBIT 3.6.1
BYLAWS
OF
ACTIVEWORLDS.COM, INC.
Restated as of March 14, 2000
<PAGE>
ARTICLE I
STOCKHOLDERS
1.1 Annual Meetings. Annual meetings of Stockholders for the election
of Directors and for such other business as may be stated in the notice of the
meeting, shall be held at such place, either within or without the State of
Delaware, and at such time and dates as the Board of Directors, by resolution,
shall determine and as set forth in the notice of the meeting. At each annual
meeting, the Stockholders entitled to vote shall elect a Board of Directors and
may transact such other corporate business as shall be stated in the notice of
the meeting.
1.2 Other Meetings. Meetings of Stockholders for any purpose other than
the election of Directors may be held at such time and place, within or without
the State of Delaware, as shall be stated in the notice of the meeting.
1.3 Voting. Each Stockholder entitled to vote in accordance with the
terms and provisions of the Certificate of Incorporation and these Bylaws shall
be entitled to one vote, in person or by proxy, for each share of stock entitled
to vote held by such Stockholder, but no proxy shall be voted after three years
from its date unless such proxy provides for a longer period. Upon the demand of
any Stockholder, the vote for Directors and upon any question before the meeting
shall be by ballot. All elections for Directors shall be decided by plurality
vote; all other questions should be decided by majority vote except as otherwise
provided by the Certificate of Incorporation or the laws of the State of
Delaware.
1.4 Stockholder List. The officer who has charge of the stock ledger of
the Corporation shall at least ten days before each meeting of Stockholders
prepare a complete alphabetical addressed list of the Stockholders entitled to
vote at the ensuing election, with the number of shares held by each. Said list
shall be open to the examination of any Stockholder, for any purpose germane to
the meeting, during ordinary business hours, for a period of at least ten days
prior to the meeting, either at a place within the city where the meeting is to
be held, which place shall be specified in the notice of the meeting, or, if not
so specified, at the place where the meeting is to be held. The list shall be
available for inspection at the meeting.
1.5 Quorum. Except as otherwise required by law, by the Certificate of
Incorporation or these Bylaws, the presence, in person or by proxy, of
Stockholders holding a majority of all common stock of the Corporation entitled
to vote shall constitute a quorum at all meetings of the Stockholders. In case
of quorum shall not be present at any meeting, a majority in interest of the
Stockholders entitled to vote thereat, present in person or by proxy, shall have
power to adjourn the meeting from time to time, without notice other than
announcement at the meeting, until the requisite amount of stock entitled to
vote shall be present. At any such adjourned meeting at which the requisite
-2-
<PAGE>
amount of stock entitled to vote shall be represented, any business may be
transacted which might have been transacted at the meeting as originally
noticed; but only those Stockholders entitled to vote at the meeting as
originally noticed shall be entitled to vote at any adjournment or adjournments
thereof.
1.6 Special Meetings. Special meetings of the Stockholders, for any
purpose, unless otherwise prescribed by statute or by the Certificate of
Incorporation, may be called by the President and shall be called by the
President or Secretary at the request in writing of a majority of the Directors
or 10% of the Stockholders entitled to vote. Such request shall state the
purpose of the proposed meeting.
1.7 Notice of Meetings. Written notice, stating the place, date and
time of the meeting, and the general nature of the business to be considered,
shall be given to each Stockholder entitled to vote thereat at his address as it
appears upon the books of the Corporation, not less than ten nor more than sixty
days before the date of the meeting.
1.8 Business Transacted. No business other than that stated in the
notice shall be transacted at any meeting without the unanimous consent of all
of the Stockholders entitled to vote thereat.
1.9 Action Without Meeting. Except as otherwise provided by the
Certificate of Incorporation, whenever the vote of Stockholders at a meeting
thereof is required or permitted to be taken in connection with any corporate
action by any provisions of the statutes or the Certificate of Incorporation or
of these Bylaws, the meeting and vote of Stockholders may be dispensed with, if
all the Stockholders who would have been entitled to vote upon the action if
such meeting were held, shall consent in writing to such corporate action being
taken. Until such time as the Corporation is a reporting company pursuant to the
Securities and Exchange Act of 1934, any action permitted by the preceding
sentence may be taken by a majority of the Stockholders who would have been
entitled to vote upon the action if such meeting were held.
ARTICLE II
BOARD OF DIRECTORS
2.1 Powers. The business of the Corporation shall be managed by a Board
of Directors who may exercise all the powers of the Corporation except as
otherwise provided by law, by the Certificate of Incorporation or by these
By-Laws. In the event of a vacancy in the Board of Directors, the remaining
Directors, except as otherwise provided by law, may exercise the powers of the
full Board until the vacancy is filled.
2.2 Number and Term. The number of Directors shall be no fewer than one
or such other minimum number as is required by law. The Directors shall be
elected at the annual meeting of the Stockholders and each Director shall be
elected to serve until his successor shall be elected and shall qualify.
-3-
<PAGE>
2.3 Resignations. Any Director, member of a committee or other officer
may resign at any time. Such resignation shall be made in writing, and shall
take effect at the time specified therein, and if no time be specified, at the
time of its receipt by the President or Secretary. The acceptance of a
resignation shall not be necessary to make it effective.
2.4 Vacancies. If the office of any Director, member of a committee or
other officer becomes vacant, the remaining Directors in office, though less
than a quorum by a majority vote, may appoint any qualified person to fill such
vacancy, who shall hold such office for the unexpired term and until his
successor shall be duly chosen.
2.5 Removal. Any Director or Directors may be removed from office with
or without cause at any time by the affirmative vote of the holders of a
majority of the shares of stock outstanding and entitled to vote, at a special
meeting of the Stockholders called for the purpose and the vacancies thus
created may be filled, at the meeting held for the purpose of removal, by the
affirmative vote of a majority in interest of the Stockholders entitled to vote.
2.6 Increase of Number. The number of Directors may be increased by
amendment of these Bylaws by the affirmative vote of a majority of the
Directors, though less than a quorum, or, by the affirmative vote of a majority
in interest of the Stockholders, at the annual meeting or at a special meeting
called for such purpose, and by like vote the additional Directors may be chosen
at such meeting to hold office until the next annual election and until their
successors are elected and qualify.
2.7 Special Meetings. Special meetings of the Directors may be held at
any time and place designated in a call by the Chairman of the Board of
Directors, President, Treasurer or two or more Directors or one Director in the
event there is only a single Director in office.
2.8 Action By Consent. Any action required or permitted to be taken at
any meeting of the Directors or any committee may be taken without a meeting if
all the Directors or committee members consent to the action in writing and the
written consents are filed with the records of the meetings of the Directors or
such committee. Each consent shall be treated for all purposes as a vote of the
Directors or committee at a meeting.
2.9 Meetings by Telephone Conference Calls. Directors or members or any
committee designated by the Directors may participate in a meeting of the
Directors or such committee by means of a conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other at the same time and participation by such means
shall constitute presence in person at a meeting.
2.10 Quorum of Directors. At any meeting of the Directors a majority of
the Directors at the time in office shall constitute a quorum, but a lesser
number may adjourn any meeting from time to time without further notice. Unless
otherwise provided by law or by the By-Laws, business may be transacted by vote
of a majority of those in attendance at any meeting at which there is a quorum.
-4-
<PAGE>
2.11 Action at Meeting. At any meeting of the Board of Directors at
which a quorum is present, the vote of a majority of those present shall be
sufficient to take any action, unless a different vote is specified by law, by
the Certificate of Incorporation or by these Bylaws.
2.12 Committees. The Directors may, by unanimous vote of the Directors
then in office, elect from their number an executive or other committees and may
by like vote delegate thereto some or all of their powers except those which by
law, the Certificate of Incorporation or these By-Laws they are prohibited from
delegating. Except as the Directors may otherwise determine, any such committee
may make rules for the conduct of its business, but unless otherwise provided by
the Directors or in such rules, its business shall be conducted as nearly as may
be in the same manner as is provided by these By-Laws for the Directors. The
Board of Directors shall have the power at any time to fill vacancies in any
such committee, to change its membership or to discharge the committee.
2.13 Compensation of Directors. Directors may be paid such compensation
for their services and such reimbursement for expenses of attendance at meetings
as the Board of Directors may from time to time determine. No such payment shall
preclude any Director from serving the Corporation in any other capacity and
receiving compensation therefor.
ARTICLE III
OFFICERS
3.1 Enumeration. The Officers of the Corporation shall consist of a
President, a Treasurer, a Secretary, and such other Officers, including one or
more Vice Presidents, Assistant Treasurers, Assistant Secretaries as the
Directors may determine.
3.2 Election. The President, Treasurer and Secretary shall be elected
annually by the Directors at their first meeting following the annual meeting of
Stockholders. Other Officers may be chosen by the Directors at such meeting or
at any other meeting.
3.3 Qualification. The President may, but need not be a Director. No
officer need be a Stockholder. Any two or more offices may be held by the same
person. Any officer may be required by the Directors to give bond for the
faithful performance of his duties to the Corporation in such amount and with
such sureties as the Directors may determine.
3.4 Tenure. Except as otherwise provided by law, by the Certificate of
Incorporation or by these By-Laws, the President, Treasurer and Secretary shall
hold office until the first meeting of the Directors following the annual
meeting of Stockholders and thereafter until his successor is chose and
qualified; and all other Officers shall hold office until the first meeting of
the Directors following the annual meeting of Stockholders, unless a shorter
term is specified in the vote choosing or appointing them.
-5-
<PAGE>
3.5 Resignation and Removal. Any officer may resign by delivering his
written resignation to the Corporation at its principal office or to the
President or Secretary, and such resignation shall be effective upon receipt
unless it is specified to be effective at some other time or upon the happening
of some other event. The Directors may remove any officer with or without cause
by a vote of a majority of the entire number of Directors then in office,
provided, that an officer may be removed with cause only after reasonable notice
and opportunity to be heard by the Board of Directors prior to action thereon.
3.6 Vacancies. The Board of Directors may fill any vacancy occurring in
any office for any reason and may, in its discretion, leave unfilled for such
period as it may determine any offices other than those of President, Treasurer
and Secretary. Each such successor shall hold office for the unexpired term of
his predecessor and until his successor is chose and qualified, or until he
sooner dies, resigns or is removed.
3.7 Chairman of the Board and Vice-Chairman of the Board. The Board of
Directors may appoint a Chairman of the Board. If the Board of Directors
appoints a Chairman of the Board, he shall perform such duties and possess such
powers as are assigned to him by the Board of Directors. If the Board of
Directors appoints a Vice-Chairman of the Board, he shall, in the absence or
disability of the Chairman of the Board, perform the duties and exercises the
powers of the Chairman of the Board and shall perform such other duties and
possess such other powers as may from time to time be vested in him by the Board
of Directors.
3.8 President. The President shall, subject to the direction of the
Board of Directors, have general charge and supervision of the business of the
Corporation. Unless otherwise provided by the Board of Directors, he shall
preside at all meetings of the Stockholders, and if he is a Director, at all
meetings of the Board of Directors. The President shall perform such other
duties and shall possess such other powers as the Board of Directors may from
time to time prescribe.
3.9 Chief Executive Officer. The Chief Executive Officer, if elected,
shall be responsible for supervising the management of the business and affairs
of the Corporation, subject to the directions and limitations imposed by the
Board of Directors, these By-laws and the Certificate of Incorporation of this
Corporation. All other officers shall report and be accountable to the Chief
Executive Officer, except as otherwise provided in these By-laws or as otherwise
determined by the Board of Directors. The Chief Executive Officer need not be
the principal executive officer of the Corporation.
3.10 Chief Operating Officer. The Chief Operating Officer, if elected,
shall be responsible for supervising the day to day operations of the business
and affairs of the Corporation, subject to the directions and limitations
imposed by the Board, the Chief Executive Officer and these By-laws, and shall
report to the Chief Executive Officer or to the Board of Directors, as the Board
of Directors shall determine. All other officers involved with the operations of
-6-
<PAGE>
the Corporation shall, to the extent of the Board of Directors shall determine,
report and be accountable to the Chief Operating Officer.
3.11 Chief Financial Officer. The Chief Financial Officer, if elected,
shall be responsible for supervising the Corporation's overall financial
planning and financial controls and shall be responsible for the maintenance of
the Corporation's books and records, subject to the directions and limitations
imposed by the Board, the Chief Executive Officer and these By-laws. All other
officers involved with the financial and accounting functions of the Corporation
shall report and be accountable to the Chief Financial Officer, and the Chief
Financial Officer shall report to the Chief Executive Officer or the Board of
Directors, as the Board of Directors shall determine.
3.12 Vice Presidents. Any Vice President shall perform such duties and
possess such powers as the Board of Directors or the President may from time to
time prescribe. In the event of the absence, inability or refusal to act of the
President, the Vice President (or if there shall be more than one, the Vice
Presidents in the order determined by the Board of Directors) shall perform the
duties of the President and when so performing shall have all the powers of and
be subject to all the restrictions upon the President. The Board of Directors
may assign to any Vice President the title of Executive Vice President, Senior
Vice President or any other title selected by the Board of Directors.
3.13 Treasurer and Assistant Treasurers. The Treasurer shall perform
such duties and shall have such powers as may from time to time be assigned to
him by the Board of Directors or the President. In addition, the Treasurer shall
perform such duties and have such powers as are incident to the office of
Treasurer, including without limitation the duty and power to keep and be
responsible for all funds and securities of the Corporation, to deposit funds of
the Corporation in depositories selected in accordance with these Bylaws, to
disburse such funds as ordered by the Board of Directors, to make proper
accounts of such funds, and to render as required by the Board of Directors
statements of all such transactions and the financial condition of the
Corporation.
The Assistant Treasurer shall perform such duties and posses such
powers as the Board of Directors, the President or the Treasury may from time to
time prescribe. In the event of the absence, inability or refusal to act of the
Treasurer, the Assistant Treasurer (or if there shall be more than one, the
Assistant Treasurers in the order determined by the Board of Directors) shall
perform the duties and exercise the powers of the Treasurer.
3.14 Secretary and Assistant Secretary. The Secretary shall give, or
cause to be given, notice of all meetings of Stockholders and Directors, and all
other notices required by law or these Bylaws, and in the case of his absence or
refusal or neglect so to do, any such notice may be given by any person
thereunto directed by the President, or by the Directors, or Stockholders, upon
whose requisition the meeting is called as provided in these Bylaws. The
Secretary shall attend all meetings of the Board of Directors and shall keep a
record of the meetings of the Directors in a book maintained for such purpose.
-7-
<PAGE>
The Secretary shall keep in safe custody the seal of the Corporation, and when
authorized by the Board of Directors, affix the same to any instrument requiring
it, and when so affixed, it shall be attested by his signature or by the
signature of any Assistant Secretary. He shall possess such other powers and
shall perform such other duties as the Board of Directors or the President may
from time to time prescribe.
Any Assistant Secretary shall perform such duties and possess such
powers as the Board of Directors, the President or the Secretary may from time
to time prescribe. In the event of the absence, inability or refusal to act of
the Secretary, the Assistant Secretary (or if there shall be more than one, the
Assistant Secretaries in the order determined by the Board of Directors) shall
perform the duties and exercise the powers of the Secretary.
3.15 Other Powers and Duties. Each officer shall, subject to these
By-Laws, has in addition to the duties and powers specifically set forth in
these By-Laws, such duties and powers as are customarily incident to his office,
and such duties and powers as the Directors may from time to time designate.
ARTICLE IV
CAPITAL STOCK
4.1 Certificate of Stock. Every holder of stock in the Corporation
shall be entitled to have a certificate, signed by, or in the name of the
Corporation by, the Chairman or Vice-Chairman of the Board of Directors, or the
President or a Vice-President and the Treasurer or an Assistant Treasurer, or
the Secretary of the Corporation, certifying the number of shares owned by him
in the Corporation. If the Corporation shall be authorized to issue more than
one class of stock or more than one series of any class, the designations,
preferences and relative, participating, optional or other special rights of
each class of stock or series thereof and the qualifications, limitations, or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate which the Corporation shall
issue to represent such class of series of stock, provided that, except as
otherwise provided in section 202 of the General Corporation Law of Delaware, in
lieu of the foregoing requirements, there may be set forth on the face or back
of the certificate which the Corporation shall issue to represent such class or
series of stock, a statement that the Corporation will furnish without charge to
each Stockholder who so requests the powers, designations, preferences and
relative, participating, optional or other special rights of each class of stock
or series thereof and the qualifications, limitations or restrictions of such
preferences or such rights. Where a certificate is countersigned (1) by a
transfer agent other than the Corporation or its employee, the signatures of
such Officers may be facsimiles.
4.2 Lost Certificates. New certificates of stock, may be issued in
place of any certificate therefore issued by the Corporation, alleged to have
been lost or destroyed, and the Directors may, in their discretion, require the
owner of the lost or destroyed certificate or his legal representatives, to give
the Corporation a bond, in such sum as they may direct, within the limits
permitted by law as the Directors may require for the protection of the
-8-
<PAGE>
Corporation of any transfer agent or registrar to indemnify the Corporation
against it on account of the alleged loss of any such new certificate.
4.3 Transfer of Shares. The shares of stock of the Corporation shall be
transferable only upon its books by the holders thereof in person or by their
duly authorized attorneys or legal representatives, and upon such transfer and
old certificates shall surrendered to the Corporation by the delivery thereof to
the person in charge of the stock and transfer books and ledgers, or to such
other persons as the Directors may designate, by who they shall be cancelled,
and new certificates shall thereupon be issued. A record shall be made of each
transfer and whenever a transfer shall be made for collateral security, and no
absolutely, it shall be so expressed in the entry of the transfer.
4.4 Stockholders Record Date. In order that the Corporation may
determine the Stockholders entitled to notice or to vote at any meeting of
Stockholders or any adjournment thereof, or to express consent to corporate
action in writing without a meeting, or entitled to receive payment of any
divided or other distribution or allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion or exchange of stock or
for the purpose of any other lawful action, the Board of Directors may fix, in
advance, a record date, which shall not be more than sixty nor less than ten
days before the day of such meeting, nor m ore than sixty days prior to any
other action. A determination of Stockholders or record entitled to notice of or
to vote at a meeting of Stockholders shall apply to any adjournment of the
meeting; provided, however, that the Board of Directors may fix a new record
date for the adjourned meeting.
4.5 Dividends. Subject to the provisions of the Certificate of
Incorporation the Board of Directors may, out of funds legally available
therefore at any regular or special meeting, declare dividends upon the capital
stock of the Corporation as and when any funds of the Corporation available for
dividends, such sum or sums as the Directors from time to time in their
discretion deem proper working capital or as a reserve fund to meet
contingencies or for equalizing dividends or for such other purposes as the
Directors shall deem conducive to the interests of the Corporation.
4.6 Seal. The corporate seal shall be circular in form and shall
contain the name of the Corporation, the year of its creation and the words
"CORPORATE SEAL DELAWARE." Said seal may be used by causing it or a facsimile
thereof to be impressed or affixed or otherwise reproduced.
4.7 Fiscal Year. The fiscal year of the Corporation shall be determined
by resolution of the Board of Directors.
4.8 Checks. All checks, drafts, or other orders for the payment of
money, notes or other evidences of indebtedness issued in the name of the
Corporation shall be signed by the officer or Officers, agent or agents of the
Corporation, and in such manner as shall be determined from time to time by
resolution of the Board of Directors.
-9-
<PAGE>
4.9 Notice and Waiver of Notice. Whenever any notice is required by
these Bylaws to be given, personal notice is not meant unless expressly stated,
and any notice so required shall be deemed to be sufficient if given by
depositing the same in the United States mail, postage prepared, addressed to
the person entitled thereto at his address as it appears on the records of the
Corporation, and such notice shall be deemed to have been given on the day of
such mailing. Stockholders not entitled to vote shall not be entitled to receive
notice of any meetings except as otherwise provided by statute.
Whenever any notice whatsoever is required to be given under the
provisions of any law, or under the provisions of the Certificate of
Incorporation of the Corporation or these Bylaws, a waiver thereof in writing
signed by the person or persons entitled to said notice, whether before or after
the time stated therein, shall be deemed proper notice.
ARTICLE V
INDEMNIFICATION
5.1 Power To Indemnify In Actions, Suits Or Proceedings Other Than
Those By Or In The Right Of The Corporation. Subject to Section 5.3 of this
Article V the Corporation shall indemnify any person who was or is a party of is
threatened to be made a party to any threatened, pending or completed action,
suite or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the Corporation) by reason of the
fact that he is or was a Director, officer, employee or agent of the
Corporation, or is or was serving at the request of the Corporation as a
Director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorney's
fees), judgements, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the Corporation and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction or of nolo contendere or its equivalent, shall not, of itself, create
a presumption that the person did not act in good faith and in manner which he
reasonably believed to be in or not opposed to the best interests of the
Corporation and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful.
5.2 Power To Indemnify In Actions, Suits Or Proceedings By Or In The
Right Of The Corporation. Subject to Section 5.3 of this Article V, the
Corporation shall indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action or suit by or in
the right of the Corporation to procure a judgment it is favor by reason or the
fact that he is or was a Director, officer, employee or agent of the
Corporation, or is or was serving at the request of the Corporation as a
Director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted in good faith and in a manner he
-10-
<PAGE>
reasonably believed to be in or not opposed to the best interests of the
Corporation; except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the Corporation unless and only to the extent that the Court of
Chancery or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnify for such expenses which the Court or Chancery or such other court
shall deem proper.
5.3 Authorization Of Indemnification. Any indemnification under this
Article V (unless ordered by a court) shall be made by the Corporation only as
authorized in the specific case upon a determination that indemnification of the
Director, officer, employee or agent is proper in the circumstances because he
has met the applicable standard of conduct set forth in Section 5.1 or Section
5.2 of this Article V, as the case may be. Such determination shall be made (i)
by the Board of Directors by a majority vote of a quorum consisting of Directors
who were not parties to such action, suite or proceeding, or (ii) if such a
quorum is not obtainable, or, even if obtainable, a quorum of disinterested
Directors so directs, by independent legal counsel in a written opinion, or
(iii) by the Stockholders. To the extent, however, that a Director, officer,
employee or agent of the Corporation has been successful on the merits or
otherwise in defense of any action, suit or proceeding described above, or in
defense of any claim, issue or matter therein, he shall be indemnified against
expenses (including attorney's fees) actually and reasonably incurred by him in
connection therewith, without the necessity of authorization in the specific.
5.4 Good Faith Defined. For purposes of any determination under Section
5.3 of this Article V, a person shall be deemed to have acted in good faith and
in a manner he reasonably believed to be in or not opposed to the best interests
of the Corporation, or, with respect to any criminal action or proceeding, to
have had no reasonable cause to believe his conduct was unlawful, if his action
is based on the records or books of account of the Corporation or another
enterprise, or on information supplied to him by the Offices of the Corporation
or another enterprise in the course of their duties, or on the advice of legal
counsel for the Corporation or another enterprise or on information or records
given or reports made to the Corporation or another enterprise by an independent
certified public accountant or by an appraiser or other expert selected with
reasonable care by the Corporation or another enterprise. The term "another
enterprise" as used in this Section 5.4 shall mean any other corporation or any
partnership, joint venture, trust, employment benefit plan or other enterprise
of which such person is or was serving at the request of the Corporation as a
Director, officer, employee or agent. The provisions of this Section 5.4 shall
not be deemed to be exclusive or to limit in any way the circumstances in which
a person may be deemed to have met the applicable standard of conduct set forth
in Sections 5.1 or 5.2 of this Article V, as the case may be.
5.5 Indemnification By A Court. Notwithstanding any contrary
determination in the specific case under Section 5.3 this Article V, and
notwithstanding the absence of any determination thereunder, any Director,
officer, employee or agent may apply to any court of competent jurisdiction in
-11-
<PAGE>
the State of Delaware for indemnification to the extent otherwise permissible
under Sections 5.1 and 5.2 of this Article V. The basis of such indemnification
by a court shall be determination by such court that indemnification of the
Director, officer, employee, or agent is proper in the circumstances because he
has met the application for indemnification pursuant to this Section 5.5 shall
be given to the Corporation promptly upon the filing of such application.
5.6 Expenses Payable In Advance. Expenses incurred in defending or
investigating a threatened or pending action, suit or proceeding may be at the
discretion of the Board of Directors, be paid by the Corporation in advance of
the final disposition of such actin, suite or proceeding upon receipt of any
undertaking by or on behalf of the Director, officer, employee or agent to repay
such amount if it shall ultimately be determined that he is not entitled to be
indemnified by the Corporation as authorized in this Article V.
5.7 Nonexclusively And Survival Of Indemnification. The indemnification
and advancement of expenses provided by or granted pursuant to the other
sections of this Article V shall not be deemed exclusively of any other rights
to which those seeking indemnification or advancement or expenses may be
entitled under any By-Law, agreement, contract, vote of Stockholders or
disinterested Directors or pursuant to the direction (howsoever embodied) of any
court of competent jurisdiction or otherwise, both as to action in his official
capacity and as to action in another capacity while holding such office it being
the policy of the Corporation that indemnification of the persons specified in
Sections 5.1 and 4.2 of this Article V shall be made to the fullest extent
permitted by law. The provisions of this Article V shall be made to the fullest
extent permitted by law. The provisions of this Article V shall not be deemed to
preclude the indemnification of any person who is not specified in Sections 5.1
or 5.2 of this Article V but whom the Corporation has the power or obligation to
indemnify under the provisions of the General Corporation Law of the State of
Delaware, or otherwise. The indemnification and advancement of expenses
provided, or granted pursuant to, this Article V shall, unless otherwise
provided when authorized or ratified, continue as to a person who was ceased to
be a Director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such person.
5.8 Insurance. The Corporation may purchase and maintain insurance on
behalf of any person who is or was a Director, officer, employee or agent of the
Corporation, or is or was serving at the request of the Corporation as a
Director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against him
and incurred by him in any such capacity, or arising out of his status as such,
whether or not the Corporation would have the power or obligation to indemnify
him against such liability under the provisions of this Article V.
5.9 Meaning Of "Corporation" For Purposes Of Article V. For the purpose
f this Article V, references to "the Corporation" shall include, in addition to
the resulting corporation, any constituent corporation (including any
constituent of a constituent) absorbed in a consolidation or merger which, if
its separate existence had continued, would have had power and authority to
-12-
<PAGE>
indemnify its directors, officers, and employees or agents, so that any person
who is or was a director, officer, employee or agent of such constituent
corporation, or is or was serving at the request of such constituent corporation
as a Director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, shall stand in the same position under
the provisions of this Article V with respect to the resulting or surviving
corporation as he would have with respect to such constituent corporation if its
separate existence had continued.
ARTICLE VI
AMENDMENTS
These Bylaws may be altered and repealed and Bylaws may be made at any
annual meeting of the Stockholders or at any special meeting thereof if notice
thereof is contained in the notice of such special meeting by affirmative vote
of a majority of the stock issued and outstanding or entitled to vote thereat,
or by the regular meeting of the Board of Directors, at any regular meeting of
the Board of Directors, or at any special meeting of the Board of Directors, if
notice thereof is contained in the notice of such special meeting.
<PAGE>
WARRANT AGREEMENT
AGREEMENT, dated as of this day of , 2000, by and between
Activeworlds.com, Inc., a Delaware corporation (the "Company"), and , as
Warrant Agent (the "Warrant Agent").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, in connection with a public offering of 1,200,000 units (the
"Units"), each Unit consisting of one share of common stock, par value $.001 per
share ("Common Stock"), and a Series B Redeemable Common Stock Purchase Warrant
(collectively, the "Warrants") to purchase one share of Common Stock, pursuant
to an underwriting agreement (the "Underwriting Agreement") dated as of , 2000,
between the Company and the several underwriters named therein of which HD Brous
& Co., Inc. ("Brous") and Solid ISG Capital Markets, LLC ("Solid ISG") are the
representatives (the "Representatives"), the Company may issue Warrants to
purchase up to One Million Two Hundred Thousand (1,200,000) shares of Common
Stock; and
WHEREAS, in connection with the issuance, pursuant to the Underwriting
Agreement, to the Representatives and their designees of options (the "Unit
Purchase Options" and each a "Unit Purchase Option") to purchase up to one
hundred twenty thousand (120,000) Units, the Company may issue Warrants to
purchase up to one hundred twenty thousand (120,000) shares of Common Stock; and
WHEREAS, the Company desires the Warrant Agent to act on behalf of the
Company, and the Warrant Agent is willing to so act, in connection with the
issuance, registration, transfer, exchange and redemption of the Warrants, as
hereinafter defined, the issuance of certificates representing the Warrants, the
exercise of the Warrants, and the rights of the holders thereof;
NOW, THEREFORE, in consideration of the premises and the mutual
agreements hereinafter set forth and for the purpose of defining the terms and
provisions of the Warrants and the certificates representing the Warrants and
the respective rights and obligations thereunder of the Company, the holders of
certificates representing the Warrants and the Warrant Agent, the parties hereto
agree as follows:
1. Definitions. As used in this Agreement, the following terms
shall have the following meanings, unless the context shall otherwise require:
(a) "Corporate Office" shall mean the office of the Warrant
Agent (or its successor) at which at any particular time its principal business
shall be administered, which office is located at the date of this Agreement
at .
(b) "Effective Date" shall mean the date that the Registration
Statement is declared effective by the Securities and Exchange Commission (the
"Commission").
<PAGE>
(c) "Exercise Date" shall mean, as to any Warrant, the date on
which the Warrant Agent shall have received both (a) the Warrant Certificate
representing such Warrant, with the exercise form thereon duly executed by the
Registered Holder thereof or his attorney duly authorized in writing, and (b)
payment in cash, or by official bank or certified check made payable to the
Company, of an amount in lawful money of the United States of America equal to
the Purchase Price; provided, however, that, subject to Paragraph 4 of this
Agreement, if payment shall be made by personal or corporate check, the exercise
of the Warrant shall not be effective until the Warrant Agent shall be satisfied
that the check shall have cleared; provided, further, that if such payment is
made prior to the Warrant Expiration Date or the expiration of a period during
which a reduced Purchase Price is in effect pursuant to Paragraph 9(f) of this
Agreement and the check shall not have cleared until after the Warrant
Expiration Date or such other date, then the Warrant shall be deemed to have
been exercised immediately prior to 5:00 P.M. New York City time on the Warrant
Expiration Date.
(d) "Purchase Price" shall mean the purchase price per share
to be paid upon exercise of each Warrant in accordance with the terms hereof,
which price shall be and /100 dollars ($ ) per share for the Warrants, subject
to adjustment from time to time pursuant to the provisions of Paragraph 9 of
this Agreement.
(e) "Redemption Price" shall mean the price at which the
Company may, at its option, redeem the Warrants, in accordance with the terms of
this Agreement, which price shall be ten cents ($.10) per Warrant. The
Redemption Price shall not be subject to adjustment pursuant to this Agreement.
(f) "Registration Statement" shall mean the Company's
registration statement on Form SB-2, File No. 333-85095, which was declared
effective by the Commission on , 2000.
(g) "Registered Holder" shall mean, as to any Warrant and as
of any particular date, the person in whose name the certificate representing
the Warrant shall be registered on that date on the books maintained by the
Warrant Agent pursuant to Paragraph 6 of this Agreement.
(h) "Transfer Agent" shall mean , as the Company's
transfer agent, or its authorized successor, as such.
(i) "Warrant Certificate" shall mean the certificate for the
Warrants in the form attached as Exhibit A to this Agreement.
(j) "Warrant Expiration Date" shall mean 5:00 P.M. New York
City time on the first to occur of (i) , 2005, or (ii) the business day
immediately preceding the Redemption Date, as defined in Paragraph 8(c) of this
Agreement; provided, that if such date shall in the State
- 2 -
<PAGE>
of New York be a holiday or a day on which banks are authorized or required to
close, the Warrant Expiration Date shall be the next day which is not such a
date. Upon notice to all warrant holders the Company shall have the right to
extend the Warrant Expiration Date.
(k) "Warrant Shares" shall mean the shares of Common Stock
issuable upon exercise of the Warrants.
2. Warrants and Issuance of Warrants Certificates.
(a) Each Warrant initially shall entitle the Registered Holder
of the Warrant Certificate representing such Warrant to purchase, upon the
exercise thereof, in accordance with the terms of this Agreement, subject to
modification and adjustment as provided in Paragraph 9 of this Agreement, such
number of shares of Common Stock as is set forth on the certificate representing
the Warrants.
(b) Upon execution of this Agreement, Warrant Certificates
representing the number of Warrants initially issuable pursuant to the
Underwriting Agreement shall be executed by the Company and delivered to the
Warrant Agent. Upon written order of the Company signed by its President or
Chairman or a Vice President and by its Secretary or an Assistant Secretary or
its Treasurer or an Assistant Treasurer, the Warrant Certificates shall be
countersigned, issued and delivered by the Warrant Agent.
(c) From time to time, up to the Warrant Expiration Date, the
Transfer Agent shall countersign and deliver stock certificates in required
whole number denominations representing the shares of Common Stock issuable upon
the exercise of Warrants in accordance with this Agreement.
(d) From time to time, up to the Warrant Expiration Date, the
Warrant Agent shall countersign and deliver Warrant Certificates in required
whole number denominations to the persons entitled thereto in connection with
any transfer or exchange permitted under this Agreement; provided that no
Warrant Certificates shall be issued except (i) those initially issued hereunder
or otherwise issuable pursuant to the Underwriting Agreement, including those
issuable in exchange for certain outstanding warrants, (ii) those issued on or
after the date of this Agreement, upon the exercise of fewer than all Warrants
represented by any Warrant Certificate, to evidence any unexercised Warrants
held by the exercising Registered Holder, (iii) those issued upon any transfer
or exchange pursuant to Paragraph 6 of this Agreement, (iv) those issued in
replacement of lost, stolen, destroyed or mutilated Warrant Certificates
pursuant to Paragraph 7 of this Agreement, (v) those issued pursuant to the
Representatives' Option, and (vi) at the option of the Company, in such form as
may be approved by the Board of Directors, to reflect any adjustment or change
in the Purchase Price or the number of shares of Common Stock purchasable upon
exercise of the Warrants made pursuant to Paragraph 9 of this Agreement.
- 3 -
<PAGE>
In addition, at the discretion of the Company, the Company may authorize the
issuance of additional Warrants, which shall be subject to the provisions of
this Agreement.
3. Form and Execution of Warrant Certificates.
(a) The Warrant Certificates for the Warrants shall be
substantially in the form annexed as Exhibit A to this Agreement, (the
provisions of which are hereby incorporated herein) and may have such letters,
numbers or other marks of identification or designation and such legends,
summaries or endorsements printed, lithographed or engraved thereon as the
Company may deem appropriate and as are not inconsistent with the provisions of
this Agreement, or as may be required to comply with any law or with any rule or
regulation made pursuant thereto or with any rule or regulation of any stock
exchange on which the Warrants may be listed, or to conform to usage or to the
requirements of Paragraph 2(b) of this Agreement. The Warrant Certificates shall
be dated the date of issuance thereof (whether upon initial issuance, transfer
or exchange in lieu of mutilated, lost, stolen, or destroyed Warrant
Certificates) and issued in registered form. Warrant Certificates shall be
numbered serially with the letter M or other letters acceptable to the Company
and the Warrant Agent.
(b) Warrant Certificates shall be executed on behalf of the
Company by its Chairman of the Board, President or any Vice President and by its
Secretary or an Assistant Secretary, by manual signatures or by facsimile
signatures printed thereon, and shall have imprinted thereon a facsimile of the
Company's seal. Warrant Certificates shall be manually countersigned by the
Warrant Agent and shall not be valid for any purpose unless so countersigned. In
case any officer of the Company who shall have signed any of the Warrant
Certificates shall cease to be an officer of the Company or to hold the
particular office referenced in the Warrant Certificate before the date of
issuance of the Warrant Certificates or before countersignature by the Warrant
Agent and issue and delivery thereof, such Warrant Certificates may nevertheless
be countersigned by the Warrant Agent, issued and delivered with the same force
and effect as though the person who signed the Warrant Certificates had not
ceased to be an officer of the Company or to hold such office. After
countersignature by the Warrant Agent, Warrant Certificates shall be delivered
by the Warrant Agent to the Registered Holder without further action by the
Company, except as otherwise provided by Paragraph 4 of this Agreement.
4. Exercise. Each Warrant may be exercised by the Registered
Holder thereof at any time after the issuance thereof, but not after the Warrant
Expiration Date, upon the terms and subject to the conditions set forth herein
and in the Warrant Certificate. A Warrant shall be deemed to have been exercised
immediately prior to the close of business on the Exercise Date and the person
entitled to receive the securities deliverable upon such exercise shall be
treated for all purposes as the holder of those securities upon the exercise of
the Warrant as of the close
- 4 -
<PAGE>
of business on the Exercise Date. As soon as practicable on or after the
Exercise Date, the Warrant Agent shall deposit the proceeds received from the
exercise of a Warrant and shall notify the Company in writing of the exercise of
the Warrant. Promptly following, and in any event within five (5) days after the
date of such notice from the Warrant Agent, the Warrant Agent, on behalf of the
Company, shall cause to be issued and delivered by the Transfer Agent, to the
person or persons entitled to receive the same, a certificate or certificates
for the securities deliverable upon such exercise, (plus a certificate for any
remaining unexercised Warrants of the Registered Holder) unless prior to the
date of issuance of such certificates the Company shall instruct the Warrant
Agent to refrain from causing such issuance of certificates pending clearance of
checks received in payment of the Purchase Price pursuant to such Warrants.
Notwithstanding the foregoing, in the case of payment made in the form of a
check drawn on an account of the Representatives or such other investment banks
and brokerage houses as the Company shall approve in writing to the Warrant
Agent, by the Representatives or such other investment bank or brokerage house,
certificates shall immediately be issued without prior notice to the Company or
any delay. Upon the exercise of any Warrant and clearance of the funds received,
the Warrant Agent shall promptly remit the payment received for the Warrant (the
"Warrant Proceeds") to the Company or as the Company may direct in writing.
5. Reservation of Shares; Listing; Payment of Taxes.
(a) The Company covenants that it will at all times reserve
and keep available out of its authorized Common Stock, solely for the purpose of
issue upon exercise of Warrants, such number of shares of Common Stock as shall
then be issuable upon the exercise of all outstanding Warrants. The Company
covenants that all Warrant Shares shall, at the time of delivery in accordance
with this Agreement, be duly and validly issued, fully paid, nonassessable and
free from all taxes, liens and charges with respect to the issue thereof (other
than those which the Company shall promptly pay or discharge), and that upon
issuance such shares shall be listed on each national securities exchange or
eligible for inclusion in each automated quotation system, if any, on which the
other shares of outstanding Common Stock of the Company are then listed or
eligible for inclusion.
(b) The Company covenants that if any securities to be
reserved for the purpose of exercise of Warrants hereunder require registration
with, or approval of, any governmental authority under any Federal securities
law before such securities may be validly issued or delivered upon such
exercise, then the Company will in good faith and as expeditiously as reasonably
possible, endeavor to secure such registration or approval. The Company will use
reasonable efforts to obtain appropriate approvals or registrations under state
"blue sky" securities laws. With respect to any such securities, however,
Warrants may not be exercised by, or shares
- 5 -
<PAGE>
of Common Stock issued to, any Registered Holder in any state in which such
exercise would be unlawful.
(c) The Company shall pay all documentary, stamp or similar
taxes and other governmental charges that may be imposed with respect to the
issuance of Warrants, or the issuance, or delivery of any shares upon exercise
of the Warrants; provided, however, that if the shares of Common Stock are to be
delivered in a name other than the name of the Registered Holder of the Warrant
Certificate representing any Warrant being exercised, then no such delivery
shall be made unless the person requesting the same has paid to the Warrant
Agent the amount of transfer taxes or charges incident thereto, if any.
(d) The Warrant Agent is hereby irrevocably authorized to
requisition the Company's Transfer Agent from time to time for certificates
representing shares of Common Stock issuable upon exercise of the Warrants, and
the Company will authorize the Transfer Agent to comply with all such proper
requisitions. The Company will file with the Warrant Agent a statement setting
forth the name and address of the Transfer Agent of the Company for shares of
Common Stock issuable upon exercise of the Warrants.
6. Exchange and Registration of Transfer.
(a) Warrant Certificates may be exchanged for other Warrant
Certificates representing an equal aggregate number of Warrants of the same
class or may be transferred in whole or in part. Warrant Certificates to be
exchanged shall be surrendered to the Warrant Agent at its Corporate Office, and
upon satisfaction of the terms and provisions of this Agreement, the Company
shall execute and the Warrant Agent shall countersign, issue and deliver in
exchange therefor the Warrant Certificate or Certificates which the Registered
Holder making the exchange shall be entitled to receive.
(b) The Warrant Agent shall keep at its office books in which,
subject to such reasonable regulations as it may prescribe, it shall register
Warrant Certificates and the transfer thereof in accordance with its regular
practice. Upon due presentment for registration of transfer of any Warrant
Certificate at such office, the Company shall execute and the Warrant Agent
shall issue and deliver to the transferee or transferees a new Warrant
Certificate or Certificates representing an equal aggregate number of Warrants.
(c) With respect to all Warrant Certificates presented for
registration or transfer, or for exchange or exercise, the subscription form on
the reverse thereof shall be duly endorsed, or be accompanied by a written
instrument or instruments of transfer and subscription, in form satisfactory to
the Company and the Warrant Agent, duly executed by the Registered Holder or his
attorney-in-fact duly authorized in writing.
- 6 -
<PAGE>
(d) A reasonable service charge may be imposed by the Warrant
Agent for any exchange or registration of transfer of Warrant Certificates. In
addition, the Company may require payment by such holder of a sum sufficient to
cover any tax or other governmental charge that may be imposed in connection
with any exchanges, registration or transfer of Warrant Certificates.
(e) All Warrant Certificates surrendered for exercise or for
exchange in case of mutilated Warrant Certificates shall be promptly canceled by
the Warrant Agent and thereafter retained by the Warrant Agent until termination
of this Agreement or resignation as Warrant Agent, or, with the prior written
consent of the Representatives, disposed of or destroyed, at the direction of
the Company.
(f) Prior to due presentment for registration of transfer
thereof, the Company and the Warrant Agent may deem and treat the Registered
Holder of any Warrant Certificate as the absolute owner thereof and of each
Warrant represented thereby (notwithstanding any notations of ownership or
writing thereon made by anyone other than a duly authorized officer of the
Company or the Warrant Agent) for all purposes and shall not be affected by any
notice to the contrary.
(g) Notwithstanding any other provisions of this Agreement, no
Warrants issued upon exercise of the Unit Purchase Option and no shares of
Common Stock issuable upon exercise of such Warrants may be sold, transferred,
assigned or hypothecated for a period of one year from the Effective Date except
to the officers of the Representatives or to selling group members or officers
or partners thereof, all of whom shall be bound by such restrictions. Until the
expiration of such one-year period, Warrant Certificates and stock certificates
shall be marked with a legend referring to such restriction.
7. Loss or Mutilation. Upon receipt by the Company and the
Warrant Agent of evidence satisfactory to them of the ownership of and loss,
theft, destruction or mutilation of any Warrant Certificate and (in case of
loss, theft or destruction) of indemnity satisfactory to them, and (in the case
of mutilation) upon surrender and cancellation thereof, the Company shall
execute and the Warrant Agent shall (in the absence of notice to the Company
and/or Warrant Agent that the Warrant Certificate has been acquired by a bona
fide purchaser) countersign and deliver to the Registered Holder in lieu thereof
a new Warrant Certificate of like tenor representing an equal aggregate number
of Warrants. Applicants for a substitute Warrant Certificate shall comply with
such other reasonable regulations and pay such other reasonable charges as the
Warrant Agent may prescribe.
- 7 -
<PAGE>
8. Redemption.
(a) Commencing twelve (12) months from the Effective Date or
earlier with the consent of the Representatives, the Company shall have the
right, on not less than thirty (30) nor more than sixty (60) days notice given
prior to the Redemption Date, as hereinafter defined, at any time to redeem the
then outstanding Warrants at the Redemption Price, provided that the Market
Price of the Common Stock shall equal or exceed the "Target Price" with respect
to the class of Warrants as to which the Company is exercising its right of
redemption. The "Target Price" shall mean one hundred fifty percent (150%) of
the Purchase Price with respect to the applicable class of Warrants. Market
Price for the purpose of this Paragraph 8 shall mean, if the Common Stock is
listed on the Nasdaq Stock Market or the New York or American Stock Exchange,
the average last reported sales price (or, if no sale is reported on any such
trading day, the average of the closing bid and asked prices) on the principal
market for the Common Stock or, if the Common Stock is not so listed or traded,
the average of the last reported bid prices of the Common Stock, during the
twenty (20) day period ending within three (3) days of the date the Warrants are
called for redemption. Notice of redemption shall be mailed by first class mail,
postage prepaid, not later than five (5) business days (or such longer period to
which the Representatives may consent) after the date the Warrants are called
for redemption. All Warrants of any class of Warrants must be redeemed if any
Warrants of such class are redeemed.
(b) If the conditions set forth in Paragraph 8(a) of this
Agreement are met, and the Company desires to exercise its right to redeem the
Warrants, it shall request the Representatives or the Warrant Agent to mail the
notice of redemption referred to in said Paragraph 8(a) to each of the
Registered Holders of the Warrants to be redeemed, first class, postage prepaid,
not earlier than the sixtieth (60th) day nor later than the thirtieth (30th) day
before the date fixed for redemption, at their last addresses as shall appear on
the records maintained pursuant to Paragraph 6(b) of this Agreement. Any notice
mailed in the manner provided herein shall be conclusively presumed to have been
duly given whether or not the Registered Holder receives such notice. The
Warrant Agent agrees to mail such notice if requested by the Company or the
Representatives.
(c) The notice of redemption shall specify (i) the Redemption
Price, (ii) the date fixed for redemption, (iii) the place where the Warrant
Certificates shall be delivered and the redemption price to be paid, and (iv)
that the right to exercise the Warrants shall terminate at 5:00 p.m. (New York
City time) on the business day immediately preceding the date fixed for
redemption. The date fixed for the redemption of the Warrants shall be the
Redemption Date. No failure to mail such notice nor any defect therein or in the
mailing thereof shall affect the validity of the proceedings for such redemption
except as to a Registered Holder (A) to whom
- 8 -
<PAGE>
notice was not mailed, or (B) whose notice was defective. An affidavit of the
Warrant Agent or of the Secretary or an Assistant Secretary of either of the
Representatives or the Company that notice of redemption has been mailed shall,
in the absence of fraud, be prima facie evidence of the facts stated therein.
(d) If either class of Warrant shall have been redeemed, any
right to exercise a Warrant of such class shall terminate at 5:00 p.m. (New York
City time) on the business day immediately preceding the Redemption Date. After
such time, Holders of the Warrants shall have no further rights except to
receive, upon surrender of the Warrant, the Redemption Price without interest,
subject to the provisions of applicable laws relating to the treatment of
abandoned property. In the event that the Warrants or the Warrant Shares shall
not be subject to a current and effective registration statement under the
Securities Act of 1933, as amended, at any time subsequent to the date the
Warrants are called for redemption, the notice of redemption shall not be
effective and shall be deemed for all purposes not to have been given. Nothing
in the preceding sentence shall be construed to prohibit or restrict the Company
from thereafter calling the Warrants for redemption in the manner provided for,
and subject to the provisions of, this Paragraph 8.
(e) From and after the Redemption Date with respect to the
Warrants, the Company shall, at the place specified in the notice of redemption,
upon presentation and surrender to the Company by or on behalf of the Registered
Holder thereof of one or more Warrant Certificates evidencing Warrants to be
redeemed, deliver or cause to be delivered to or upon the written order of such
Holder a sum in cash equal to the Redemption Price of each such Warrant. From
and after the Redemption Date and upon the deposit or setting aside by the
Company of a sum sufficient to redeem all the Warrants called for redemption,
such Warrants shall expire and become void and all rights hereunder and under
the Warrant Certificates, except the right to receive payment of the Redemption
Price, shall cease.
(f) Notwithstanding any other provision of this Agreement, the
Company shall not call the Warrants for redemption unless there is, at the time
the Warrants are called for redemption, a current and effective registration
statement or a post-effective amendment to the registration statement covering
the issuance of the shares of Common Stock issuable upon exercise of the
Warrants.
(g) In the event that the Representatives' Option is exercised
at a time subsequent to the redemption of the Warrants but prior to the Warrant
Expiration Date, as defined in Paragraph 1(j) of this Agreement, then,
notwithstanding any other provisions of this Agreement, the Warrants issued upon
such exercise may be redeemed by the Company at any time after issuance.
- 9 -
<PAGE>
9. Adjustment of Exercise Price and Number of Securities Issuable
upon Exercise of Warrants.
(a) In case the Company shall, at any time or from time to
time after the date of this Agreement, pay a dividend or make a distribution on
its shares of Common Stock in shares of Common Stock, subdivide or reclassify
its outstanding Common Stock into a greater number of shares, or combine or
reclassify its outstanding Common Stock into a smaller number of shares or
otherwise effect a combination of shares or reverse split, the Purchase Price in
effect at the time of the record date for such dividend or distribution or of
the effective date of such subdivision, combination or reclassification shall be
proportionately adjusted so that the holder of any Warrant exercised after such
date shall be entitled to receive the aggregate number and kind of shares which,
if such Warrant had been exercised immediately prior to such time, he would have
owned upon such exercise and been entitled to receive upon such dividend,
subdivision, combination or reclassification. Such adjustment shall be made
successively whenever any event listed in this Paragraph 9(a) shall occur.
(b) In case the Company shall, at any time or from time to
time after the date of this Agreement, issue rights or warrants to all holders
of its Common Stock entitling them to subscribe for or purchase shares of Common
Stock (or securities convertible into Common Stock) at a price (or having a
conversion price per share) less than the current market price of the Common
Stock (as defined in Paragraph 9(e) of this Agreement) on the record date
mentioned below, the Purchase Price shall be adjusted so that the same shall
equal the price determined by multiplying the Purchase Price in effect
immediately prior to the date of such issuance by a fraction, of which the
numerator shall be the number of shares of Common Stock outstanding on the
record date mentioned below plus the number of additional shares of Common Stock
which the aggregate offering price of the total number of shares of Common Stock
so offered (or the aggregate conversion price of the convertible securities so
offered) would purchase at such current market price per share of the Common
Stock, and of which the denominator shall be the number of shares of Common
Stock outstanding on such record date plus the number of additional shares of
Common Stock offered for subscription or purchase (or into which the convertible
securities so offered are convertible). Such adjustment shall be made
successively whenever such rights or warrants are issued and shall become
effective immediately after the record date for the determination of
stockholders entitled to receive such rights or warrants; and to the extent that
shares of Common Stock are not delivered (or securities convertible into Common
Stock are not delivered) after the expiration of such rights or warrants, the
Purchase Price shall be readjusted to the Purchase Price which would then be in
effect had the adjustments made upon the issuance of such rights or warrants
been made upon the basis of delivery of only
- 10 -
<PAGE>
the number of shares of Common Stock (or securities convertible into Common
Stock) actually delivered.
(c) In case the Company shall, at any time or from time to
time after the date hereof, distribute to all holders of Common Stock evidences
of its indebtedness or assets (excluding cash dividends or distributions paid
out of current earnings and dividends or distributions referred to in Paragraph
9(a) of this Agreement) or subscription rights or warrants (excluding those
referred to in Paragraph 9(b) of this Agreement), then in each such case the
Purchase Price in effect thereafter shall be determined by multiplying the
Purchase Price in effect immediately prior thereto by a fraction, of which the
numerator shall be the total number of shares of Common Stock outstanding
multiplied by the current market price per share of Common Stock (as defined in
Paragraph 9(e) of this Agreement), less the fair market value (as determined by
the Company's Board of Directors) of said assets or evidences of indebtedness so
distributed or of such rights or warrants, and of which the denominator shall be
the total number of shares or Common Stock outstanding multiplied by such
current market price per share of Common Stock. Such adjustment shall be made
whenever any such distribution is made and shall become effective immediately
after the record date for the determination of stockholders entitled to receive
such distribution.
(d) Whenever the Purchase Price payable upon exercise of each
Warrant is adjusted pursuant to Paragraphs 9(a), (b) or (c) of this Agreement,
the number of shares of Common Stock purchasable upon exercise of each Warrant
shall simultaneously be adjusted by multiplying the number of shares issuable
upon exercise of each Warrant in effect on the date thereof by the Purchase
Price in effect on the date thereof and dividing the product so obtained by the
Purchase Price, as adjusted.
(e) For the purpose of any computation pursuant to Paragraphs
9(b) and (c) of this Agreement, the current market price per share of Common
Stock at any date shall be deemed to be the average of the daily closing prices
for thirty (30) consecutive business days commencing fifteen (15) business days
before such date. The closing price for each day shall be the reported last sale
price regular way or, in case no such reported sale takes place on such day, the
average of the last reported high bid and low asked prices regular way, in
either case on the principal national securities exchange on which the Common
Stock is admitted to trading or listed, if the Common Stock is admitted to
trading or listing on the New York or American Stock Exchange or on The Nasdaq
Stock Market if included in such system or if not listed or admitted to trading
on such exchange or system, the average of the highest bid and lowest asked
prices as reported by Nasdaq, or the National Quotation Bureau, Inc. or another
similar organization if Nasdaq is no
- 11 -
<PAGE>
longer reporting such information, or if not so available, the fair market price
as determined by the Board of Directors of the Company.
(f) No adjustment in the Purchase Price shall be required
unless such adjustment would require an increase or decrease of at least five
cents ($0.05) in such price; provided, however, that any adjustments which by
reason of this Paragraph 9(f) are not required to be made shall be carried
forward and taken into account in any subsequent adjustment. All calculations
under this Paragraph 9 shall be made to the nearest cent or to the nearest
one-tenth of a share, as the case may be. Anything in this Paragraph 9 to the
contrary notwithstanding, the Company may, upon notice to the record holders of
the Warrants, in its sole discretion, reduce the Purchase Price of the Warrants,
and, if such reduction is not otherwise required by this Paragraph 9, such
reduction (i) will not, unless the Board of Directors otherwise determines,
result in any change in the number or class of shares of Common Stock issuable
upon exercise of such Warrants, and (ii) may be of limited duration, in which
event the reduction in Purchase Price shall not apply to any Warrants exercised
after the expiration of the time during which the reduced Purchase Price is in
effect.
(g) The Company may retain a firm of independent public
accountants (who may be the regular accountants employed by the Company) of
recognized standing selected by the Board of Directors of the Company to make
any computation required by this Paragraph 9, and a certificate signed by such
firm shall be conclusive evidence of the correctness of such adjustment.
(h) In the event that at any time, as a result of an
adjustment made pursuant to Paragraph 9(a) of this Agreement, the holder of any
Warrant thereafter shall become entitled to receive any shares of the Company,
other than Common Stock, thereafter the number of such other shares so
receivable upon exercise of any Warrant shall be subject to adjustment from time
to time in a manner and on terms as nearly equivalent as practicable to the
provisions with respect to the Common Stock contained in Paragraphs 9(a) to (f),
inclusive, of this Agreement.
(i) The Company may elect, upon any adjustment of the Purchase
Price hereunder, to adjust the number of Warrants outstanding, in lieu of the
adjustment in the number of shares of Common Stock purchasable upon the exercise
of each Warrant as hereinabove provided, so that each Warrant outstanding after
such adjustment shall represent the right to purchase one share of Common Stock.
Each Warrant held of record and each Warrant issuable upon exercise of the
Representatives' Option prior to such adjustment of the number of Warrants shall
become that number of Warrants or an Representatives' Option to purchase that
number of Warrants (calculated to the nearest tenth) determined by multiplying
the number one by a fraction, the numerator of which shall be the Purchase Price
in effect immediately prior to such
- 12 -
<PAGE>
adjustment and the denominator of which shall be the Purchase Price in effect
immediately after such adjustment. Upon each adjustment of the number of
Warrants pursuant to this Paragraph 9, the Company shall, as promptly as
practicable, cause to be distributed to each Registered Holder of Warrant
Certificates on the date of such adjustment Warrant Certificates evidencing,
subject to Paragraph 10 of this Agreement, the number of additional Warrants to
which such Holder shall be entitled as a result of such adjustment or, at the
option of the Company, cause to be distributed to such Holder in substitution
and replacement for the Warrant Certificates held by him prior to the date of
adjustment (and upon surrender thereof, if required by the Company) new Warrant
Certificates evidencing the number of Warrants to which such Holder shall be
entitled after such adjustment. With respect to the Representative's Option, the
Company shall give the registered holders of the Representative's Option notice
as to the number of Warrants issuable in respect of such Representative's Option
reflecting such adjustment. Any Warrants or notice to registered holders of
Representative's Option may be mailed by the Warrant Agent or by first class
mail, postage prepaid.
(j) In case of any reclassification, capital reorganization or
other change of outstanding shares of Common Stock, or in case of any
consolidation or merger of the Company with or into another corporation (other
than a consolidation or merger in which the Company is the continuing
corporation and which does not result in any reclassification, capital
reorganization or other change of outstanding shares of Common Stock), or in
case of any sale or conveyance to another corporation of the property of the
Company as, or substantially as, an entirety (other than a sale/leaseback,
mortgage or other financing transaction), the Company shall cause effective
provision to be made so that each holder of a Warrant then outstanding shall
have the right thereafter, by exercising such Warrant, to purchase the kind and
number of shares of stock or other securities or property (including cash)
receivable upon such reclassification, capital reorganization or other change,
consolidation, merger, sale or conveyance by a holder of the number of shares of
Common Stock that might have been purchased upon exercise of such Warrant
immediately prior to such reclassification, capital reorganization or other
change, consolidation, merger, sale or conveyance. Any such provisions shall
include provision for adjustments that shall be as nearly equivalent as may be
practicable to the adjustments provided for in this Paragraph 9. The Company
shall not effect any such consolidation, merger or sale unless, prior to or
simultaneously with the consummation thereof, the successor (if other than the
Company) resulting from such consolidation or merger or the corporation
purchasing assets or other appropriate corporation or entity shall assume, by
written instrument executed and delivered to the Warrant Agent, the obligation
to deliver to the holder of each Warrant such shares of stock, securities or
assets as, in accordance with the foregoing provisions, such holders may be
entitled
- 13 -
<PAGE>
to purchase and the other obligations under this Agreement. The foregoing
provisions shall similarly apply to successive reclassifications, capital
reorganizations and other changes of outstanding shares of Common Stock and to
successive consolidations, mergers, sales or conveyances. In the event that, as
a result of any merger, consolidation or similar transaction, all of the holders
of Common Stock receive and are entitled to receive no consideration other than
cash in respect of their shares of Common Stock, then, at the effective time of
the transaction, the rights to purchase Common Stock pursuant to the Warrants
shall terminate, and the holders of the Warrants shall, notwithstanding any
other provisions of this Agreement or the Warrants, receive in respect of each
Warrant to purchase one (1) share of Common Stock, upon presentation of the
Warrant Certificate, the amount by which the consideration per share of Common
Stock payable to the holders of Common Stock at such effective time exceeds the
Purchase Price in effect on such effective date, without giving effect to the
transaction. In the event that, subsequent to the effective time, additional
cash or other consideration is payable to the holders of Common Stock of record
as of the effective time, the same consideration shall be payable to the holders
of the Warrants to the extent that the total cash then received by the holders
of Common Stock exceeds the Purchase Price in effect at such effective date,
without giving effect to the transaction, with the same effect as if the
Warrants had been exercised on and as of such effective time. In the event of
any merger, consolidation, sale or lease of substantially all of the Company's
assets or reorganization whereby the Company is not the surviving corporation,
in lieu of the foregoing provisions of this Paragraph 9(j), the Company may
provide in the agreement relating to the transaction that each Warrant shall
become, be converted into or be exchanged for, such securities of the surviving
or acquiring corporation or other entity as has a value equal to the value of
the Warrants (which shall not exceed the amount by which the consideration to be
received per share of Common Stock (valued on such date as the Company's Board
of Directors shall determine) exceeds the exercise price of the Warrant), the
value of the Warrants and securities being issued in exchange therefor to be
determined by the Company's Board of Directors, such determination to be final,
binding and conclusive on the Company and the holders of the Warrants. In the
event that, in such a transaction, the value of the consideration to be received
per share of Common Stock is not greater than the exercise price of the
Warrants, the Warrants shall terminate and no consideration will be paid with
respect thereof.
(k) Irrespective of any adjustments or changes in the Purchase
Price or the number of shares of Common Stock purchasable upon exercise of the
Warrants, the Warrant Certificates theretofore and thereafter issued shall,
unless the Company shall exercise its option to issue new Warrant Certificates
pursuant to Paragraphs 2(e) and 9(i) of this Agreement, continue to express the
Purchase Price per share, the number of shares purchasable thereunder
- 14 -
<PAGE>
and the Redemption Price therefor as to the Purchase Price per share, and the
number of shares purchasable and the Redemption Price therefore were expressed
in the Warrant Certificates when the same were originally issued.
(l) After any adjustment of the Purchase Price pursuant to
this Paragraph 9, the Company will promptly prepare a certificate signed by the
Chairman, President, Vice President or Treasurer, of the Company setting forth:
(i) the Purchase Price as so adjusted, (ii) the number of shares of Common Stock
purchasable upon exercise of each Warrant after such adjustment, and, if the
Company shall have elected to adjust the number of Warrants, the number of
Warrants to which the registered holder of each Warrant shall then be entitled,
and (iii) a brief statement of the facts accounting for such adjustment. The
Company will promptly file such certificate with the Warrant Agent and cause a
brief summary thereof to be sent by first class mail to each Representative and
to each registered holder of Warrants at his last address as it shall appear on
the registry books of the Warrant Agent. No failure to mail such notice nor any
defect therein or in the mailing thereof shall affect the validity thereof. The
affidavit of an officer of the Warrant Agent or the Secretary or an Assistant
Secretary of the Company that such notice has been mailed shall, in the absence
of fraud, constitute prima facie evidence of the facts stated therein.
(m) As used in this Paragraph 9, the term "Common Stock" shall
mean and include the Company's Common Stock authorized on the Effective Date and
shall also include any capital stock of any class of the Company thereafter
authorized which shall not be limited to a fixed sum or percentage in respect of
the rights of the holders thereof to participate in dividends and in the
distribution of assets upon the voluntary liquidation, dissolution or winding up
of the Company; provided, however, that the shares issuable upon exercise of the
Warrants shall include only shares of such class designated in the Company's
Certificate of Incorporation as Common Stock on the Effective Date or, in the
case of any reclassification, change, consolidation, merger, sale or conveyance
of the character referred to in Paragraph 9(j) of this Agreement, the stock,
securities or property provided for in such section or, in the case of any
reclassification or change in the outstanding shares of Common Stock issuable
upon exercise of the Warrants as a result of a subdivision or combination or
consisting of a change in par value, or from par value to no par value, or from
no par value to par value, such shares of Common Stock as so reclassified or
changed.
(n) Any determination as to whether an adjustment in the
Purchase Price in effect hereunder is required pursuant to this Paragraph 9, or
as to the amount of any such adjustment, if required, shall be binding upon the
holders of the warrants and the Company if made in good faith by the Board of
Directors of the Company.
- 15 -
<PAGE>
(o) In lieu of an adjustment pursuant to Paragraph 9(b) of
this Agreement, if the Company shall grant to the holders of Common Stock, as
such, rights or warrants to subscribe for or to purchase Common Stock or
securities convertible into or exchangeable for or carrying a right or warrant
to purchase Common Stock, the Company may concurrently therewith grant to each
Registered Holder as of the record date for such transaction of the Warrants
then outstanding, the rights or warrants to which each Registered Holder would
have been entitled if, on the record date used to determine the stockholders
entitled to the rights or warrants being granted by the Company, the Registered
Holder were the holder of record of the number of whole shares of Common Stock
then issuable upon exercise of his Warrants. If the Company exercises such right
no adjustment which otherwise might be called for pursuant to said Paragraph
9(b) shall be made.
10. Fractional Warrants and Fractional Shares. If the number of
shares of Common Stock purchasable upon the exercise of each Warrant is adjusted
pursuant to Paragraph 9 of this Agreement, the Company nevertheless shall not be
required to issue fractions of shares, upon exercise of the Warrants or
otherwise, or to distribute certificates that evidence fractional shares. With
respect to any fraction of a share called for upon any exercise hereof, the
Company, at its option, shall either issue a whole share in lieu of such
fractional share or pay to the Holder an amount in cash equal to such fraction
multiplied by the current market value of such fractional share, determined as
follows:
(a) If the Common Stock is listed on the New York or American
Stock Exchange or admitted to unlisted trading privileges on such exchange or
listed for trading on the Nasdaq Stock Market, the current value shall be the
reported last sale price of the Common Stock on such exchange or system on the
last business day prior to the date of exercise of this Warrant, or if no such
sale is made on such day, the average closing bid and asked prices for such day
on such exchange or system; or
(b) If the Common Stock is not listed or admitted to unlisted
trading privileges, the current value shall be the last reported bid price
reported by the National Quotation Bureau, Inc. on the last business day prior
to the date of the exercise of this Warrant; or
(c) If the Common Stock is not so listed or admitted to
unlisted trading privileges and bid prices are not so reported, the current
value shall be an amount determined in such reasonable manner as may be
prescribed by the Board of Directors of the Company.
11. Warrant Holders Not Deemed Stockholders. No holder of
Warrants shall, as such, be entitled to vote or to receive dividends or be
deemed the holder of Common Stock that may at any time be issuable upon exercise
of such Warrants for any purpose whatsoever, nor shall anything contained in
this Agreement be construed to confer upon the holder of Warrants, as
- 16 -
<PAGE>
such, any of the rights of a stockholder of the Company or any right to vote for
the election of directors or upon any matter submitted to stockholders at any
meeting thereof, or to give or withhold consent to any corporate action (whether
upon any recapitalization, issue or reclassification of stock, change of par
value or change of stock to no par value, consolidation, merger or conveyance or
otherwise), or to receive notice of meetings, or to receive dividends or
subscription rights, until such Holder shall have exercised such Warrants and
been issued shares of Common Stock in accordance with the provisions hereof
12. Rights of Action. All rights of action with respect to this
Agreement are vested in the respective Registered Holders of the Warrants, and
any Registered Holder of a Warrant, without consent of the Warrant Agent or of
the holder of any other Warrant, may, in his own behalf and for his own benefit,
enforce against the Company his right to exercise his Warrants for the purchase
of shares of Common Stock in the manner provide in the Warrant Certificate and
this Agreement.
13. Agreement of Warrant Holders. Every holder of a Warrant, by
his acceptance of the Warrants, consents and agrees with the Company, the
Warrant Agent and every other holder of a Warrant that:
(a) The warrants are transferable only on the registry books
of the Warrant Agent by the Registered Holder thereof in person or by his
attorney duly authorized in writing and only if the Warrant Certificates
representing such Warrants are surrendered at the office of the Warrant Agent,
duly endorsed or accompanied by a proper instrument of transfer satisfactory to
the Warrant Agent and the Company in their sole discretion, together with
payment of any applicable transfer taxes; and
(b) The Company and the Warrant Agent may deem and treat the
person in whose name the Warrant Certificate is registered as the holder and as
the absolute, true and lawful owner of the Warrants represented thereby for all
purposes, and neither the Company nor the Warrant Agent shall be affected by any
notice or knowledge to the contrary, except as otherwise expressly provided in
Paragraph 6 of this Agreement.
14. Cancellation of Warrant Certificates. If the Company shall
purchase or acquire any Warrant or Warrants, the Warrant Certificate or Warrant
Certificates evidencing the same shall thereupon be delivered to the Warrant
Agent and canceled by it and retired.
15. Concerning the Warrant Agent.
(a) The Warrant Agent acts hereunder as agent and in a
ministerial capacity for the Company, and its duties shall be determined solely
by the provisions of this Agreement. The Warrant Agent shall not, by issuing and
delivering Warrant Certificates or by any other act hereunder be deemed to make
any representations as to the validity, value or authorization of the
- 17 -
<PAGE>
Warrant Certificates or the Warrants represented thereby or of any securities or
other property delivered upon exercise of any Warrant or whether any stock
issued upon exercise of any Warrant is fully paid and nonassessable.
(b) The Warrant Agent shall not at any time be under any duty
or responsibility to any holder of Warrant Certificates to make or cause to be
made any adjustment of the Purchase Price or the Redemption Price provided in
this Agreement, or to determine whether any fact exists which may require any
such adjustments, or with respect to the nature or extent of any such
adjustment, when made, or with respect to the method employed in making the
same. It shall not (i) be liable for any recital or statement of facts contained
herein or for any action taken, suffered or omitted by it in reliance on any
Warrant Certificate or other document or instrument believed by it in good faith
to be genuine and to have been signed or presented by the proper party or
parties, (ii) be responsible for any failure on the part of the Company to
comply with any of its covenants and obligations contained in this Agreement or
in any Warrant Certificate, or (iii) be liable for any act or omission in
connection with this Agreement except for its own negligence or wilful
misconduct.
(c) The Warrant Agent may at any time consult with counsel
satisfactory to it (who may be counsel for the Company) and shall incur no
liability or responsibility for any action taken, suffered or omitted by it in
good faith in accordance with the opinion or advice of such counsel.
(d) Any notice, statement, instrument, request, direction,
order or demand of the Company shall be sufficiently evidenced by an instrument
signed by the Chairman of the Board, President, any Vice President, its
Secretary, or Assistant Secretary, unless other evidence in respect thereof is
specifically prescribed in this Agreement. The Warrant Agent shall not be liable
for any action taken, suffered or omitted by it in accordance with such notice,
statement, instruction, request, direction, order or demand believed by it to be
genuine.
(e) The Company agrees to pay the Warrant Agent reasonable
compensation for its services hereunder and to reimburse it for its reasonable
expenses hereunder; it further agrees to indemnify the Warrant Agent and hold it
harmless against any and all costs and counsel fees, for anything done or
omitted by the Warrant Agent in the execution of its duties and powers hereunder
except losses, expenses and liabilities arising as a result of the Warrant
Agent's negligence or wilful misconduct.
(f) The Warrant Agent may resign its duties and be discharged
from all further duties and liabilities hereunder (except liabilities arising as
a result of the Warrant Agent's own negligence or wilful misconduct), after
giving thirty (30) days' prior written notice to the Company. At least fifteen
(15) days prior to the date such resignation is to become effective, the Warrant
- 18 -
<PAGE>
Agent shall cause a copy of such notice of resignation to be mailed to the
Registered Holder of each Warrant Certificate at the Company's expense. Upon
such resignation, or any inability of the Warrant Agent to act as such under
this Agreement, the Company shall appoint a new warrant agent in writing. If the
Company shall fail to make such appointment within a period of fifteen (15) days
after it has been notified in writing of such resignation by the resigning
Warrant Agent, then the Registered Holder of any Warrant Certificate may apply
to any court of competent jurisdiction for the appointment of a new warrant
agent. Any new warrant agent, whether appointed by the Company or by such a
court, shall be a bank or trust company having a capital and surplus, as shown
by its last published report to its stockholders, of not less than $10,000,000
or a stock transfer company. After acceptance in writing of such appointment by
the new warrant agent is received by the Company, such new warrant agent shall
be vested with the same powers, rights, duties and responsibilities as if it had
been originally named herein as the Warrant Agent, without any further
assurance, conveyance, act or deed; but if for any reason, it shall be necessary
or expedient to execute and deliver any further assurance, conveyance, act or
deed, the same shall be done at the expense of the Company and shall be legally
and validly executed and delivered by the resigning Warrant Agent. Not later
than the effective date of any such appointment the Company shall file notice
thereof with the resigning Warrant Agent and shall forthwith cause a copy of
such notice to be mailed to the Registered Holder of each Warrant Certificate.
(g) Any corporation into which the Warrant Agent or any new
warrant agent may be converted or merged or any corporation resulting from any
consolidation to which the Warrant Agent or any new warrant agent shall be a
party or any corporation succeeding to the trust business of the Warrant Agent
shall be a successor warrant agent under this Agreement without any further act,
provided that such corporation is eligible for appointment as successor to the
Warrant Agent under the provisions of the preceding paragraph. Any such
successor warrant agent shall promptly cause notice of its succession as warrant
agent to be mailed to the Company and to the Registered Holder of each Warrant
Certificate.
(h) The Warrant Agent, its subsidiaries and affiliates, and
any of its or their officers or directors, may buy and hold or sell Warrants or
other securities of the Company and otherwise deal with the Company in the same
manner and to the same extent and with like effects as though it were not
Warrant Agent. Nothing herein shall preclude the Warrant Agent from acting in
any other capacity for the Company or for any other legal entity.
16. Modification of Agreement. The Warrant Agent and the Company
may, by supplemental agreement, make any changes or corrections in this
Agreement (i) that they shall deem appropriate to cure any ambiguity or to
correct any defective or inconsistent provision or manifest mistake or error
herein contained; or (ii) that they may deem necessary or desirable and
- 19 -
<PAGE>
which shall not adversely affect the interests of the holders of Warrant
Certificates; provided, however, that this Agreement shall not otherwise be
modified, supplemented or altered in any respect except with the consent in
writing of the Registered Holders of Warrant Certificates representing not less
than fifty percent (50%) of the Warrants then outstanding; and provided,
further, that no change in the number or nature of the securities purchasable
upon the exercise of any Warrant, or the Purchase Price therefor, or the
acceleration of the Warrant Expiration Date, shall be made without the consent
in writing of the Registered Holder of the Warrant Certificate representing such
Warrant, other than such changes as are specifically prescribed by this
Agreement as originally executed or are made in compliance with applicable law;
and provided, further, that Paragraphs 4(b) and 4(c) may not be modified or
amended without the consent of the Representatives.
17. Notices. All notices provided for in this Agreement shall be
in writing signed by the party giving such notice, and, unless otherwise
expressly provided in this Agreement, delivered personally or sent by overnight
courier or messenger against receipt thereof or sent by registered or certified
mail (air mail if overseas), return receipt requested, or by facsimile
transmission or similar means of communication. Notices sent by facsimile
transmission or similar means of communication shall be confirmed by
acknowledged receipt or by registered or certified mail, return receipt
requested. Notices shall be deemed to have been received on the date of personal
delivery or telecopy or, if sent by certified or registered mail, return receipt
requested, shall be deemed to be delivered on the third business day after the
date of mailing. Notices shall be sent to the Registered Holders at their
respective addresses on the Warrant Agent's warrant register, to the Company at
95 Parker Street, Newburyport, MA 01950, telecopier (978) 499-0221, Attention:
Richard F. Noll, President and Chief Executive Officer, and to the Warrant Agent
at its Corporate Office, telecopier ( ) . Either party may, by like
notice, change the address, person or telecopier number to which notice should
be given.
18. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York applicable to
agreements entered and to be performed wholly within such State, without regard
to principles of conflicts of laws. The parties hereby (a) irrevocably consent
and agree that any legal or equitable action or proceeding arising under or in
connection with this Agreement shall be brought exclusively in any Federal or
state court situated in New York County, New York, (b) irrevocably submit to and
accept, with respect to their respective properties and assets, generally and
unconditionally, the in personam jurisdiction of the aforesaid courts, and (c)
agree that any process in any action commenced in such court under this
Agreement may be served upon such party personally, by certified or registered
mail, return receipt requested, or by overnight courier service which obtains
evidence of delivery, with the
- 20 -
<PAGE>
same full force and effect as if personally served upon such party in New York
City, in addition to any other method of service permitted by law.
19. Binding Effect. This Agreement shall be binding upon and
inure to the benefit of the Company and, the Warrant Agent and their respective
successors and assigns, and the holders from time to time of Warrant
Certificates. Nothing in this Agreement is intended or shall be construed to
confer upon any other person any right, remedy or claim, in equity or at law, or
to impose upon any other person any duty, liability or obligation.
20. Termination. This Agreement shall terminate at the close of
business on the Expiration Date of all the Warrants or such earlier date upon
which all Warrants have been exercised, except that the Warrant Agent shall
account to the Company for cash held by it, and the provisions of Paragraph 15
of this Agreement shall survive any such termination.
21. Counterparts. This Agreement may be executed in several
counterparts, which taken together shall constitute a single document.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be duly executed as of the date first above written.
ACTIVEWORLDS.COM, INC.
By:_______________________________________
Richard F. Noll, President and CEO
__________________________________________
By:_______________________________
, Authorized Officer
- 21 -
<PAGE>
EXHIBIT A
[FORM OF FACE OF WARRANT CERTIFICATE]
No. A- Warrant to Purchase
-----------
Shares of Common Stock
Void after , 2005 (or earlier upon redemption).
ACTIVEWORLDS.COM, INC
SERIES B REDEEMABLE COMMON STOCK PURCHASE WARRANT
This certifies that FOR VALUE RECEIVED or
registered assigns (the "Registered Holder") is the owner of the number of
Series B Redeemable Common Stock Purchase Warrants ("Warrants") specified above.
Each Warrant initially entitles the Registered Holder to purchase, subject to
the terms and conditions set forth in this Certificate and the Warrant Agreement
(as hereinafter defined), one (1) fully paid and nonassessable share of Common
Stock, par value $.001 per share ("Common Stock"), of Activeworlds.com, Inc., a
Delaware corporation (the "Company"), at any time during the period commencing
with the issuance of this Warrant and ending on the Expiration Date, as
hereinafter defined, by delivery of this Warrant, with the Subscription Form on
the reverse hereof duly executed, at the corporate office of
, as Warrant Agent, or its successor (the "Warrant
Agent"), accompanied by payment of $ , subject to adjustment as
provided in the Warrant Agreement (the "Purchase Price") in lawful money of the
United States of America in cash or by official bank or certified check made
payable to the order of the Company.
This Warrant Certificate and each Warrant represented hereby are issued
pursuant to and are subject in all respects to the terms and conditions set
forth in the Warrant Agreement (the "Warrant Agreement"), dated as of
, 2000, by and between the Company and the Warrant Agent.
In the event of certain contingencies provided for in the Warrant
Agreement, the Purchase Price or the number of shares of Common Stock subject to
purchase upon the exercise of each Warrant represented hereby are subject to
modification or adjustment.
Each Warrant represented hereby is exercisable at the option of the
Registered Holder, but no fractional shares of Common Stock will be issued. In
the case of the exercise of less than all the Warrants represented hereby, the
Company shall cancel this Warrant Certificate upon the surrender hereof and
shall execute and deliver a new Warrant Certificates or Warrant Certificates of
like tenor, which the Warrant Agent shall countersign, for the balance of such
Warrants.
The term "Expiration Date" shall mean 5:00 P.M. (New York City time)
on , 2005 or earlier upon redemption as hereinafter provided. If such
date shall in the State of New York be a holiday or a day on which the banks are
authorized or required to close, then the Expiration Date shall mean 5:00 P.M.
(New York City time) the next following day which in the State of New York is
not a holiday or a day on which banks are authorized or required to close. Under
certain circumstances as provided in the Warrant Agreement, the period during
which the Warrant may be exercised may be extended.
The Company shall not be obligated to deliver any securities pursuant
to the exercise of this Warrant unless a registration statement under the
Securities Act of 1933, as amended, with respect to such securities is
effective. The Company has covenanted and agreed that it will file a
registration statement and will use its commercially reasonably efforts to cause
the same to become effective and to keep such registration statement current
while any of the Warrants are outstanding. This Warrant shall not be exercisable
by a Registered Holder in any state where such exercise would be unlawful.
This Warrant Certificate is exchangeable, upon the surrender hereof by
the Registered Holder at the corporate office of the Warrant Agent, for a new
Warrant Certificate or Warrant Certificates of like tenor representing an equal
aggregate number of Warrants, each of such new Warrant Certificates to represent
such number of Warrants as shall
A-1
<PAGE>
be designated by such Registered Holder at the time of such surrender. Upon
payment by the Registered Holder of any tax or other governmental charge imposed
in connection therewith, for registration of transfer of this Warrant
Certificate at such office, a new Warrant Certificate or Warrant Certificates
representing an equal aggregate number of Warrants will be issued to the
transferee in exchange therefor, subject to the limitations provided in the
Warrant Agreement.
Prior to the exercise of any Warrant represented hereby, the Registered
Holder shall not be entitled to any rights of a stockholder of the Company,
including, without limitation, the right to vote or to receive dividends or
other distributions, and shall not be entitled to receive any notice of any
proceedings of the Company, except as provided in the Warrant Agreement.
Commencing , 2000, or earlier as provided in the Warrant Agreement,
this Warrant may be redeemed at the option of the Company, at a redemption price
of $.10 per Warrant at any time, provided the average market price for the
Common Stock issuable upon exercise of such Warrant shall equal or exceed 150%
of the Purchase Price for the twenty day period ending within three days of the
date the Warrants are called for redemption. Notice of redemption shall be given
not earlier than the thirtieth (30th) nor later than the sixtieth (60th) day
before the date fixed for redemption, all as provided in the Warrant Agreement.
On and after 5:00 P.M. (New York City time) on the business day immediately
preceding the date fixed for redemption, the Registered Holder shall have no
rights with respect to this Warrant except to receive the $.10 per Warrant upon
surrender of this Certificate. This Warrant may only be called for redemption
if, on the date the Warrant is called for redemption, the issuance of the shares
of Common Stock upon exercise of this Warrant is subject to a current and
effective registration statement.
Prior to due presentment for registration of transfer hereof, the
Company and the Warrant Agent may deem and treat the Registered Holder as the
absolute owner hereof and of each Warrant represented hereby (notwithstanding
any notations of ownership or writing hereon made by anyone other than a duly
authorized officer of the Company or the Warrant Agent) for all purposes and
shall not be affected by any notice to the contrary.
This Warrant Certificate shall be governed by and construed in
accordance with the laws of the State of New York applicable to agreements
executed and to be performed wholly within such State, without regard to
principles of conflicts of laws.
This Warrant Certificate is not valid unless countersigned by the
Warrant Agent.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be duly executed, manually or in facsimile by two of its officers thereunto duly
authorized and a facsimile of its corporate seal to be imprinted hereon.
ACTIVEWORLDS.COM, INC.
Dated:_____________ By:_________________________
By:_________________________
Countersigned:
____________________________ [Seal]
as Warrant Agent
By:_______________________________
Authorized Officer
A-2
<PAGE>
ACTIVEWORLDS.COM, INC.
SUBSCRIPTION FORM
To Be Executed by the Registered Holder in Order to Exercise Warrants
THE UNDERSIGNED REGISTERED HOLDER hereby irrevocably elects to
exercise______________ Warrants represented by this Warrant Certificate to
purchase the securities issuable upon the exercise of such Warrants, and
requests that certificates for such securities shall be issued in the name of
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
(please print or type name and address)
Please insert Social Security
or other identifying number
______________________________
and be delivered to
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
(please print or type name and address)
and if such number of Warrants shall not be all the Warrants evidenced by this
Warrant Certificate, that a new Warrant Certificate for the balance of such
Warrants be registered in the name of, and delivered to, the Registered Holder
at the address stated below.
Date:__________________________ X__________________________________________
___________________________________________
___________________________________________
___________________________________________
Address
___________________________________________
Taxpayer Identification Number
___________________________________________
Signature Medallion Guaranteed
A-3
<PAGE>
ASSIGNMENT
To Be Executed by the Registered Holder in Order to Assign Warrants
FOR VALUE RECEIVED, ___________________________________________________
hereby sells, assigns and transfers onto
Please insert social security
or other identifying number
_____________________________
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
(please print or type name and address)
______________________________ of the Warrants represented by this Warrant
Certificate, and hereby irrevocably constitutes and appoints _________________
_______________________________________________________________________Attorney
to transfer this Warrant Certificate on the books of the Company, with full
power of substitution in the premises.
Date:________________________________ X_____________________________________
Signature Medallion Guaranteed
______________________________________
THE SIGNATURE TO THE ASSIGNMENT OR THE SUBSCRIPTION FORM MUST CORRESPOND TO THE
NAME AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER. AND MUST BE
GUARANTEED BY AN ELIGIBLE INSTITUTION (AS DEFINED IN RULE 17Ad-15 UNDER THE
SECURITIES AND EXCHANGE ACT OF 1934) WHICH MAY INCLUDE A COMMERCIAL BANK OR
TRUST COMPANY, SAVINGS ASSOCIATION, CREDIT UNION OR A MEMBER FIRM OF THE
AMERICAN STOCK EXCHANGE, NEW YORK STOCK EXCHANGE, PACIFIC STOCK EXCHANGE OR
MIDWEST STOCK EXCHANGE
A-4
<PAGE>
RESTATED 1999 LONG-TERM INCENTIVE PLAN
Preamble. Activeworlds.com, Inc., a corporation incorporated under the laws
of the State of Delaware (the "Corporation"), hereby adopts the following
restated incentive plan to be known as the Activeworlds.com, Inc. Restated 1999
Long-Term Incentive Plan (the "Plan"). This Plan supercedes and replaces the
Activeworlds.com, Inc. 1999 Long-Term Incentive Plan.
Section I. Purpose of the Plan. The purposes of the Plan are (i) to associate
more closely the interests of certain key contributors to the success of the
Corporation with those of the Corporation's stockholders by encouraging stock
ownership, (ii) to provide long-term incentives and rewards to those persons who
are in a position to contribute to the long-term success and growth of the
Corporation and its subsidiaries, and (iii) to assist the Corporation and its
Affiliates (as hereinafter defined) in retaining and attracting key employees,
independent contractors, directors and other service providers. Awards under the
Plan may be made to employees of the Corporation and its Affiliates, and other
key service providers or consultants to the Corporation and its Affiliates.
Section II. Administration.
a. The Committee. The Plan shall be administered by a committee
appointed by the Board of Directors of the Corporation (the
"Committee"). The Committee shall be composed of members who (i) to
the extent necessary to comply with Rule 16b-3 as promulgated under
the Securities Exchange Act of 1934, as amended (the "Exchange
Act") are "Non-Employee Directors" within the meaning of Rule 16b-3
and (ii) to the extent any option granted hereunder is intended to
qualify as performance-based compensation under Section 162(m) of
the Internal Revenue Code of 1986, as amended and the regulations
promulgated thereunder (the "Code"), constitute "outside directors"
within the meaning of Section 162(m) of the Code. Such Committee
shall consist of not less than two members of the Corporation's
Board of Directors. The Board of Directors may, from time to time,
remove members from, or add members to, the Committee. Vacancies on
the Committee, howsoever caused, shall be filled by the Board of
Directors. The Committee shall select one of its members as
Chairman, and shall hold meetings at such times and places as it
may determine. A majority of the Committee at which a quorum is
present, or acts reduced to or approved in writing by a majority of
the members of the Committee, shall be the valid acts of the
Committee.
b. Authority and Discretion of Committee. Subject to the express
provisions of the Plan and provided that all actions taken shall be
consistent with the purposes of the Plan, the Committee shall have
<PAGE>
full and complete authority and the sole discretion to: (i) select
the individuals to whom awards shall be granted under the Plan (the
"Participants"); (ii) determine the size and the form of the award
or awards to be granted to any Participant; (iii) determine the
time or times such awards shall be granted; (iv) establish the
terms and conditions upon which such awards may be exercised and/or
transferred; (v) alter any restrictions; (vi) interpret and
construe provisions of the Plan or of any award granted under it;
and (vii) adopt such rules and regulations, establish, define
and/or interpret any other terms and conditions, and make all other
determinations (which may be on a case-by-case basis) deemed
necessary or desirable for the administration of the Plan. No
member of the Board of Directors or the Committee shall be liable
for any action or determination made in good faith with respect to
the Plan or any stock option or other award granted under it.
c. If at any time no Committee shall be in office, the Board of
Directors shall perform the functions of the Committee.
Section III. Awards. Awards under the Plan may include any or all of the
following, as described and defined herein: Stock Options, including Incentive
Stock Options and Nonqualified Stock Options, Stock Appreciation Rights,
Restricted Share Awards and Performance Shares.
a. Stock Options. Stock options ("Stock Options") are rights to
purchase shares of common stock $0.001 par value of the Corporation
("Common Stock") at a stated price (determined by the Committee) on
the date of grant for a predetermined period of time.
i. The Committee may grant Stock Options either alone or in
conjunction with Stock Appreciation Rights as described in
paragraph d. below. It shall determine the number of shares
of Common Stock to be covered by each such Stock Option.
ii. The Committee will determine the conditions of Stock Option
exercise as well as the conditions upon which Stock Options
shall lapse, but in no event may any portion of a Stock
Option be exercisable later than ten (10) years from the date
of the grant.
iii. The Committee may provide for acceleration of Stock Option
exercise in case of the acquisition of a significant portion
of the assets or a significant change in ownership of the
Corporation.
-2
<PAGE>
iv. The exercise price of any Stock Option shall be no less than
the Fair Market Value of the Common Stock on the date such
Stock Option is granted, shall be determined by the
Committee, and shall be paid in full upon exercise, either
(a) in cash, (b) by delivery of shares of Common Stock
(valued at their Fair Market Value on the date of purchase,
as defined in Section IV) or (c) a combination of cash and
Common Stock. In addition, the Committee may provide for the
cashless exercise of Stock Options.
b. Incentive Stock Options. Any Stock Option designated by the
Committee as an "Incentive Stock Option" is intended to qualify as
an "incentive stock option" within the meaning of Subsection 422
(b) of the Code and shall satisfy, in addition to the conditions of
Section III.a. hereof, the conditions set forth in this Section
III.b.
i. Incentive Stock Options may only be granted to common law
employees of the Corporation or its subsidiaries.
ii. On the date on which an Incentive Stock Option is granted,
the exercise price per share provided for in such Incentive
Stock Option will not be less than the Fair Market Value of
one share of the stock for which such Incentive Stock Option
may be exercised, provided however, that an Incentive Stock
Option may only be granted to an individual who, on the date
of grant, owns stock possessing more than ten percent (10%)
of the total combined voting power of all classes of stock of
the Corporation or of any Affiliate (a "Ten Percent Owner")
if, on the date such Incentive Stock Option is granted, the
exercise price per share provided for in such option granted
to a Ten Percent Owner is at least 110 percent of the Fair
Market Value of one share of the stock for which such
Incentive Stock Option may be exercised.
iii. An Incentive Stock Option may only be exercised during the
ten (10) year period following the date such Incentive Stock
Option is granted, provided however, that an Incentive Stock
Option may only be granted to a Ten Percent Owner if such
Incentive Stock Option by its terms is not exercisable after
the expiration of the five (5) year period following the date
such Incentive Stock Option is granted.
iv. To the extent that the aggregate Fair Market Value of stock
with respect to which Incentive Stock Options are exercisable
for the first time by any individual during any calendar year
under all option plans maintained by the Corporation or any
Affiliate exceeds $100,000, such excess shall be treated as
Nonqualified Stock Options and not as Incentive Stock
Options.
-3
<PAGE>
c. Nonqualified Stock Options. Any Stock Option designated by the
Committee as a "Nonqualified Stock Option" is intended to qualify
as a "non-statutory stock option" within the meaning of Section 83
of the Code and shall satisfy the conditions of Section III.a.
Nonqualified Stock Options may be granted to (i) individuals who
are key employees (including officers and directors who are also
key employees) of the Corporation or any Affiliate, (ii) Directors
who are not otherwise employees of the Corporation or an Affiliate;
or (iii) employees and other persons who are consultants to or
otherwise perform services to or for the benefit of the
Corporation, any Affiliate, or any Affiliate (whether or not a
member of the Corporation's consolidated group), all as the
Committee shall determine from time to time.
d. Stock Appreciation Rights. "Stock Appreciation Rights" are rights
to receive cash and/or Common Stock in lieu of the purchase of
shares under a related Stock Option. The Committee may grant Stock
Appreciation Rights to any recipient of a Stock Option either at
the time of the grant of the Stock Option or subsequently, by
amendment to such grant. All Stock Appreciation Rights shall be
granted under and subject to the following terms and conditions,
and such other terms and conditions as the Committee may establish:
i. Each Stock Appreciation Right shall be exercisable at the
same times and with regard to the same number of shares as
the related Stock Option is exercisable.
ii. Each Stock Appreciation Right shall entitle the holder
thereof to surrender to the Corporation a portion of or all
of the unexercised, but exercisable, related Stock Option,
and to receive with respect to each share of Common Stock
represented by such surrendered portion cash and/or shares of
Common Stock of a value equal to the amount by which the Fair
Market Value of each such share on the date of exercise
exceeds the exercise price provided in the related Stock
Option. The recipient shall not be required to pay the Stock
Option exercise price upon surrender of the Stock Option or
exercise of the related Stock Appreciation Right.
iii. Each surrender of a portion of or all of a Stock Option upon
the exercise of a Stock Appreciation Right shall cause a
share for share reduction in the number of shares of Common
Stock covered by the related Stock Option.
-4
<PAGE>
iv. Notwithstanding any other provision of the Plan, the
Committee may, from time to time, determine the maximum
amount of cash or stock which may be paid or issued upon
exercise of Stock Appreciation Rights (a) in any year and/or
(b) to any particular Participant. In no event, however, may
the cash portion of such payment exceed 50% of the total
amount due. Any other limitation on payments may be changed
by the Committee from time to time, provided that no such
change shall require the holder to return to the Corporation
any amount theretofore received upon the exercise of Stock
Appreciation Rights.
e. Restricted Stock Awards. "Restricted Stock Awards" are grants of
Common Stock to a Participant subject to the restrictions described
in the following subsections.
i. The Committee may award Restricted Stock alone or in
conjunction with Performance Shares as described in paragraph
f. below. The Committee shall further determine the number of
shares of Restricted Stock to be awarded.
ii. Restricted Stock may be subject to such terms and conditions
as the Committee may determine which may include, without
limitation, a provision that the Restricted Stock will be
forfeited unless the recipient remains in the employ of the
Corporation or an Affiliate for a minimum period of time, or
a provision that the Restricted Stock will be forfeited
unless the Corporation or an Affiliate achieves specified
earnings, sales or other performance-based goals. In
addition, the Committee may condition the grant of Restricted
Stock on the agreement of the recipient to make an election
to disregard the risk of forfeiture of the Restricted Stock
pursuant to Section 83(b) of the Internal Revenue Code of
1986, as amended. The period during which any Restricted
Stock remains subject to forfeiture shall be determined by
the Committee but shall not be less than one (1) year nor
more than ten (10) years. Upon the satisfaction of any
vesting requirement specified in the grant of the Restricted
Stock, such Restricted Stock will cease to be Restricted
Stock and, other than restrictions, if any, imposed by
federal or state securities or similar laws, shall be freely
transferable by the owner.
iii. Restricted Stock may not be sold, transferred or otherwise
disposed of, pledged, or otherwise encumbered.
iv. In the event a recipient of Restricted Stock is an employee
whose employment is terminated for any reason except death,
retirement or permanent disability, any Restricted Stock he
-5
<PAGE>
or she holds shall be delivered to the Corporation without
compensation and on such other terms identified in the
restricted stock grant within 30 days following such
termination and shall be deemed void for all corporate
purposes.
v. Upon the occurrence of the earlier of the death, retirement,
or permanent disability of the recipient of a Restricted
Stock Award, the restrictions against disposition of shares
as to which such restrictions have not otherwise lapsed shall
immediately lapse.
vi. In addition to the terms provided in paragraph e.ii. above,
the Committee may, in its discretion, provide that any
forfeitable Restricted Stock shall become nonforfeitable upon
the acquisition of a significant portion of the assets or
upon any significant change of ownership of the Corporation.
vii. Certificates issued in respect of Restricted Stock granted
under the Plan shall be registered in the name of the
recipient but shall bear the following legend:
"The transferability of this certificate and the shares of
stock represented hereby is restricted and the shares are
subject to the further terms and conditions contained in the
Activeworlds.com, Inc. 1999 Long-Term Incentive Plan. Copies
of said plan are on file in the office of the Treasurer of
Activeworlds.com, Inc. at its offices in Newburyport,
Massachusetts."
viii. In order to enforce the restrictions, terms and conditions on
Restricted Stock, each recipient thereof shall, immediately
upon receipt of a certificate or certificates representing
such shares, deposit such certificates, together with stock
powers and other instructions of transfer as the Committee
may require, appropriately endorsed in blank, with the
Corporation as escrow agent under an escrow agreement in such
form as shall be determined by the Committee.
f. Performance Shares. Performance Shares are rights to payment in
cash of an amount equal to the Fair Market Value of the
Corporation's Common Stock on the date the restrictions lapse on an
accompanying Restricted Stock Award. The Committee may grant
Performance Shares to a recipient of Restricted Stock either at the
time of the award of the Restricted Stock or subsequently by
amendment of such award. Any number of Performance Shares, up to an
amount equal the number of shares of the accompanying Restricted
Stock Award, may be granted by the Committee.
-6
<PAGE>
g. Special Rules for Awards to Covered Employees. The Committee may,
in its sole discretion, grant to any Covered Employee (as defined
below) any Stock Option for which the exercise price of a share of
the stock for which such option is granted is equal to or greater
than the Fair Market Value of a share of such stock on the date
such Stock Option is granted with the intent that such award
qualifies as "performance-based compensation" under Section 162(m)
of the Code, or any successor provision thereto (a "162(m) Award").
In the event the Corporation is a "publicly held corporation" as
defined in Section 162 (m) (2) of the Code, awards to Covered
Employees (as defined below) shall be made only in compliance with
that intent and with all of the following conditions:
i. Only the Committee shall have authority to make 162(m) Awards
to Covered Employees;
ii. No more than One Thousand (1,000) shares of the Corporation's
Common Stock shall be included in 162(m) Awards made to any
Covered Employee in any calendar year;
iii. In connection with his or her initial employment, an employee
may be granted options to purchase up to an additional One
Hundred (100) shares, which shall not count against the limit
set forth in subsection ii. above;
iv. The foregoing limitations shall be adjusted proportionately
in connection with any change in the Corporation's
capitalization as described in Section V;
v. If an option granted in connection with a 162(m) Award is
canceled in the same fiscal year of the Corporation in which
it was granted (other than in connection with a transaction
described in Article 6(g)), the canceled option shall be
counted against the limits set forth in subsections (ii) and
(iii) above. For this purpose, if the exercise price of an
option is reduced, the transaction will be treated as a
cancellation of the option and the grant of a new option;
vi. Amounts earned in connection with 162(m) Awards shall be
based upon the attainment of performance objectives
established by the Committee in accordance with Section
162(m). Such performance objectives may vary by optionee and
by award and shall be based upon the attainment of specific
amounts of, or changes in one or more of the following: Fair
-7
<PAGE>
Market Value of the Corporation's common stock, revenues,
earnings, shareholders' equity, return on equity, assets,
return on assets, capital, return on capital, book value,
economic value added, operating margins, cash flow,
shareholder return, expenses or market share. The Committee
may provide that in measuring the achievement of the
performance objectives, a 162(m) Award may include or exclude
items such as realized investment gains and losses,
extraordinary, unusual or non-recurring items, asset
write-downs, effects of accounting charges, currency
fluctuations, acquisitions, divestitures,
reserve-strengthening and other non-operating items; and
vii. For the purposes of this Plan, the term "Covered Employee" is
defined in Section 162(m)(3) of the Code and generally
includes (a) the Corporation's Chief Executive Officer who is
serving on the last day of the taxable year (the "CEO") and
(b) the four (4) most highly compensated employees of the
Corporation other than the CEO whose compensation is required
to be reported to the Corporation's shareholders under the
Securities Exchange Act of 1934.
Section IV. Miscellaneous Provisions.
1. Rights of Recipients of Awards. The holder of Stock Appreciation Rights or
any Stock Option granted under this Plan shall have no rights as a
stockholder of the Corporation with respect thereto unless and until
certificates for shares are issued. The holder of a Restricted Stock Award
will be entitled to receive any dividends on such shares in the same amount
and at the same time as they are declared on shares of Common Stock of the
Corporation and shall be entitled to vote such shares as a stockholder of
record.
a. Assignment of Options and Stock Appreciation Rights. No stock
Option or Stock Appreciation Right or any rights or interests of
the recipient therein shall be assignable or transferable by such
recipient except by will or the laws of descent and distribution.
During the lifetime of the recipient, such Stock Option or Stock
Appreciation Right shall be exercisable only by, or payable only
to, the recipient thereof.
b. Further Agreements. All Stock Options, Stock Appreciation Rights,
Restricted Stock Awards, and Performance Share Awards granted under
this Plan shall be evidenced by agreements in such form and
containing such terms and conditions (which must be consistent with
this Plan) as the Committee may require.
c. Replacement Options and Stock. Upon cancellation of an outstanding
Stock Option or the forfeiture of Restricted Stock, replacement
Stock Options or replacement Restricted Stock may be issued in an
amount and with such terms as the Committee may determine.
-8
<PAGE>
d. Legal and Other Requirements. No shares of Common Stock shall be
issued or transferred upon exercise of any award under the Plan
unless and until all legal requirements applicable to the issuance
or transfer of such shares and such other requirements as are
consistent with the Plan have been complied with to the
satisfaction of the Committee. The Committee may require that,
prior to the issuance or transfer of Common Stock hereunder, the
recipient thereof shall enter into a written agreement to comply
with any restrictions on subsequent disposition that the Committee
or the Corporation deem necessary or advisable under any applicable
law, regulation or official interpretation thereof. Certificates of
stock issued hereunder may be legended to reflect such
restrictions.
e. Withholding of Taxes. Pursuant to applicable Federal, state, local,
or foreign laws, the Corporation may be required to collect income
or other taxes upon the grant of certain awards, the exercise of an
option, or Stock Appreciation Right, or the lapse of restrictions
on a Restricted Stock Award. The Corporation may deduct applicable
taxes from payments made under the Plan, or require, as a condition
to such award, or to the exercise of an option or Stock
Appreciation Right, that the recipient pay the Corporation, at such
time as the Committee or the Corporation determines, the amount of
any taxes which the Committee or the Corporation, in their
discretion, determines are required to be withheld.
f. Right to Awards. No employee of the Corporation or other person
shall have any claim or right to be a Participant in this Plan or
to be granted an award hereunder. Neither this Plan nor any action
taken hereunder shall be construed as giving any Participant any
right to be retained in the employ of the Corporation. Nothing
contained hereunder shall be construed as giving any Participant or
any other person any equity or interest of any kind in any assets
of the Corporation or creating a trust of any kind or a fiduciary
relationship of any kind between the Corporation and any such
person. As to any claim for any unpaid amounts under the Plan, any
Participant or any other person having a claim for payments shall
be an unsecured creditor.
g. Fair Market Value The "Fair Market Value" of Common Stock shall be
(x) if the Common Stock of the Corporation is listed on a national
stock exchange or traded in the over-the-counter market, the
closing price reported on the day immediately preceding the date of
grant, (y) if the Common Stock is not listed on a national stock
exchange or traded in the over-the-counter market but a private
sale of Common Stock has taken place within the 60 days preceding a
grant or award, the sales
-9
<PAGE>
price per share in such private sale, unless the Board of Directors
determines in good faith that such price does not accurately
reflect the value of the Common Stock or (z) in any other case, the
value determined by the Board of Directors in good faith.
h. Permanent Disability. A Participant shall be deemed to have a
"Permanent Disability" if, for physical or mental reasons, the
Participant is prevented from performing the Participant's duties
for 60 consecutive days, or 120 days during any twelve-month
period. A Permanent Disability shall be determined by the Board of
Directors in consultation with a medical doctor selected by it. The
Participant shall submit to a reasonable number of examinations by
the medical doctor making the determination of Disability, and the
Participant shall authorize the disclosure and release to the
Corporation of such determination and all supporting medical
records. If the Participant is not legally competent, the
Participant's legal guardian or duly authorized attorney-in-fact
shall act in the Participant's stead for the purposes of submitting
the Participant to the examinations, and providing the
authorization of disclosure, required hereunder.
i. Retirement. "Retirement" shall mean any date on which an employee
terminates employment with the Corporation on or after attaining
age 62.
j. Indemnity. Neither the Board of Directors nor the Committee, nor
any members of either, nor any employees of the Corporation or any
Affiliate, shall be liable for any act, omission, interpretation,
construction or determination made in good faith in connection with
their responsibilities with respect to the Plan. The Corporation
hereby agrees to indemnify the members of the Board of Directors,
the members of the Committee, and the employees of the Corporation
and its subsidiaries with respect to any claim, loss, damage, or
expense (including counsel fees) arising from any such act,
omission, interpretation, construction or determination to the full
extent permitted by law.
2. Affiliate. For the purposes of this Plan, the term "Affiliate" means,
with respect to a specified Person, any Person that directly or indirectly
controls, is controlled by, or is under common control with, the specified
Person. As used in this definition, the term "control" means the possession,
directly or indirectly, of the power to direct or cause the direction of the
management and policies of a Person, whether through ownership of voting
securities, by contract or otherwise. The term "Person" means any individual,
corporation, association, partnership (general or limited), joint venture,
trust, estate, limited liability company, or other legal entity or organization.
An entity which is included with the "affiliated group" of the Corporation as
defined by Section 1504 of the Code, or an entity which is consolidated with the
Corporation for financial reporting purposes, shall in any case be considered an
"Affiliate" as defined herein.
-10
<PAGE>
Section V. Amendment and Termination; Adjustments Upon Changes in Stock. The
Board of Directors of the Corporation may at any time, and from time to time,
amend, suspend or terminate the Plan in whole or in part; provided, however,
that the Board of Directors may not materially increase the benefits accruing to
participants under the Plan, increase the number of shares of Common Stock
reserved for purposes of the Plan, or materially modify the requirements as to
eligibility for participation in the Plan without further approval by the
affirmative vote of at least a majority of the holders of the outstanding shares
of Common Stock. Except as provided herein, no amendment, suspension or
termination of the Plan may affect the rights of a participant to whom an award
has been granted without such participant's consent. In the event of any merger,
consolidation, reorganization, recapitalization, stock dividend, stock split or
other change in the Corporation's corporate structure, appropriate adjustments
may be made by the Committee or by the Board of Directors of the Corporation
(or, if the Corporation is not the surviving corporation in any such
transaction, by the Board of Directors of the surviving corporation) in the
aggregate number of shares available for award under the Plan, and in the
aggregate number and kind of shares and the price per share subject to
outstanding Stock Options, Stock Appreciation Rights, Restricted Stock Awards or
Performance Share Awards.
Section VI. Shares of Stock Available. The aggregate number of Stock Options
and Restricted Stock Awards under the Plan is One Million (1,000,000) shares of
the capital stock of the Corporation on a fully-diluted basis, assuming full
exercise of all options and conversion of all convertible shares. The total
number of Stock Options and Restricted Stock Awards which may be issued
hereunder will be reduced (i) upon the exercise of an option, by the number of
shares for which such option is exercised; (ii) upon the exercise of a Stock
Appreciation Right, by the number of shares covered by the option canceled upon
such exercise; and (iii) by the number of shares which are released due to the
lapse of restrictions in case of a Restricted Stock Award. The grant and payment
of Performance Shares shall not affect the number of shares of Common Stock
subject to the Plan. Any shares subject to an option hereunder that for any
reason is canceled (other than because of the exercise of an attached Stock
Appreciation Right) or expires unexercised or shares reacquired because
restrictions do not lapse on Restricted Stock Awards will be available for
further awards. Shares of Common Stock to be delivered under the Plan may be
authorized, but unissued shares or shares reacquired on the open market.
Section VII. Effective Date and Term of the Plan. Subject to shareholder
approval, the effective date of the Plan is January 21, 1999, and awards under
the Plan may be made for a period of ten (10) years commencing on such date. The
period during which an option or other award may be exercised may extend beyond
that time as provided herein.
This Plan was adopted by the directors of the Corporation by written
consent on March __, 2000.
__________________________
Richard F. Noll, President
-11
<PAGE>
AUDIO VISUAL/MULTIMEDIA CONTRACT
The Tech Museum of Innovation
Contract #: ExD#03-0498
-----------
PO #: P.O.#12288
----------
This AGREEMENT made as of the 20th of April, 1998.
BETWEEN: The Tech Museum of Innovation, a California not for profit corporation,
having its offices at 145 West San Carlos Street, San Jose, California
95113-2006
(hereinafter called "TMI")
OF THE FIRST PART
AND: Circle of Fire, Inc. (COF), having its offices at 4 Middle Street,
Newburyport, MA 02172
(hereinafter called "Consultant")
OF THE SECOND PART
WHEREAS:
TMI in San Jose, California is developing a new exhibit program for its new
facility opening in October of 1998. TMI has identified several portions of the
exhibit program that require AV and interactive multimedia.
Based on previous work experience, the Consultant has been selected to work with
TMI.
NOW, THEREFORE, THIS AGREEMENT WITNESSES that in consideration of the promises
and the covenants herein contained, the parties hereby agree on the following
outline of the two parties' mutual rights and responsibilities for the
completion of the described exhibits beginning April 20, 1998.
As of the date of this Agreement, the exhibits in the theme gallery indicated in
Section 1.1 are scheduled to be installed, tested and in full operation no later
than September 1, 1998. This date may be changed by mutual agreement of the
parties.
<PAGE>
Section 1: Scope of Work
The Consultant's scope of services includes the elements described in this
section of the Agreement, along with all other services necessary for or
incidental to the performance of the project. The work of each principal phase
shall be performed so as to achieve the interim completion dates for the
respective phases as set forth in the Project Schedule incorporated in this
Agreement.
1.1 The Consultant's Scope of Work will include the following: (described in
detail in Attachment One);
Exhibit # Exhibit Name
- --------- ------------
C1-1208 Electronic Cafe
C1-1210 Cyberchat
according to the schedule in this Agreement (see Attachment Two).
1.2 For each of these exhibit units, the Consultant's Scope of Work includes
fulfilling the following:
1.2.1 Story Board Refinement
1.2.2 Hardware & Software Specification
1.2.3 Interface Design
1.2.4 Multilingual
1.2.5 Hearing Impaired
1.2.6 Formative Evaluation
1.2.7 Coordination with Exhibit Fabricator
1.2.8 Production
1.2.9 "Burn - In"
1.2.10 Installation
1.2.11 Staff Training
1.2.12 Documentation
1.2.13 Quality Control
1.2.14 Review
1.2.15 Permits and Regulations
1.2.16 Schedule
1.2.1 Story Board Refinement
Attachment One consists of written descriptions of the multimedia programs, some
of which may include sketch story boards, provided by TMI and Consultant's
Proposal which has been accepted as a basis for production by TMI. These
descriptions, together with Consultant's Proposal, represent the joint design
intent, and should serve as the starting point for further development of the
programs by the Consultant. TMI has provided the written descriptions to help
ensure that the developments of the multimedia programs are consistent with the
content and key concepts of the other exhibit elements. TMI strongly encourages
the Consultant's creative and innovative input in the Consultant's development
and refinement of the written descriptions and story boards. The Consultant
shall submit the final developed concepts for TMI review and approval. An
example of approved story boards and flow chart is included as Attachment Seven
of his Agreement.
1.2.2 Hardware & Software Equipment and Specifications
All exhibit units must comply with the TMI Interior Construction and Exhibit
Fabrication Specifications and Design Guidelines (see Attachment Three). Any
hardware required in the final exhibit which does not comply with the TMI
Interior Construction and Exhibit Fabrication Specifications and Design
Guidelines must be approved in writing by TMI.
Consultant is to provide and pay for all hardware and software equipment,
materials and labor used in the development and installation of their work
unless otherwise specifically noted in this Agreement. If specified in this
Agreement, TMI may loan the Consultant the development hardware to be used at
the Consultant's premises for the length of the project.
At TMI's option, the Consultant may be required to ship back the loaned hardware
to TMI as part of one of the formal reviews of the progress of the work. All
equipment loaned by TMI shall be returned by the Consultant with the final
submittal of software and discs.
<PAGE>
TIM will be using a museum-wide Lucent Technologies twisted pair network system.
In many cases, this will allow for the software/video server to be located away
from the exhibit. All input and output signals will be sent over twisted pair
from and to the CPU and or video server. All successful bidders will be required
to prove that their software works over such a network. A small network, for
tests to be conducted on, will be provided at TMI. In other cases, TMI may
provide the necessary materials to conduct network tests at the Consultant's
office.
Consultant will be responsible for the security of the TMI loaned equipment, and
will replace the equipment at no cost to TMI in the event the equipment is lost
or damaged.
1.2.3 Interface Design
All AV/multimedia exhibits shall comply with TMI's User Interface Standards (see
Attachment Four) and TMI Exhibit Graphic Standards (see Attachment Five), and
TMI Editorial and Graphic Guidelines (see Attachment Six). The Consultant shall
include creative and innovative ways to adapt TMI's standards to the specific
needs of the exhibit experience. The Consultant's proposed exhibit interface
design shall be submitted to TMI for review and approval.
It is TMI's intent that all AV/multimedia programs fit within the graphic
design of the overall museum. Consultant should anticipate the following graphic
design standards:
o Titles, screens and headers should match the graphic design found in the
specific thematic area.
o All other text, specifically that text which conveys content, will use the
font type "Arial."
o Colors chosen for the multimedia should coordinate with the graphic design of
the exhibit.
Consultant will be given graphic design overviews to facilitate the coordination
of its work with the graphic panels found in the themes.
1.2.4 Multilingual
The exhibits in this Agreement are to be multilingual. The actual format and
application of this requirement are to be agreed upon by TMI and the Consultant.
The Consultant must provide a written description of this work which shall serve
as Attachment Eight of this Agreement.
1.2.5 Hearing Impaired
All exhibits with audio must be subtitled in English. Open or closed captioning
has yet to be determined.
1.2.6 Formative Evaluation
Consultant will work with TMI to establish a formative evaluation program which
will consist of two phases for prototyping Interactive computer programs. TMI
and the Consultant shall jointly develop the objectives for the prototypes which
shall be deployed at TMI, or other location(s) as selected by TMI. The
COnsultant shall be responsible for design services, as described in this
Agreement. TMI will be responsible for any evaluation or testing services. The
software and computer equipment will be shipped to TMI, or other location
selected by TMI, on a date mutually agreed upon by the Consultant and TMI. The
period for the prototype phases will be mutually agreed upon between TMI and the
Consultant. TMI will share these results with the Consultant in a timely manner.
In consultation with the Consultant, TMI will determine how the evaluation
results are used for the production of actual finished exhibits.
1.2.7 Coordination with Exhibit Fabricator
The Consultant shall work with TMI's exhibit fabricator, AV/multimedia equipment
installer (and other consultants) as necessary for the complete coordination of
their work into the exhibit. This shall include but not be limited to:
o Providing detailed specifications on equipment and material sizes;
o Meeting and/or teleconferencing with fabricator to review construction and
installation details;
o Defining and Coordinating construction schedule and delivery times;
o All other items as needed to properly intergrate the AV and multimedia design
into the exhibit.
April 20, 1998 Circle of Fire, Inc. page 3
<PAGE>
1.2.8 Production
Consultant is responsible for all elements of the production, which includes but
is not limited to all software programming, acquisition of existing software and
media footage, creation of new media footage, animation, computer graphics and
networking protocols, necessary for the completion of exhibit units described in
this Agreement except as specified in the definitions of Scope of Work
incorporated into Attachment 1.
1.2.9 Testing & "Burn-In"
Consultant will conduct testing as required to ensure the integrity of the final
video storage devices and software prior to delivery to TMI. A written
description of the testing conducted will be supplied to TMI.
After delivery and installation, the Consultant must test all units once again
with "the public" to ensure that there are no "bugs," defects, failures and/or
malfunctions in the exhibits.
1.2.10 Installation
Consultant shall be responsible for the complete installation of all
media-resulting in a complete exhibit.
1.2.11 Staff Training
Consultant shall be responsible for training TMI staff on all aspects of the
exhibits including but not limited to use, trouble-shooting, maintenance,
back-up, and understanding the function of the multimedia hardware and software.
1.2.12 Documentation
Consultant will provide a user instructional manual that acan be used by TMI
staff to train new staff, and for reference. This manual must outline all
required maintenance to be performed by TMI staff and by qualified technicians,
matrix of equipment and part numbers, all warranties, suppliers and contact list
with address and phone numbers, and manufacturer's manuals for equipment used in
the exhibits and purchased by Consultant, design documentation and system test
documentation.
The AV/multimedia producer is responsible for installing the final program and
start it running. This can be accomplished by the AV/multimedia producer
actually delivering a machine that is running the software or it can be
installed from a storage device.
In addition, all finished media must be delivered in the following formats:
o CD ROMS (or other master archive format to be agreed upon by TMI) with
original sofware, audio files and artwork required for exhibit operation. This
disc should be PC formatted.
o CD ROMS (or other master archive format to be agreed upon by TMI) with all
video/audio used or not used in the final production.
o Source code documentation and a listing of all software required by the system
for exhibit operation.
1.2.13 Quality Control
Consultant should achieve a varied and exciting AV environment. The program
should achieve, but not be limited to, the following performance
characteristics:
Sound:
The sound-track shall exactly match the video portion with in-synch tracks for
all portions of the program. The audio portions must not contribute to any sound
"bleed" problems.
Seven sounds are standard across exhibits:
- - 1 sound for transition between Attraction screen and Intro screen (1g)
- - 1 sound for transition to End screen and Allow Others to Play window, the Quit
button on the Stop Screen (3b, 4b, and 7b)
- - 3 Navigation button sounds (Stop, Go Back, Continue) (6e)
- - 1 sound for click-able objects/choices (and buttons other than the three
Navigation buttons) (11b)
- - 1 sound for the appearance of a Prompt note, a Visitor Error note, or a
Time-out note (13g, 14h, 15f)
Sounds unique to a particular exhibit should not resemble the seven standard
museum-wide sounds.
April 20, 1998 Circle of Fire, Inc. page 4
<PAGE>
If an exhibit is playing recorded or synthesized speech to convey predetermined
information or content to a visitor, then the exhibit should enable hearing
impaired visitors to display visual text in addition to the speech. A standard
button or icon representing this Display Text function should be determined.
(TBD).
Any exhibit audio should not be so loud or distracting that it interferes with
the experience of visitors using other nearby exhibits. The maximum and minimum
sounds the exhibit produces should vary only over a 10dB range, and the standard
sounds should be in the middle of this range.
Sound for all multimedia must be recorded and played back on separate channels.
The standard channel separation is as follows:
Channel 1: Vocals
Channel 2: Sound Effects and Soundtracks
Speed:
The system must have very fast response times, characteristic of those found on
coin operated computer games. The programs must have effective, fast prompts
(voice-over and sound effect).
Errors:
These systems shall be bug free.
Equipment:
The program must have fully operational hardware and software when installed in
the Museum.
1.2.14 Reviews
Consultant will submit to TMI for review all materials developed, components
produced and/or equipment to be used by the Consultant in their completion of
their work under this Agreement. TMI will review submittals within ten (10) days
of receipt and will notify the Consultant in writing of any exceptions to the
materials, components and/or equipment submitted. In the event TMI rejects any
material or takes exception to items submitted, the Consultant will have five
(5) days in which to resubmit to TMI any material and components that were not
deemed acceptable.
1.2.15 Permits and Regulations
Consultant will give all notices and secure, pay for and maintain all permits,
licenses and inspections required or necessary for proper performance of this
Agreement. The Consultant will also comply with all federal, state and local
codes, federal, state and local tax laws, social security acts, the National
Science Foundation terms and conditions as it applies to this contract and
unemployment compensation acts and workmen's compensation acts as may relate to
the performance of this Agreement. The Consultant will comply with safety
measures initiated by TMI and required by applicable laws, regulations and
orders of public authorities, including but not limited to requirements under
OSHA.
1.2.16 Schedule
With the signing of this Agreement, the Consultant shall submit for TMI's
approval a schedule which will include proposed milestones, delivery dates,
payment dates, and meeting dates, times and locations to accomplish the Scope of
Work. This will serve as Attachment Two of this Agreement.
Section 2: TMI's Responsibilities
2.1 Until further notice from TMI, TMI hereby designates Wayne LaBar, Director
of Exhibit Implementation (hereinafter referred to as "Representative") to have
authority to deal with the Consultant in connection with the performance of the
project, to give and receive all written communications and documentation
between TMI and the Consultant, to give direction and instruction to the
Consultant and to make decisions binding on TMI falling within the scope of this
Agreement. The Representative may designate one or more other persons to perform
particular functions on his behalf by written notice to the Consultant which
notice shall specify the authority so delegated. Such notice shall be effective
until revoked or varied by subsequent written notice. The Representative shall
be authorized to determine whether Interim Completion Dates have been met, to
give approvals herein required from time to time in respect to the Work, to
determine generally whether the Consultant is meeting or has met its obligations
here under, and to make all other determinations permitted or required of TMI.
Authorizations must be written and signed by the Representative. TMI may change
the Representative upon notice to the Consultant.
April 20, 1998 Circle of Fire, Inc. Page 5
<PAGE>
2.2 TMI shall provide to the Consultant information regarding TMI's requirements
for the project.
2.3 TMI shall examine the documents submitted by the Consultant, and shall
render decisions pertaining thereto so as not to cause unreasonable delay in the
progress of the Consultant's services.
2.4 TMI's approval of any plans, drawings, specifications or other documents
prepared by the Consultant shall not relieve the Consultant of his obligations
pursuant to this Agreement, nor impose any liability whatsoever on TMI for any
inadequacy, inconsistency, or failure of such plans, drawings, specifications,
or documents.
Section 3: Performance by Consultant
3.1 Consultant shall perform the services provided for hereunder in a skillful
and competent manner in accordance with the standards of Consultant's
profession. The work of this project, including project documentation, shall be
accurate and complete. Inaccurate work or documentation shall be corrected at
Consultant's expense.
3.2 Consultant shall perform the services described herein in conformance with
the project schedule set out in Attachment Two.
3.3 Consultant will make staff available for phone conversations and
consultations related to technology and administrative issues. J.P. McCormick
will serve for Consultant, with responsibility for addressing all administrative
issues. The Consultant will work in whatever ways are possible to facilitate
every aspect of the project.
3.4 Consultant shall submit within ten (10) days after execution of contract the
staffing that the Consultant proposes for this project. TMI shall provide
written notice of acceptability of staffing within five (5) days. TMI may at its
sole discretion reject any of the proposed staff, at which time the Consultant
will have five (5) days to provide an alternate. The Consultant shall not
remove any staff member from the project without TMI's prior written approval.
Section 4: Insurance
4.1 Worker's Compensation Insurance
During the term of this Agreement, and at all times that the Consultant performs
services for TMI hereunder, the Consultant shall maintain in full force and
effect, at its own cost and expense, Worker's Compensation Insurance as required
by law, and employer's liability insurance in an amount not less than
$500,000.00.
4.2 Auto and Liability Insurance
During the term of this Agreement, and at all times that the Consultant performs
services for TMI hereunder, the Consultant shall maintain in full force and
effect, at its own cost and expense, the following policies of insurance:
4.3 Commercial General Liability Insurance
Automobile insurance (comprehensive or business automobile including owned,
non-owned and hired automobiles).
The amount of the Commercial General Liability policy shall be not less than
$1,000,000.00 single limit per occurrence, issued by an admitted insurer(s) as
defined in the California Insurance Code, and as acceptable to TMI. This policy
shall provide TMI and its officers, employees and agents, and the Redevelopment
Agency of the City of San Jose as additional insured and shall stipulate that
the insurance will operate as primary insurance and that no other insurance
effected by TMI will be called upon to contribute to a loss covered thereunder.
4.4 Certificate of Insurance
Within fifteen (15) days after execution of this Agreement, the Consultant shall
provide TMI with certificates of insurance from a company or companies deemed
acceptable by TMI. Such certificates shall demonstrate compliance with the above
provisions, and shall provide that no policy shall be canceled without thirty
(30) days' prior written notice to TMI.
April 20, 1998 Circle of Fire, Inc. Page 6
<PAGE>
4.5 Notice
Consultant shall notify TMI within five (5) working days after the Consultant
receives notice of or becomes aware of any claims made against the Consultant or
TMI which may relate to the Consultant's liability to TMI under this Agreement.
Section 5: Changes in the Work
5.1 The Consultant may be ordered by TMI, without invalidating this Agreement,
to make changes in the work within the general scope of the Agreement,
consisting of additions, deletions or other revisions. If such changes are
ordered, then the amounts due the Consultant set forth in Section 6.1 and the
completion dates set forth in Attachment Two will be adjusted accordingly. Prior
to commencement of any revised or changed work, the Consultant and TMI shall
mutually agree, in writing, to the revised budget and production schedule.
Section 6: Compensation
6.1 The Consultant will perform all work necessary in accordance with this
Agreement for a fee not to exceed $25,000.00 (Twenty Five Thousand Dollars and
00/100). This includes a base fee of $10,000.00, bonuses in the amount of
$10,000.00 for on-time performance and, upon negotiation, up to $5,000.00 for
modifications. The fee also includes all costs for the AV/multimedia production
of the exhibits listed in Section 1.1, multilingual translation, and travel
reimbursement costs for pre-production, research, design, prototyping and
installation. TMI and the Consultant will identify and mutually agree upon the
number of trips required. If the number of trips by the Consultant to TMI should
exceed eight (8), TMI will pay reimbursable expenses at cost. An invoice and
original copies of all expense receipts will be required.
Schedule
--------
i. $5,000.00 upon execution of the Agreement;
ii. $5,000.00 bonus for on-time delivery of Beta #1 - June 2, 1998;
iii. Up to $5,000.00 for modifications and delivery of Beta #2
incorporating Spanish translation (text only). This amount will be
contingent upon the extent of the modifications negotiated on June 9,
1998 between TMI and the Consultant - June 15, 1998;
iv. $5,000.00 bonus for final on-time delivery, including final voice-
overs in English and Spanish, following evaluation and approval by TMI
- June 25, 1998;
v. $5,000.00 upon final installation on site and acceptance by TMI - July
30, 1998. If through no fault of the Consultant, installation is
delayed, the Consultant shall at TMI's option receive all or a portion
of the balance. However, this is conditional on the Consultant
guaranteeing in writing the satisfactory performance of all its
productions at the time of Installation.
6.2 TMI must be invoiced for each payment, with the invoice apportioned per
exhibit in accordance with the agreed upon schedules of payment.
6.3 Reimbursable expenses after eight (8) trips, as defined in Schedule One,
Project Expenses, shall not exceed a total of $5,000.00 (Five Thousand Dollars
and 00/100) throughout the Scope of Work described in this Agreement, unless
authorized in writing by TMI. The Consultant agrees to track its submitted
reimbursable expenses monthly and indicate the total invoiced to date on each
invoice submitted to TMI for payment.
6.4 Consultant acknowledges that it will not be entitled to reimbursement for
any costs it incurs in excess of the amounts listed in Section 6.1 of this
Agreement unless such excess costs result from changes in work, approved by TMI
in writing under Section 2 hereto.
6.5 All invoices should be sent to Wayne LaBar at TMI. Payments will be made
within thirty (30) days of approval by TMI's representative on completion of
scheduled tasks in Section 6.1
April 20, 1998 Circle of Fire, Inc. Page 7
<PAGE>
Section 7: Innovations and Ownership
In rendering services to TMI, Consultant may create or develop scientific,
technical, and/or business innovations.
7.1 TMI shall be granted a royalty free license to use, compile, install and
execute the computer software elements and other intellectual property and/or
trade secrets embodied in the Work Product (the "Licensed Program") in
connection with its operation of an interactive media exhibit (the "Exhibit" in
TMI's San Jose, California location. In support of TMI's authorized use of the
Licensed Program, it may store the Licensed Program's machine-readable
instructions or data in, transmit it through, and display it on machines
associated with the exhibit. TMI shall have the right to make copies of the
Licensed Program in machine-readable form, for nonproductive backup purpose
only, provided that Consultant's proprietary legend is included.
7.2 TMI acknowledges that Consultant may incorporate preexisting materials,
previously developed and owned by Consultant or third parties, into the Work
Product being produced for TMI under this Agreement. Consultant agrees to obtain
licenses from all such third parties covering the manner in which Consultant
will use their respective materials in the Work Product, and supply these
licenses to TMI upon completion of any work to which they relate. TMI agrees
that it will not use such licensed works in any manner that exceeds the scope of
the underlying licenses granted to Consultant.
Section 8: Confidential and Protected Information
8.1 Confidential Information.
Consultant's rendering of services to TMI creates a relationship of trust and
confidence between TMI and Consultant. During and after Consultant's rendering
of services to TMI, either party will not use or disclose, or allow anyone else
to use or disclose, any "Confidential Information" (as defined below) relating
to the other, its products, suppliers, or customers, except as may be necessary
in the performance of such party's work for the benefit of the other or as may
be authorized in advance by appropriate officials of such other party.
"Confidential Information" includes Innovations, marketing plans, business
strategies, financial information, customer lists, trade secrets, and any other
nonpublic technical or business information, whether in writing or given to a
party orally, and if designated as confidential or not, which such party knows
or has reason to know the other party would like to treat as confidential for
any purpose, such as maintaining the uniqueness of its programs and services or
avoiding undesirable publicity. These restrictions, however, will not apply to
Confidential Information that has become known to the public generally through
no fault or breach of the party to whom it is given, that the party to whom it
belongs regularly gives to third parties without restriction on use or
disclosure, or that was rightfully in the receiving party's possession and not
subject to an obligation of nondisclosure before disclosure to such party by the
other party or which becomes available to a party other than those through the
other party.
8.2 Protected Information.
"Protected Information" means any trade secret or other nonpublic technical or
business information of any kind of a third party, analogous in scope to
Confidential Information, which such third party has not intentionally made
generally and publicly available or disclosed through official announcement or
disclosure. Each party represents and warrants to the other that it has not and
will not: (a) use, rely upon, or obtain any benefit from any Protected
Information in rendering services to the other; (b) provide or disclose to the
other party any information which it believes or has reason to believe may be
Protected Information; or (c) induce any other persons to use, rely upon or
disclose Protected Information in rendering services to the other party.
Section 9: Warranties and Disclaimer
9.1 Consultant hereby warrants and represents it has the full right to enter
into this Agreement and to grant the rights granted to TMI hereunder and that it
will obtain all necessary consents from third parties to do so, and that all
components and materials it provides do not infringe upon any U.S. patent and
copyrights of any third party.
9.2 Consultant warrants that its services under this Agreement will conform
substantially to the plans and specifications attached as Attachment One and
that all services will be performed in a professional manner according to
industry standards.
April 20, 1998 Circle of Fire, Inc. Page 8
<PAGE>
9.3 Consultant warrants that all components (which include all the software
programs) provided by the Consultant will be free from defects, glitches, and
bugs for a period of one (1) year following final approval by TMI of each
component (or component parts thereof including, without limitation, software.)
Approval by TMI with respect to any component shall be deemed to have been given
in the event TMI fails to notify the Consultant of its not giving said approval
within 30 days of its receipt of such component. If a component becomes
defective, and such defect is directly and solely attributable to the Consultant
within such one (1) year period, the Consultant will at its sole expense, repair
or replace such defective component as soon as reasonably possible. The warranty
under this Section 9.3 will also apply to all replaced components.
9.4 The warranties set forth herein are in lieu of all other warranties, whether
written, oral, expressed or implied, including, without limitation, any warranty
or merchantability or fitness for a particular purpose.
Section 10: Representations and Warranties; Consultant's Employees and
Independent Contractors
Any employee of Consultant shall be obligated under this Agreement in the same
manner as Consultant.
10.1 Services. Consultant represents and warrants that: (a) each of its
employees assigned to perform services under this Agreement shall have the
proper skill, training and background so as to be able to perform in a competent
and professional manner; and (b) all innovations, materials, documentation and
other items delivered under this Agreement shall have been completed in a
thorough and workmanlike manner. Consultant will, at no additional charge to
TMI, correct any defects, failures, malfunctions and/or nonconformities
discovered after delivery of any of the foregoing for a period of one (1) year
after TMI's acceptance and installation of Consultant's completed exhibits.
Section 11: Indemnification by Consultant
11.1 Consultant hereby indemnifies TMI, its officers, directors, employees,
distributors, agents, customers and licensees, and agrees to defend them and
hold them harmless from and against any and all liability, damage, loss or
expense (including costs of investigation, disbursement and reasonable
attorney's fees) arising from any claim, demand, action or proceeding ("claims")
based upon the alleged breach of any of the representations or warranties set
forth in this Agreement or reasonably incurred in the settlement or avoidance of
any such claim; provided, however, that TMI shall give prompt notice to
Consultant of the assertion of any such claims as provided, further, that
Consultant shall have the right to select counsel and control the defense
thereof, subject to the right of TMI to participate therein and approve any
settlement thereof.
11.2 TMI hereby indemnifies Consultant, its officers, directors, employees,
distributors, agents, customers and licensees, and agrees to defend them and
hold them harmless from and against any and all liability, damage, loss or
expense (including costs of investigation, disbursement and reasonable
attorney's fees) arising from any claim, demand, action or proceeding ("claims")
based upon the alleged breach of any to the representations or warranties set
forth in this Agreement or reasonably incurred in the settlement or avoidance of
any such claim; provided, however, that Consultant shall give prompt notice to
TMI of the assertion of any such claims as provided, further, that TMI shall
have the right to select counsel and control the defense thereof, subject to the
right of Consultant to participate therein and approve any settlement thereof.
Section 12: Limitation of Liability
IN NO EVENT SHALL EITHER PARTY BE LIABLE FOR ANY SPECIAL, INCIDENTAL, INDIRECT
OR CONSEQUENTIAL DAMAGES OR ANY KIND IN CONNECTION WITH THIS AGREEMENT, EVEN IF
SUCH PARTY HAS BEEN INFORMED IN ADVANCE OF THE POSSIBILITY OF SUCH DAMAGES.
Section 13: Term and Terms of Service
The services Consultant will render to TMI and the term of rendering such
services will be as set forth in Section 1. TMI may terminate this Agreement if
Consultant fails within thirty (30) days of receipt of written notice from TMI
to fully and completely correct any default by Consultant of the terms of this
Agreement. In the event of such termination, TMI will pay Consultant for all
services performed by Consultant up to the date of termination and will
reimburse Consultant for all amounts paid by Consultant to third parties in
connection with this Agreement. The provisions and obligations of Sections 7.2,
7.3, 7.4, 8, 10-12, and 14-21 of this Agreement will survive any termination of
services of this Agreemenmt.
April 20, 1998 Circle of Fire, Inc. Page 9
<PAGE>
This Agreement may be terminated by TMI without cause upon at least seven (7)
days' written notice to the Contractor.
In the event of termination not the fault of the Contractor, the Contractor
shall be compensated for services performed to the termination date and
termination expenses. Termination expenses are expenses directly attributable to
termination, including a reasonable amount for overhead and profit, for which
the Constitution is not otherwise compensated under this Agreement.
Consultant may terminate this Agreement: (i) in the event TMI fails to make any
payment within fourteen (14) days of its becoming due hereunder, (ii) in the
event of any breach of any term or condition of this Agreement by TMI, or (iii)
in the event TMI becomes insolvent; files a voluntary petition in bankruptcy or
liquidation; proposes any dissolution, liquidation, reorganization, or
recapitalization with creditors, has filed against it any involuntary petition
in bankruptcy or liquidation of a receiver is appointed or takes possession of
the party's property, and such position or receiver is not dismissed or stayed
within ninety (90) days after such filing, appointment or taking possession;
makes an assignment for the benefit of creditors, or is adjudicated as bankrupt;
or takes any similar action under the laws of any jurisdiction.
Section 14: Status as an Independent Contractor
It is understood and agreed that Consultant is an independent contractor and is
not an agent or employee of TMI and has no authority whatsoever to bind TMI by
contract or otherwise. Consultant will render services under the general
direction of TMI, but Consultant will determine, in her or his sole discretion,
the manner and means by which the services may be rendered, subject to the
requirement that Consultant shall at all times comply with applicable law.
Section 15: Employment Taxes and Benefits
Consultant acknowledges and agrees that it shall be Consultant's sole obligation
to report as self-employment income all compensation received by Consultant from
TMI for services hereunder. Consultant agrees to indemnify TMI and hold it
harmless to the extent of any obligations imposed by law on TMI to pay any
withholding taxes, social security, unemployment or disability insurance, or
similar items in connection with any payments made to Consultant for the
rendering of services hereunder.
Section 16: Severability
If a court finds any provision of this Agreement invalid or unenforceable, that
provision shall be enforced to the maximum extent permitted by law, and the
other provisions of this Agreement will remain in full force and effect.
Section 17: Governing Law
This Agreement will be governed and construed in accordance with the laws of the
State of California without regard to or application of choice of law rules or
principles.
Section 18: Remedies
Because the services rendered hereunder are personal and unique and because each
party will have access to Confidential Information of the other, each party will
have the right to enforce this Agreement and any of its provisions by
injunction, specific performances or other equitable relief without prejudice to
any other rights and remedies that the other party may have for a breach of this
Agreement. The election by a party to
April 20, 1998 Circle of Fire, Inc. page 10
<PAGE>
terminate this Agreement in accordance with its terms shall not be deemed an
election of remedies, and all other remedies provided by this Agreement or
available at law or in equity shall survive any termination.
Section 19: Attorneys' Fees
If any action is necessary to enforce the terms of this Agreement, the
substantially prevailing party will be entitled to reasonable attorneys' fees,
costs and expenses in addition to any other relief to which such prevailing
party may be entitled.
Section 20: Assignment, Successors and Assigns
Consultant may not assign this Agreement or delegate its duties hereunder
without prior written consent from TMI, and any attempt to do so without
permission will be void. This Agreement may be assigned by TMI and will inure to
the benefit of any successor or assign of TMI.
Section 21: Entire Agreement
This Agreement represents the entire Agreement between the parties with respect
to the subject matter hereof, and no changes or deletion may be made except in
writing bearing the authorized signature of the Representative of both parties
to this Agreement.
Notices provided in connection with the Agreement shall be addressed as follows:
A. If to TMI:
The Tech Museum of Innovation
145 West San Carlos Street
San Jose, CA 95113
Attn: Wayne LaBar
B. If to Consultant:
Circle of Fire, Inc.
4 Middle Street
Newburyport, MA 01950
Attn: J.P. McCormick
With a copy to
John A. Kostrubanic, Esq.
Pepe & Hazard LLP
150 Federal Street, 28th Floor
Boston, Massachusetts 02110
April 20, 1998 Circle of Fire, Inc. page 11
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
in duplicate by their respective duly authorized representatives as of the day
and year first written above.
Tech Museum of Innovation Consultant: Circle of Fire, Inc.
By: Peter B. Giles By: J.P. McCormick
-------------------------- ----------------------------
Printed Name: Peter B. Giles Printed Name: J.P. McCormick
---------------- ------------------
Title: President & CEO Title: CFO
----------------------- -------------------------
Date: June 5, 1998 Date: June 6, 1998
------------------------ --------------------------
Federal Tax ID:
----------------
Contract No.: ExD#3-0498
------------------
Attachments:
Attachment One: Exhibit Operational Descriptions, User Interface/Flowchart
and Scope of Work
Attachment Two: Deliverable Schedule
Attachment Three: The Tech Museum of Innovation Interior Construction and
Exhibit Fabrication Specifications and Design Guidelines
Attachment Four: The Tech Museum of Innovation Multimedia Exhibit Interface
Standards
Attachment Five: The Tech Museum of Innovation Graphic Design Standards
Attachment Six: The Tech Museum of Innovation Editorial and Graphic
Guidelines
Attachment Seven: The Tech Museum of Innovation Story Board and Flow Chart
Examples
Attachment Eight: Multilingual Strategy
Schedule One: Project Expenses
Exhibit A: Copyright Notices
April 20, 1998 Circle of Fire, Inc. page 12
