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Filed Pursuant to Rule 424(b)(4)
Registration No. 333-85095
PROSPECTUS
1,260,000 Units
[GRAPHIC OMITTED]
ACTIVEWORLDS.COM, INC.
This is a firm-commitment offering of 1,260,000 of our units. Each unit
consists of one share of our common stock and a Series B redeemable common stock
purchase warrant to purchase one share of our common stock at $4.675 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
AWDDE. We have applied for the listing of our common stock, units and 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 7.
Per Unit Total
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Public Offering Price ........... $4.25 $5,355,000
Underwriting Discounts .......... $ .425 $ 535,500
Proceeds, before expenses,
to Activeworlds.com ............ $3.825 $4,819,500
We have granted the underwriters a 45-day option to purchase up to 189,000
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
May 8, 2000.
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HD Brous & Co., Inc. SOLID ISG CAPITAL MARKETS, LLC
FIRST COLONIAL SECURITIES GROUP, INC.
The date of this prospectus is May 2, 2000
<PAGE>
INSIDE FRONT COVER ARTWORK
"Activeworlds.com, Inc.
"Building the 3D Internet"
ARTWORK:
On the page are four pictures of screenshots showing the Activewords
environment with applications which deal with the following applications: Top
left -- Training: picture shows avatars in a convention center; Top right --
Gaming: avatars in an e-commerce store; Bottom left -- Entertainment: picture
shows a hand of cards set up for a game of spades; and Bottom right --
E-commerce: avatar of a woman in a futuristic environment.
Above each screenshot photograph are the words "View within an Activeworlds
environment"
Under the photograph relating to Training: "TRAINING Avatars participate in
an information technology training and conference session using
Activeworlds"
Under the photograph relating to Gaming: "GAMING Virtual casino games for
fun in real time is one of many applications created with Activeworlds
Software Development Kit"
Under the photograph related to Entertainment: "ENTERTAINMENT Users
interact in realtime in thematic environments and create their own
three-dimensional websites with simple drag and drop building tools"
Under the phtograph relating to E-commerce: "E-COMMERCE Using Avatars,
consumers shop in virtual stores and communicate with store clerks"
2
INSIDE FRONT COVER ARTWORK
"Activeworlds.com, Inc.
"Building the 3D Internet"
<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
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The Offering
Securities Offered....... 1,260,000 units, each unit consisting of one share
of common stock and a series B warrant to purchase
one share of common stock. The common stock and
warrants will be separately tradeable immediately
upon issuance.
Description of the Warrants
Exercise price.......... Each warrant will entitle you to purchase one
share of common stock at $4.675 per share, subject
to adjustment, which is equal to 110% of the portion
of the offering price allocated to the common stock.
Exercise period......... Unless we redeem the warrants, you may exercise
the warrants at any time during the period
commencing May 2, 2001, or earlier with the
consent of the representatives, until May 1, 2005.
Redemption.............. Commencing May 2, 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..... 8,602,762 shares
The number of shares of common stock outstanding
prior to and after this offering does not include
3,279,225 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 long-term incentive 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 1,260,000 shares issuable upon exercise of the
warrants included in the units offered by this
prospectus;
o 378,000 shares issuable as part of the units
issuable upon exercise of the underwriters'
over-allotment option and the underlying
warrants; and
o 252,000 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.
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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............ AWDDE (OTC Bulletin Board) AWLD (Nasdaq SmallCap
Market) AWD (Boston Stock Exchange)
Warrant................. AWLDW (Nasdaq SmallCap Market) AWDW (Boston Stock
Exchange)
We have applied for the listing of our common
stock, units and warrants on the Nasdaq SmallCap
Market and the Boston Stock Exchange.
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, effective April 10, 2000.
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.
5
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SUMMARY FINANCIAL INFORMATION
Statement of Operations Data:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1999 December 31, 1998
------------------- ------------------
<S> <C> <C>
Revenue ............................................... $ 598,993 $ 576,163
(Loss) from operations ................................ (1,070,289) (69,533)
(Loss) before extraordinary item ...................... (1,045,819) (69,533)
Extraordinary item .................................... -- 109,807
Net income (loss) ..................................... (1,045,819) 40,274
Net income (loss) per share basic and diluted ......... (.145) .007
Common stock outstanding:
basic ............................................... 7,207,145 5,433,211
diluted ............................................. 7,207,145 5,476,051
</TABLE>
Balance Sheet Data:
<TABLE>
<CAPTION>
December 31, 1999
----------------------------------
As Adjusted(1) Actual December 31, 1998
---------------- --------------- ------------------
<S> <C> <C> <C>
Current assets ............................ $ 4,845,250 $ 561,250 $ 148,847
Working capital (deficiency) .............. 4,365,922 81,922 (410,934)
Short-term debt ........................... -- -- 54,753
Accumulated deficit ....................... (1,830,488) (1,830,488) (784,669)
Stockholders' equity (deficiency) ......... 4,691,774 407,774 (393,946)
Net tangible book value per share ......... .51 .012 (.08)
</TABLE>
- -------------
(1) As adjusted to reflect the sale of the 1,260,000 units offered hereby at an
assumed public offering price of $4.25 per unit, and our receipt of the
net proceeds from the sale of the units.
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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 $1,046,000, or $.145 per share (basic and diluted)
on revenue of $599,000. 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 $82,000, which was sufficient to meet only our
most immediate cash requirements. We require the net proceeds from this
offering to fund our marketing and research and development programs as well as
our administrative infrastructure. 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. For additional information, please refer to "Business - Our
Technology".
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 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.
7
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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. For additional information,
please refer to "Management".
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. If we make acquisitions, we could have difficulty integrating
the acquired company's personnel and operations with our own. Negotiations
relating to acquisitions could disrupt our business, distract our management
and employees, increase our expenses and otherwise impair our operations and
financial condition. For additional information please refer to "Business -
Future Acquisition Strategies".
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. For additional information
please refer to "Business - Intellectual Property".
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
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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.
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. For additional information please refer to
"Business-Government Regulation".
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. For additional information please refer to "Market for Common Stock;
Dividends".
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. We cannot be sure that any
active market for our units will develop or be maintained, nor can we assure
you that you will be able to resell the units in the future.
Because the common stock and warrants comprising the units will be
seperately tradeable immediately upon issuance, our common stock price may go
down. 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. For additional information please refer to "Description of
Securities - Dividend Policy".
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By paying $4.25 per unit, you will incur immediate and substantial
dilution. On December 31, 1999, we had a net tangible book value of $.012 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 $3.74,
or 88% from the $4.25 initial public offering price of the units, without
allocating any value to the warrants. For additional information please refer to
"Dilution".
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
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 have applied 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.
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. 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
5,011,778 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. For additional information
please refer to "Principal Stockholders".
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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 $.012 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 1,260,000 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 $0.51 per share. This
amount represents an immediate increase in net tangible book value per share of
approximately $.498 to the present stockholders and an immediate dilution per
share of approximately $3.74 representing dilution of 88% from the initial
public offering price of $4.25 per share 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:
<TABLE>
<S> <C>
Offering price per share of common stock ................................ $ 4.25
Net tangible book value per share at December 31, 1999 .................. $ 0.012
Increase per share attributable to sale of the units offered hereby ..... $ 0.498
Pro forma net tangible book value per share after offering .............. $ 0.51
Dilution to public investors ............................................ $ 3.74
</TABLE>
If the underwriters exercise the over-allotment option in full, the pro
forma net tangible book value would be $0.580 per share of common stock,
resulting in an increase in the net tangible book value per share of $0.568 and
dilution to the public investors of $3.682 per share.
MARKET FOR COMMON STOCK; DIVIDENDS
Our common stock has been traded on the OTC Bulletin Board under the
symbol AWDDE 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.
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<PAGE>
The high and low closing prices for our common stock since January 1, 1997
are as set forth below.
<TABLE>
<CAPTION>
Period
- -------
<S> <C> <C>
1999: High Low
------ ---------
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 ......................................... $ 6.375 $ 4.875
Second Quarter (through May 1)......................... $ 6.09375 $ 4.00
</TABLE>
The closing price for our common stock on May 1, 2000 was $ 4.00 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 took place on April 10, 2000.
As of May 1, 2000, we believe that there were approximately 68 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 1,260,000 units in
this offering will be approximately $4.28 million, based on an estimated
initial public offering price per unit of $4.25 per unit. Net proceeds are
determined after deducting underwriting discounts and commissions and the
estimated offering expenses payable by us estimated at $1.07 million, or 20% of
the gross proceeds of the offering.
Net Percent
Proceeds of Total
------------- ---------
Marketing ........................ $2,698,000 63%
Research and Development ......... $1,157,000 27%
Working Capital .................. $ 429,000 10%
---------- --
Total ............................ $4,284,000 100%
Marketing. We intend to retain the services of an outside marketing firm
to develop an effective marketing program. We will then utilize proceeds from
the offering to implement the plan developed by this firm, which will likely
include our purchasing various media exposure.
Research and Development. We intend to engage in additional research and
development activities so as to enhance our three-dimensional environment and
our website. We may also work with third parties or purchase content from third
parties for this purpose.
Working Capital. We intend to utilize a portion of the offering proceeds
to purchase or lease additional computers and other equipment.
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.
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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.
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<PAGE>
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
1,260,000 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,
8,602,762 shares issued and outstanding, as adjusted ................ 7,343 8,603
Additional paid-in capital ........................................... 2,237,419 6,520,159
Note receivable for shares ........................................... (6,500) (6,500)
Accumulated deficit .................................................. (1,830,488) (1,830,488)
Total stockholders' equity ........................................... 407,774 4,691,774
</TABLE>
The number of shares of common stock outstanding prior to and after this
offering does not include 3,279,225 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 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 1,260,000 shares issuable upon exercise of the warrants included in the units
offered by this prospectus;
o 378,000 shares issuable as part of the units issuable upon exercise of the
underwriters' over-allotment option and the underlying warrants; and
o 252,000 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.
14
<PAGE>
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 has been derived from our audited financial statements,
which appear elsewhere in this prospectus. The selected balance sheet
information for December 31, 1998 has been derived from our audited financial
statements and is presented for comparative purposes.
Statement of Operations Data:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1999 December 31, 1998
------------------- ------------------
<S> <C> <C>
Revenues ................................. $ 598,993 $ 576,163
(Loss) from operations ................... (1,070,289) (69,533)
(Loss) before extraordinary item ......... (1,045,819) (69,533)
Extraordinary gain ....................... -- 109,807
Net income (loss) ........................ (1,045,819) 40,274
Net income (loss) per share:
basic and diluted ....................... (.145) .007
Common stock outstanding:
basic ................................... 7,207,145 5,433,211
diluted ................................. 7,207,145 5,476,051
Balance Sheet Data:
</TABLE>
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
------------------- ------------------
<S> <C> <C>
Current assets ............................. 561,250 148,847
Working capital (deficiency) ............... 81,922 (410,934)
Short-term debt ............................ -- 54,753
Accumulated deficit ........................ (1,830,488) (784,669)
Stockholders' equity (deficiency) .......... 407,774 (393,946)
</TABLE>
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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 4%,
to $599,000 from $576,000 in the year ended December 31, 1998. This increase
resulted from an increase from 21 in 1998, to 23 in 1999 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 $1,071,000 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 $1,046,000, or
$.145 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.
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).
16
<PAGE>
Financial Condition
At December 31, 1999, we had working capital of $82,000, 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 $23,000. 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.
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.
17
<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;
o allow visitors to our website to enter, move about in and interact with
others in a computer-generated, three-dimensional virtual environment; and
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. Users pay an annual membership fee of $19.95 to access the website
for one year. Membership fees represented approximately 37% of revenues in 1999
and 1998.
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. Uniserver and galaxerver software fees range
from $1,995 to $62,495 depending on the size of the server. The company
generally has no obligation to maintain support for the software under the
licensing agreement. 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.
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 fee to purchase a world ranges between $92 and
$519 with a majority of world sales between $92-$119. The fee allows the user
access to the world for one year. The fee is significantly reduced for annual
renewals of the worlds.
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.
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<PAGE>
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.
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
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<PAGE>
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
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.
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<PAGE>
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.
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.
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<PAGE>
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 enables:
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,
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.
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<PAGE>
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.
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
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<PAGE>
launch new websites at 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 Phandom, Inc.com amounted to $60,000 for the
development and construction of several worlds for them which amounted to
approximately 10% 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
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<PAGE>
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
September 5, 1995. Vanguard Enterprises was formed for the
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<PAGE>
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.
<TABLE>
<CAPTION>
Name Age Position
- ----- ----- --------
<S> <C> <C>
Richard F. Noll .................. 34 President, chief executive officer and director
J.P. McCormick ................... 39 Chairman, chief financial officer, secretary, treasurer and director
Alexander M. Adelson(1) .......... 65 Director
Sean Deson(1) .................... 36 Director
</TABLE>
- ------------
(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.
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<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.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation
-----------------------------------------------
Long-Term
Compensation
(Awards,
Options, SARs
Name and Principal Position Year Salary Bonus (Number)
- ----------------------------- ------ ----------- ------- --------------
<S> <C> <C> <C> <C>
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 -- -- --
</TABLE>
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<PAGE>
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.
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.
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<PAGE>
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. Mr. Noll received
advances from us in 1998. As of December 31, 1999, $10,491 of these amounts
were owed by Mr. Noll to us.
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 will not offer preferred stock to our officers, directors or principal
stockholders except upon the same terms as it is offered to all other existing
stockholders or to new stockholders, unless the issuance is approved by the
audit committee, who will have access, at our expense, to independent legal
counsel. 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 unaffiliated directors or by our audit committee
who do not have an interest in the transactions and who will have access, at
our expense, to independent legal counsel.
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. HD Brous gave this warrant
back to us in April, 2000.
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<PAGE>
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% 29.5%
J.P. McCormick(4) ......................... 2,489,479 33.9% 28.9%
Alexander M. Adelson (5) .................. 20,000 * * %
Sean Deson(6) ............................. 0 -- --
All officers and directors as a group (four
persons)(3),(4) and (5) .................. 5,048,129 68.7% 58.4%
</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.
(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.
30
<PAGE>
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.
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 separately transferable immediately upon issuance.
Series B Redeemable Common Stock Purchase Warrants
Unless previously redeemed by us, you may, upon payment of the exercise
price of $4.675 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.
31
<PAGE>
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.
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 was given back to us in April 2000.
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.
32
<PAGE>
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 8,602,762 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:
<TABLE>
<CAPTION>
Number of Shares Date Shares May be Sold
- ------------------ ------------------------------------------------------------------------------------------
<S> <C>
537,092 Ninety days from the date of this prospectus
5,011,778 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
</TABLE>
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
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.
33
<PAGE>
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., Solid ISG Capital
Markets, LLC and First Colonial Securities Group, Inc. 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, 1,260,000 units as follows:
HD Brous & Co., Inc. .......................... 555,000 units
Solid ISG Capital Markets, LLC ................ 555,000 units
First Colonial Securities Group, Inc. ......... 150,000 units
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 $.2125 per unit. After the offering, the offering price and the
concession may be changed.
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
189,000 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 126,000 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
34
<PAGE>
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 unit purchase option provides the holders with cashless
exercise rights which enable them to receive any appreciation in the value of
the units without making a cash investment. 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.
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.
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.
35
<PAGE>
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 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.
36
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
ACTIVEWORLDS.COM, INC.
Consolidated Financial Statements
at December 31, 1999 and for years ended
December 31, 1999 and 1998
INDEX TO FINANCIAL STATEMENTS
<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 15
</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, except for note 16 as
to which the date is April 25, 2000
F-2
<PAGE>
ACTIVEWORLDS.COM, INC.
Consolidated Balance Sheet
December 31, 1999
<TABLE>
<S> <C>
Assets
Current assets
Cash .......................................................................... $ 481,408
Accounts receivable, trade - net of allowance for doubtful accounts of $20,000 22,519
Prepaid expenses .............................................................. 44,832
Advances to officer/stockholder/employees ..................................... 12,491
------------
Total current assets ........................................................ 561,250
------------
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 ................................................................ $ 898,992
------------
Liabilities and Stockholders' Equity
Current liabilities
Current portion - capital lease ............................................... $ 9,537
Accounts payable .............................................................. 163,821
Accrued liabilities ........................................................... 32,075
Deferred revenue .............................................................. 273,895
------------
Total current liabilities ................................................... 479,328
Capital lease, net of current portion .......................................... 11,890
------------
Commitments and contingencies
Total liabilities ........................................................... 491,218
------------
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 ............................................................ (1,830,488)
------------
Total stockholders' equity .................................................. 407,774
------------
Total liabilities and stockholders' equity .................................. $ 898,992
------------
</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 ................................................................. $ 598,993 $ 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 ................................................ (1,070,289) (69,533)
Interest income .......................................................... 24,470 --
------------- ---------
(Loss) before (provision for) benefit from income taxes and
extraordinary item ................................................... (1,045,819) (69,533)
(Provision for) benefit from income taxes ................................ -- --
------------- ---------
(Loss) before extraordinary item ...................................... (1,045,819) (69,533)
Extraordinary item
Gain on extinguishment of debt related to litigation settlement, net of
tax effect of $-0- ................................................... -- 109,807
------------- ---------
Net income (loss) .................................................. $ (1,045,819) $ 40,274
------------- ---------
Earnings per share of common stock -- basic
(Loss) before extraordinary item ...................................... $ (.145) $ (.013)
Extraordinary item .................................................... -- .020
------------- ---------
Net income (loss) ..................................................... $ (.145) $ .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>
ACTIVEWORLDS.COM, INC.
Consolidated Statement of Changes in Stockholders' Equity (Deficiency)
Years Ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
Preferred Stock Common Stock
------------------ ------------------------
Shares Amount Shares Amount
-------- -------- ------------ ----------
<S> <C> <C> <C> <C>
Balances at January 1, 1998, as restated ..... -- $ -- 5,433,211 $ 5,433
Issuance of common stock in connection
with acquisition of net assets of
Vanguard (note 1) ........................... 333,333 333
Stockholder/employee contributions ...........
Contract service provider contribution .......
Issuance of stock options for compensation
and services ................................
Net income for year ..........................
---- ------ --------- -------
Balances at December 31, 1998 ................ -- -- 5,766,544 5,766
Private placements of common stock, net
of issuance costs ........................... 1,438,933 1,439
Issuance of common stock for goods and
services .................................... 137,285 138
Issuance of stock options and warrants for
services ....................................
Net (loss) for year ..........................
---- ------ --------- -------
Balances at December 31, 1999 .............. -- $ -- 7,342,762 $ 7,343
---- ------ --------- -------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Note Total
Additional Receivable Stockholders'
Paid-In Accumulated for Shares Equity
Capital Deficit Issued (Deficiency)
------------ --------------- ------------ ---------------
<S> <C> <C> <C> <C>
Balances at January 1, 1998, as restated ..... $ 218,482 $ (824,943) $ (6,500) $ (607,528)
Issuance of common stock in connection
with acquisition of net assets of
Vanguard (note 1) ........................... 1,150 1,483
Stockholder/employee contributions ........... 136,000 136,000
Contract service provider contribution ....... 32,575 32,575
Issuance of stock options for compensation
and services ................................ 3,250 3,250
Net income for year .......................... 40,274 40,274
---------- ------------ -------- -------------
Balances at December 31, 1998 ................ 391,457 (784,669) (6,500) (393,946)
Private placements of common stock, net
of issuance costs ........................... 1,511,538 1,512,977
Issuance of common stock for goods and
services .................................... 132,362 132,500
Issuance of stock options and warrants for
services .................................... 202,062 202,062
Net (loss) for year .......................... (1,045,819) (1,045,819)
---------- ------------ -------- -------------
Balances at December 31, 1999 .............. $2,237,419 $ (1,830,488) $ (6,500) $ 407,774
---------- ------------ -------- -------------
</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
----------------- -------------
<S> <C> <C>
Operating activities .......................................................
Net income (loss) ....................................................... $ (1,045,819) $ 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 ............................................... (21,317) (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 .................................................. (129,555) 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>
ACTIVEWORLDS.COM, INC.
Notes to Consolidated Financial Statements
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
which became effective on April 10, 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.
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
F-7
<PAGE>
ACTIVEWORLDS.COM, INC.
Notes to Consolidated Financial Statements -- (Continued)
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.
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
Membership revenue and revenue from licensing the Company's worlds are
recognized ratably over the periods the memberships are in effect and the
licensing periods for the worlds. Advances on royalties from licensing
agreements are recognized over the period the royalties are earned. Revenue
from licensing the Company's uniservers and galaxservers 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 as the
phases are accepted by the customer.
F. Significant customers
During 1999 and 1998, revenue from one customer amounted to approximately
10.0% and 8.3%, respectively. The customer was not the same in the two years.
F-8
<PAGE>
ACTIVEWORLDS.COM, INC.
Notes to Consolidated Financial Statements -- (Continued)
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 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
Advance on contract .................... 150,000
---------
$ 273,895
---------
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.
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.
F-9
<PAGE>
ACTIVEWORLDS.COM, INC.
Notes to Consolidated Financial Statements -- (Continued)
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 (see
note 16). 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 investor relations 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.
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.
F-10
<PAGE>
ACTIVEWORLDS.COM, INC.
Notes to Consolidated Financial Statements -- (Continued)
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 investor relations 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 (see note 16). 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, 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 Currently
Options Outstanding 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>
Reference is also made to note 16.
F-11
<PAGE>
ACTIVEWORLDS.COM, INC.
Notes to Consolidated Financial Statements -- (Continued)
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.
Note 10 -- Income taxes
At December 31, 1999, the Company has a net operating loss carryforward of
approximately $1,071,000 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 $132,000.
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:
<TABLE>
<S> <C>
Net operating loss carryforward ....................... $ 429,000
Accrual basis versus cash basis tax reporting ......... 53,000
---------
Deferred tax asset before valuation allowance ......... 482,000
Valuation allowance ................................... 482,000
---------
Net deferred tax asset ................................ $ --
---------
</TABLE>
F-12
<PAGE>
ACTIVEWORLDS.COM, INC.
Notes to Consolidated Financial Statements -- (Continued)
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.
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
F-13
<PAGE>
ACTIVEWORLDS.COM, INC.
Notes to Consolidated Financial Statements -- (Continued)
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.)
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 .......... $ (1,045,819) $ (69,533)
Proforma adjustment for fair value of stock options ................. (9,996) (7,433)
------------- ----------
Proforma (loss) before extraordinary item .......................... (1,055,815) (76,966)
Gain on extinguishment of debt related to litigation settlement, net of
tax effect of $-0- .................................................... -- 109,807
------------- ----------
Proforma net income (loss) ......................................... $ (1,055,815) $ 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: $150,000 to begin
development of the software. That $150,000 is included in deferred revenue.
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.
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.
F-14
<PAGE>
ACTIVEWORLDS.COM, INC.
Notes to Consolidated Financial Statements -- (Continued)
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 became
effective on April 10, 2000. The accompanying financial statements and
footnotes have been restated to reflect this two-for-three reverse stock split.
On April 12, 2000, the placement agent for the June, 1999 private
placement transferred and gave back to the Company, without recourse, the
warrant to purchase one placement agent's unit for $90,000. The placement
agent's unit consists of 10,560 shares of the Company's stock and a warrant to
purchase 12,000 shares of the Company's common stock at $8.55 per share.
On April 25, 2000, an investor transferred and gave back to the Company,
without recourse, a warrant to purchase 166,666 shares of common stock at $8.55
per share.
F-15
<PAGE>
INSIDE BACK COVER ARTWORK
Virtual satellite picture of a portion of alphaworlds.
<PAGE>
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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.
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TABLE OF CONTENTS
Page
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Prospectus Summary ......................... 3
Our Business ............................... 3
The Offering ............................... 4
Summary Financial Information .............. 6
Risk Factors ............................... 7
Forward-Looking Statements ................. 11
Dilution ................................... 11
Market for Common Stock; Dividends ......... 11
Use of Proceeds ............................ 12
Capitalization ............................. 14
Selected Financial Data .................... 15
Management's Discussion and Analysis of
Financial Condition and Results of
Operations .............................. 16
Business ................................... 18
Management ................................. 26
Related Party Transactions ................. 29
1999 Private Placements .................... 29
Principal Stockholders ..................... 30
Description of Securities .................. 30
Underwriting ............................... 34
Legal Matters .............................. 35
Experts .................................... 35
Additional Information ..................... 36
Reports to Stockholders..................... 36
Index to Financial Statements .............. F-1
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Until May 27, 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.
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[GRAPHIC OMITTED]
1,260,000 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
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PROSPECTUS
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HD Brous & Co., Inc.
SOLID ISG CAPITAL
MARKETS, LLC
FIRST COLONIAL
SECURITIES GROUP, INC.
May 2, 2000
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