-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Emx7CdcXvi2qjiQVYfgvWWroNXT7E9neYm1ZOHH54M5MKlKOTwKdr6QYUbFoJNu/ qlo5t9axX7+Y6DByOIMzJQ== 0000950116-99-001991.txt : 19991108 0000950116-99-001991.hdr.sgml : 19991108 ACCESSION NUMBER: 0000950116-99-001991 CONFORMED SUBMISSION TYPE: SB-2/A PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 19991105 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ACTIVEWORLDS COM INC CENTRAL INDEX KEY: 0001089531 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 870564911 FILING VALUES: FORM TYPE: SB-2/A SEC ACT: SEC FILE NUMBER: 333-85095 FILM NUMBER: 99742581 BUSINESS ADDRESS: STREET 1: 95 PARKER STREET CITY: NEWBURYPORT STATE: MA ZIP: 01950 BUSINESS PHONE: 9784990222 MAIL ADDRESS: STREET 1: 95 PARKER ST CITY: NEWBURYPORT STATE: MA ZIP: 01950 SB-2/A 1 SB-2/A As filed with the Securities and Exchange Commission on November 5, 1999 Registration No. 333-85095 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 AMENDMENT NO. 1 to FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ACTIVEWORLDS.COM, INC. - -------------------------------------------------------------------------------- (Name of Small Business Issuer in Its Charter)
Delaware 511210 87-0564911 - ------------------------------------ ------------------------------ -------------------- (State or Other Jurisdiction of (Primary Standard Industrial (IRS Employer Incorporation or Organization) Classification Code Number) Identification No.)
95 PARKER STREET NEWBURYPORT, MASSACHUSETTS 01950 (978) 499-0222 ---------------------------------------------------- (Address and telephone number of Principal Executive Offices) Mr. J.P. McCormick, Chief Financial Officer Activeworlds.com, Inc. 95 Parker Street Newburyport, MA 01950 (978) 499-0222 ---------------------------------------------------- (Name, address and telephone number of agent for service) Please send a copy of all communications to: John A. Kostrubanic, Esq. Asher S. Levitsky P.C. Pepe & Hazard, LLP Esanu Katsky Korins & Siger, LLP 150 Federal Street, 28th Floor 605 Third Avenue Boston, MA 02110-1745 New York, NY 10158 (617) 695-9090 (212) 953-6000 Fax: (617) 695-9255 Fax: (212) 953-6899 APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. --------------------- If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / --------------------- If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. / / --------------------- The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with section 8(a) of the securities act of 1933 or until the registration statement shall become effective on such date as the commission, acting pursuant to said section 8(a), may determine. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CALCULATION OF REGISTRATION FEE - --------------------------------------------------------------------------------
Proposed Title of Each Maximum Proposed Amount of Class of Securities Amount Offering Price(1) Maximum Registration To be Registered to be Registered Per Unit Aggregate Fee - -------------------------------------------------------------------------------------------------------------- Units each consisting of one share of common stock and one series B redeemable common stock purchase warrant(2): ......................... 1,725,000 $ 4.50 $7,762,500 $ 2,158.00 - -------------------------------------------------------------------------------------------------------------- Common stock(3) ...................... - -------------------------------------------------------------------------------------------------------------- Underwriters' unit purchase option(4) -- -- -- -- - -------------------------------------------------------------------------------------------------------------- Units issuable upon exercise of the Underwriters' unit purchase option(5) 150,000 $ 5.40 $ 810,000 $ 225.00 Common stock(6) ...................... - -------------------------------------------------------------------------------------------------------------- Totals ..................................................................................... $ 2,383.00 - --------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- - ------------ (1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457 (a) promulgated under the Securities Act of 1933, as amended, based on a price of $4.50 per unit. The price of the common stock on the Over-the-Counter Bulletin Board (OTC Bulletin Board) on November 3, 1999 was $41/16. (2) Includes 225,000 units issuable upon exercise of the underwriters' over-allotments option. (3) Represents shares of common stock issuable upon exercise of the Series B common stock purchase warrants included in the units offered hereby, including warrants issuable upon exercise of the over-allotment option. (4) The underwriters' unit purchase option entitles the underwriters to purchase 150,000 units at 120% of the initial public offering price per unit. (5) Each unit consists of one share of common stock and one warrant. (6) Represents shares of common stock issuable upon exercise of the warrants issued pursuant to the underwriters' unit purchase option. CROSS REFERENCE SHEET
Form SB-2 Item Numbers and Caption Heading in Prospectus - ------------------------------------------------------- -------------------------------------------------- 1. Front of the Registration Statement and Outside Front Cover of Prospectus ....................... Cover Page of Form SB-2 and of Prospectus 2. Inside Front and Outside Back Cover Pages of Prospectus ........................................ Inside Front and Outside Back Cover Pages of Prospectus 3. Summary Information and Risk Factors .............. Prospectus Summary and Risk Factors 4. Use of Proceeds ................................... Use of Proceeds 5. Determination of Offering Price ................... Cover Page of Prospectus, Risk Factors and Underwriting 6. Dilution .......................................... Dilution 7. Selling Security Holders .......................... Not applicable 8. Plan of Distribution .............................. Cover Page of Prospectus and Underwriting 9. Legal Proceedings ................................. Not Applicable 10. Directors, Promoters, Executive Officers, Promoters and Control Persons ..................... Management 11. Security Ownership of Certain Beneficial Owners and Management ............................ Principal Stockholders 12. Description of Securities ......................... Description of Securities 13. Interest of Named Experts and Counsel ............. Legal Matters 14. Disclosure of Commission Position on Indemnification for Securities Act Liabilities... Not Applicable 15. Organization Within Last Five Years ............... Related Party Transactions 16. Description of Business ........................... Risk Factors and Business 17. Management's Discussion and Analysis or Plan of Operation .................................... Management's Discussion and Analysis of Financial Condition and Results of Operations 18. Description of Property ........................... Business 19. Certain Relationships and Related Transactions..... Related Party Transactions 20. Market for Common Equity and Related Stockholder Matters ............................. Market for Common Stock 21. Executive Compensation ............................ Management 22. Financial Statements .............................. Financial Statements 23. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure ...................................... Not Applicable
The information in this Prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This Prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. SUBJECT TO COMPLETION, DATED NOVEMBER 5, 1999 1,500,000 Units ACTIVEWORLDS.COM, INC. This is an offering of 1,500,000 of our units. For each unit you purchase you will receive one share of our common stock and a Series B redeemable common stock purchase warrant to purchase one share of our common stock at $ per share. No public market currently exists for our units or warrants. Our common stock is traded on the OTC Bulletin Board under the symbol AWLD. We have applied for the listing of our common stock and units on the Nasdaq SmallCap Market and the Boston Stock Exchange. The warrants will not be listed on any exchange or market until they may be separately traded. At that time, we intend to apply for the listing of the warrants on the Nasdaq SmallCap Market and the Boston Stock Exchange. The initial offering price of the units may not reflect the market price after the offering. Investing in the units involves a high degree of risk. Please see the "Risk Factors" beginning on page 7. Per Unit Total ---------- ------ Public Offering Price ................. $ $ Underwriting Discounts ................ $ $ Proceeds to Activeworlds.com .......... $ $ We have granted the underwriters a 45-day option to purchase up to 225,000 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 __________, 1999. HD Brous & Co., Inc. Corinthian Partners, L.L.C. The date of this prospectus is ___________, 1999 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. Using our Active Worlds technology users are able to create objects and structures in virtual worlds which other users can see and explore in real time. We believe that the emergence of the Internet as a global communications medium has increased the demand for efficient delivery of rich multimedia and 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 our software platform. We currently have a worldwide user base of over 900,000 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 3 sources: o Membership fees, which are paid by users who become citizens 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 Three dimensional content production for our licensees 3 The Offering Securities Offered....... 1,500,000 units, each unit consisting of one share of common stock and a series B warrant to purchase one share of common stock. For one year from the date of this prospectus, or earlier at the discretion of the underwriters, you will be able to sell or otherwise transfer the common stock and warrants which comprise the units only as units. As a result, during this period you will not be able to sell the common stock or warrants which comprise the units separately. Description of the Warrants Exercise price:........ Each of the warrants will entitle you to purchase one share of common stock at the price of $ per share, subject to adjustment. Exercise period:....... Unless we redeem the warrants, you may exercise the warrants at any time during the period commencing , 2000, or earlier with the consent of the underwriters, until , 2004. Redemption:............ Commencing , 2000, 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. 11,015,568 shares After this offering:... 12,515,568 shares The number of shares of common stock outstanding prior to and after this offering does not include 3,976,090 shares of common stock which we may issue as follows: 1,000,000 shares issuable upon exercise of stock options which are either outstanding or which we may grant pursuant to our 1999 stock option plan, 726,090 shares of common stock issuable upon exercise of outstanding warrants, 1,500,000 shares issuable upon exercise of the warrants included in the units offered by this prospectus, 450,000 shares issuable as part of the units issuable upon exercise of the underwriters' over-allotment option and the underlying warrants and 300,000 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. 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. 4 Market Symbols: Common Stock:.......... AWLD (OTC Bulletin Board (present) and Nasdaq SmallCap Market (proposed)) Unit:.................. AWLDU (Nasdaq SmallCap Market)(proposed) AWLD (Boston Stock Exchange)(proposed) We have applied for the listing of our common stock and units on the Nasdaq SmallCap Market and the Boston Stock Exchange. We intend to apply for listing of the warrants and a trading symbol for the warrants at the time the warrants become separately traded All share and per share information in this prospectus reflects a one-for-two reverse split or our common stock, effective in January, 1999. 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 8,084,816 shares of our common stock. o We effected a one-for-two reverse split of our common stock. o We sold 2,000,000 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 registration statement. 5 SUMMARY FINANCIAL INFORMATION Statement of Operations Data:
Six Months Ended June 30, January 17, 1997 ----------------------------- Year Ended (inception) 1999 1998 December 31, 1998 to December 31, 1997 ------------- ------------- ------------------- --------------------- Revenue .................................. $ 210,820 $ 195,266 $ 576,163 $ 419,130 (Loss) from operations ................... (445,933) (63,163) (69,533) (324,943) (Loss) before extraordinary item ......... (435,428) (63,163) (69,533) (824,943) Extraordinary item ....................... -- -- 109,807 -- Net income (loss) ........................ (435,428) (63,163) 40,274 (824,943) Net income (loss) per share (basic and diluted): .......................... (.040) (.008) .005 (.102) Common stock outstanding: Basic .................................. 10,684,653 8,084,816 8,084,816 8,084,816 Diluted ................................ 10,684,653 8,084,816 8,128,276 8,084,816
Balance Sheet Data:
June 30, 1999 --------------------------------- As Adjusted(1) Actual December 31, 1998 ---------------- --------------- ------------------ Current assets ............................ $ 1,190,594 $ 148,847 Working capital ........................... 902,911 (410,934) Short-term debt ........................... -- 54,753 Accumulated deficit ....................... (1,220,097) (784,669) Stockholders' equity (deficiency) ......... 1,041,416 (393,936) Net tangible book value per share ......... .083 (.054)
- ------------- (1) As adjusted to reflect the issuance of the 1,500,000 shares of common stock included in the units offered hereby and our receipt of the net proceeds from the sale of the units. 6 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 six months ended June 30, 1999, we had a net loss of $435,000, or $.04 per share (basic and diluted) on revenue of $211,000. 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. During the six months ended June 30, 1999, we suffered a decline in revenue from licenses of galaxervers and uniservers. This decline may continue and may reflect a decline in the market for these products. 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. 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. We may not be successful in marketing our technology for e-commerce applications. To operate profitably we need to license our technology for use as an integral component in e-commerce solutions for business, educational, training, entertainment, leisure-time and other commercial applications. We intend to do so through aggressive marketing campaigns online and using traditional media to promote the use of our technology. If our marketing efforts are unsuccessful, we will face difficult and costly choices in deciding whether and how to redirect these efforts. If we are unable to develop a successful licensing program, our business will be materially and adversely affected. Our lack of brand recognition may impair our ability to generate revenue. Because the Active Worlds name is not well recognized either by advertisers or by users of the Internet, we are having difficulty in generating revenue from advertisers, from businesses seeking to use three-dimensional technology as part of their e-commerce solution and from users of the Internet. We intend to devote a significant portion of the net proceeds of this offering to market our services and increase our brand recognition. If our marketing effort is not successful in generating brand recognition for the Active Worlds name, our business and financial positions would be impaired. 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 of our small size, we may have difficulty in competing with major computer, software and Internet companies. All aspects of the Internet market are new, rapidly evolving and intensely competitive, and we expect competition to intensify in the future. 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. 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 7 hiring and training new employees, have increased substantially. We expect these expenses to continue to increase as we implement our marketing and research and development programs. As a result, since our senior management is comprised only of our chief executive and financial officers, our personnel, management systems and resources are being strained, with no assurance that the implementation of our programs will result in increased revenue. To manage our growth, we must implement operational and financial systems and controls and recruit, train and manage new employees, including executive, middle management and technical personnel. We cannot be certain that we will be able to integrate new executives and other employees into our organization effectively. If we do not manage our growth effectively, our business, results of operations and financial condition could be materially and adversely affected. We may have difficulty hiring qualified employees with technical experience. There is significant competition for qualified employees in the computer programming and Internet industries 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 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. We may fail to establish an effective internal sales organization to attract either advertising or licensing revenue. We believe that our ability to generate revenues from advertising and from the licensing of our technology will depend on our ability to establish an aggressive and effective internal sales organization. Our ability to increase our sales force involves a number of risks and uncertainties, including competition and the length of time for new sales employees to become productive. If we do not develop an effective internal sales force, our business will be materially and adversely affected. If our marketing program is not successful or if our expenses exceed our expectation, we may require significant cash in addition to the proceeds of this offering. We require the net proceeds from this offering to fund our marketing and research and development programs as well as our administrative infrastructure. To the extent that these expenses exceed our expectations and we are unable to generate funds from our operations, the net proceeds from this offering may not be sufficient to fund our operations for the next twelve months. We may not be able to obtain financing when we require it, and any financing may not be on terms which are acceptable to us and may result in substantial dilution to our stockholders. If we are unable to raise needed funds, we may have to reduce the scope of our marketing and research and development activities, which would have a material adverse effect upon our business and financial condition. We may be unable to respond to the rapid technological change in our industry. The computer and Internet industries are characterized by rapidly changing technologies, frequent new product and service introductions and evolving industry standards. Our future success will depend on our ability to adapt to rapidly changing technologies by continually improving the performance, features and reliability of our services, particularly with respect to other companies in the virtual reality area. If three-dimensional Internet standards evolve in a manner which is incompatible with our technology, we may not be able to effectively market our technology. Other software and hardware companies may have the market power to impose on the marketplace an incompatible technology, and we may not have access to that technology. Our failure to offer the most current or widely accepted technologies could have a material adverse effect upon our business. We may make acquisitions following completion of this offering without informing stockholders or seeking their approval. Following this offering, we may make acquisitions of other businesses. Although we anticipate that any business we acquire will be related directly or indirectly to our present business, it is possible that we may make acquisitions in one or more unrelated businesses. Any acquisition may be made using a portion of the net proceeds of this offering or with our securities or a combination of cash and securities. At present, we are not engaged in formal or informal discussions with respect to any acquisition. However, if we make an acquisition, we may not seek stockholder approval or provide stockholders with any information concerning the acquisition prior to the execution of an acquisition agreement. Furthermore, we cannot assure you that any acquisitions which we may make will be profitable. 8 Future acquisitions may disrupt or otherwise have a negative impact on our business. If we make acquisitions, we could have difficulty integrating the acquired company's personnel and operations with our own. In addition, the key personnel of that business may not be willing to work for us, which would require us to hire others who are knowledgeable about the acquired business. Furthermore, even if an acquisition is not completed, the negotiations relating to the acquisition could disrupt our business, distract our management and employees, increase our expenses and otherwise impair our operations and financial condition. We do not have any patent protection for our software. We have no patents on our software products. Although we have registered a version of our source code with the United States Copyright Office, 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. We could be subject to possible infringement actions. Any claims for infringement, with or without merit and whether based on allegations that our technology infringes upon the rights of others or that content transmitted through our uniservers infringes upon the rights of others, could subject us to costly litigation and the diversion of our financial resources and technical and management personnel, regardless of the ultimate resolution of the claim. If these claims are successful, we may be required to modify our software, change our trademarks, alter the content, pay financial damages or obtain licenses from others. We may incur product liability for products sold over the Internet. Consumers may sue us if products that we sell online or which are purchased through our website are defective or injure the user. This type of claim could require us to spend significant time and money in litigation or to pay significant damages. At this time we do not carry products liability insurance. As a result, any legal claims, whether or not successful, could seriously damage our reputation and our business. If our computer systems and software products are not year 2000 compliant, our business could suffer. Many currently installed computer systems and software products only accept two digits to identify the year in any date. Thus, the year 2000 will appear as "00," which the system might consider to be the year 1900 rather than the year 2000. Although we believe that our proprietary software is Year 2000 compliant, other software used in our business, including our telecommunications system, whether developed by us or provided by our suppliers or used by users of our three-dimensional environment, may not be Year 2000 compliant. RISKS RELATED TO THE INTERNET If businesses do not accept three-dimensional Internet websites as a medium for advertising and e-commerce, our ability to generate revenue may be limited. If we cannot demonstrate to both advertisers and businesses that our three-dimensional technology is viable and desirable as a medium for transacting business, our ability to generate revenue from both advertising and licensing of our technology will be limited. Our systems may fail or experience a slow down and our users depend upon others for access to our website. Substantially all of our communications hardware and some of our other computer hardware operations are located at our headquarters in Newburyport, Massachusetts. We do not have a back-up computer system. Fire, floods, earthquakes, power loss, telecommunications failures, break-ins and similar events could damage these systems. Any of these occurrences could adversely affect our business. Our insurance policies may not adequately compensate us for any losses that may occur due to any failures or interruptions in our systems. Furthermore, if the response time of our website is slow for some reason, users could abandon our website and cease in using our products and services. The Internet may not become accepted as an advertising and commercial medium. Our future growth is dependent upon the growth of the Internet as a medium for information, communications and commerce. The Internet is relatively new and its use is rapidly evolving. Our business will be adversely affected if Internet usage does not continue to grow. Internet usage may be inhibited for a number of reasons including: o The Internet infrastructure may not be able to support the demands placed on it, and its performance and reliability may decline as usage grows. 9 o There may be inconsistent quality of service. o Users may have concerns with respect to the security of Internet transactions, particularly the possibility of theft of credit card and other personal information. o Users may have privacy concerns because personal information which they provide on websites may be sold to third parties without the users' knowledge or consent. o Viruses, which are software programs which may impair the users ability to use their computers, may be transmitted on the Internet. We could face liability for information contained on and communications made through our website. We may be subject to claims for defamation, negligence, copyright or trademark infringement, personal injury or other legal theories relating to the information we publish on our website. Based on links we provide to other websites, we could also be subject to claims based upon on-line content we do not control that is accessible from our website. Claims may also be based on statements made and actions taken as a result of participation in our chat rooms or as a result of materials posted by citizens on news groups at our website. These claims could result in substantial costs and a diversion of our management's attention and resources, regardless of whether we are successful. Our insurance, which covers commercial general liability, may not adequately protect us against these types of claims. Government regulation and legal uncertainties could add additional costs to doing business on the Internet. There are currently few laws or regulations that specifically regulate communications or commerce on the Internet. However, in the future, laws and regulations may be adopted and existing laws and regulations may be interpreted in a manner that address issues such as user privacy, pricing, defamation, taxation and the characteristics and quality of products and services which may have an adverse effect on the number of users of our technology. RISKS RELATING TO THE OFFERING Our common stock price has been and is likely to be highly volatile. Our common stock is quoted on the OTC Bulletin Board. However, until January 1999, there was no significant trading activity in our stock, and a regular and established market may never be developed or maintained. In addition, we cannot give you any assurance as to the liquidity of any market for the units or common stock or the prices at which you may be able to sell units or common stock. The market price of our common stock has been, and is likely to continue to be, highly volatile as the stock market in general, and the market for Internet-related and technology companies in particular, has been highly volatile. You may not be able to sell your units or shares of our common stock following periods of volatility because of the market's adverse reaction to the volatility. In the past, following periods of volatility in the market price of a company's securities, securities class action litigation has often been instituted. Litigation could result in substantial costs and a diversion of management's attention and resources. We cannot assure you that our stock will trade at the same levels as other Internet stocks or that Internet stocks in general will sustain their current market prices. Factors that could cause volatility may include actual or anticipated fluctuations in our quarterly operating results, announcements of technological innovations, changes in financial estimates by securities analysts, conditions or trends in the Internet industry and changes in the market valuations of other Internet companies. The offering price of our units and the terms of the warrants were arbitrarily determined. The initial public offering price and the composition of the units and the exercise price and other terms of the warrants were determined by negotiations between us and the underwriters and does not necessarily relate to our book value, net worth, financial condition or other established criteria of value. There is presently no market for our units. Because the common stock and warrants comprising the units will not be immediately transferable or separable, you will not be able to sell your common stock or warrants as separate securities. If you buy units, you may not be able to deliver shares of common stock included as part of the units in connection with any sale by you of our common stock until the shares of common stock and warrants are separately tradable. The common stock and warrants will not be tradable except as units for one year from the date of this prospectus or earlier at the discretion of the underwriters. The separation of the common stock and warrants may have an adverse effect upon the price of the common stock. 10 We are unlikely to pay dividends on our common stock in the foreseeable future. We have not paid any dividends on our common stock since our inception and we do not anticipate paying any dividends in the foreseeable future. We plan to retain earnings, if any, to finance the development and expansion of our business. By paying $ per unit, you will incur immediate and substantial dilution. On June 30, 1999, we had a net tangible book value of $.083 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 $ , or % from the $ initial public offering price of the units, without allocating any value to the warrants. 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. These customers may subsequently sell their units to and purchase units from the underwriters. Although they have no obligation to do so, the underwriters 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 underwriter in these markets, should a market develop. If our common stock is delisted from the Nasdaq SmallCap Market or the Boston Stock Exchange, it may be subject to the penny-stock rules, which may impair the market and market price of our common stock. We are applying for the listing of our common stock on the Nasdaq SmallCap Market and the Boston Stock Exchange. If our common stock is listed and does not meet Nasdaq's or 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. In this event, our common stock may become subject to the Securities and Exchange Commission's penny-stock rules, which impose additional sales practice requirements on broker-dealers which sell our stock to persons other than established customers and institutional accredited investors. The rules may affect the ability of broker-dealers to sell our common stock and may affect your ability to sell any common stock you purchase either pursuant to this prospectus or in the open market. We have broad discretion as to the use of the proceeds from this offering, and you have with only limited information as to the manner in which we will use the proceeds. The net proceeds of this offering are allocated to working capital purposes, including marketing and research and development. Management will have broad discretion with respect to the expenditure of the net proceeds of this offering. If you purchase units in this offering, you will be entrusting your funds to our management, upon whose judgment you must depend, with only limited information concerning our specific plans or intentions. Furthermore, circumstances may change which may result in a reallocation of our intended use of proceeds. Our stock price may be affected by shares of common stock becoming available for public sale. We estimate that the public float for our common stock presently consists of approximately 2,500,000 shares of common stock. This number includes shares which were issued in private placements and may be sold without limitation on volume under Rule 144. The shares of common stock issued as part of the units may not be sold or otherwise transferred except as part of a unit for one year from the date of this prospectus, or earlier in the discretion of the underwriters. Most of the remaining shares of common stock will become eligible for sale under Rule 144 in January 2000, subject to the Rule 144 volume limitations. Our officers, directors and 5% stockholders have agreed not to sell their shares publicly without the consent of the underwriters for six months from the date of this prospectus. Following January 2000, there will be a substantial number of shares that will be available for sale publicly which could adversely affect the market price of our common stock and could impair our ability to raise capital though the sale of additional equity securities. We may issue preferred stock without approval of our stockholders which could make it more difficult for a third-party to acquire us and depress our stock price. We have the authority to issue preferred stock without a vote of our stockholders. In the future, our board of directors may issue one or more series of preferred stock that has more than one vote per share or which give the holders other preferential rights which may dilute or impair the rights of the holders of common stock. This could permit our board of directors to issue such stock to investors who support our management and give effective control of our business to our management. Furthermore, under some circumstances issuing preferred stock may violate the rules of the Nasdaq SmallCap Market, which could result in our common stock being delisted from that market. The delisting of our common stock from the Nasdaq SmallCap Market could result in both a drop in the stock price and decline in interest in our stock which could make it more difficult for you to sell your shares. 11 We are controlled by our management which means that management can stop a third party from acquiring us even if it 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 68% 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. Our certificate of incorporation and bylaws limit the liability of management. Because our certificate of incorporation limits the liability of our officers and directors and our bylaws provide for indemnification by us of our officers and directors to the full extent permitted by Delaware corporate law, stockholders may not be able to hold directors liable for breaches of fiduciary duty. 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 June 30, 1999 was approximately $.083 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 June 30, 1999 other than as a result of the sale of the 1,500,000 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 June 30, 1999, would have been approximately $ per share. This amount represents an immediate increase in net tangible book value per share of approximately $ to the present stockholders and an immediate dilution per share of approximately $ 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 June 30, 1999: Offering price per share of common stock ................................. $ Net tangible book value per share at June 30, 1999 ....................... $ .083 Increase per share attributable to sale of the units offered hereby ...... $ Pro forma net tangible book value per share after offering ............... $ Dilution to public investors ............................................. $
If the underwriters exercise the over-allotment option in full, the pro forma net tangible book value would be $0. per share of common stock, resulting in an increase in the net tangible book value per share of $0. and dilution to the public investors of $ per share. MARKET FOR COMMON STOCK; DIVIDENDS Our common stock has been traded on the OTC Bulletin Board under the symbol AWLD since January 22, 1999. From January 13, 1996 until January 21, 1999, our common stock was included in the OTC Bulletin Board under the symbol VANG. During that period, our business was the business of Vanguard Enterprises. The National Quotation Bureau, Inc. advised us that there was no trading in the common stock during the period from January 1, 1997 until January 14, 1999. 12 The high and low closing prices for our common stock since January 1, 1997 are as set forth below.
Period High Low ------ ---- --- 1999: First Quarter (January 15 through January 21) ......... $ 4.00 $ 0.50 First Quarter (from January 22) ....................... $ 9.25 $ 4.00 Second Quarter ........................................ $ 8.375 $ 4.625 Third Quarter ......................................... $ 5.8125 $ 3.125 Fourth Quarter (through November 3) ................... $ 4.25 $ 2.50
The closing price for our common stock on November 29, 1999 was $4.0625 per share. These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions and have been restated, as appropriate, to reflect the one-for-two reverse split effective January 1999. As of November 2, 1999, we believe that there were approximately 69 record holders of our common stock. We have paid no dividends on our common stock since inception, and we do not expect to pay any dividends for the foreseeable future. USE OF PROCEEDS We estimate that the net proceeds from the sale of the 1,500,000 units in this offering will be approximately $4.5 million, based on an estimated initial public offering price per unit of $4.50 per unit. Net proceeds are determined after deducting underwriting discounts and commissions and the estimated offering expenses payable by us. We intend to use the net proceeds substantially as follows: (a) approximately $3 million (67% of the net proceeds) for the development and implementation of a marketing program; (b) approximately $1 million (22% of the net proceeds) for research and development to enhance our three-dimensional environment, including the enhancement of our website, which may include our purchasing content for our website from third parties; and (c) the balance of approximately $500,000 for working capital and other corporate purposes, including the purchase or lease of capital equipment. The above allocations represent our best estimate based upon our current plans. Our management will have broad discretion in allocating the proceeds. The amount spent on marketing and research and development is based on our proposed programs. Our ability to hire the necessary marketing personnel as well as the success of our marketing program and competitive technological developments, among other reasons, may affect the money available or required for our marketing program. Similarly, the amount we spend on research and development is based both on our hiring the personnel to perform research and development and the success of our research and development program. We may reallocate the net proceeds either among the categories listed above or to uses not presently contemplated. Such reallocation will be based upon a number of factors, including future revenue growth, the cash generated or used by our operations and the progress of our marketing and research and development efforts. Any reallocation will be determined by us, in our sole discretion. Although we are not contemplating any acquisitions at this time, we may use a portion of the net proceeds of this offering to acquire other businesses or software. Acquisition candidates may include other companies that would help us expand our business in the area of the 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. 13 Pending application of the net proceeds as described above, we intend to invest the net proceeds in short-term, interest-bearing investment grade securities, money market accounts, certificates of deposit, or direct or guaranteed obligations of the United States government. CAPITALIZATION The following table sets forth our capitalization as of June 30, 1999, and as adjusted to reflect our receipt of the net proceeds from the sale of the 1,500,000 units in this offering.
June 30, 1999 Actual As Adjusted --------------- --------------- 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, 11,015,568 shares issued and outstanding at June 30, 1999, 12,515,568 shares issued and outstanding, as adjusted ............................... 11,015 12,515 Additional paid-in capital ................................................ 2,256,998 Note receivable for shares issued ......................................... (6,500) (6,500) Accumulated deficit ....................................................... (1,220,097) (1,220,097) Total stockholders' equity ................................................ 1,041,416
The number of shares of common stock outstanding prior to and after this offering does not include 3,976,090 shares of common stock which we may issue as follows: 1,000,000 shares issuable upon exercise of stock options which are either outstanding or which we may grant pursuant to our 1999 stock option plan, 726,090 shares of common stock issuable upon exercise of outstanding warrants, 1,500,000 shares issuable upon exercise of the warrants included in the units offered by this prospectus, 450,000 shares issuable as part of the units issuable upon exercise of the underwriters' over-allotment option and the underlying warrants and 300,000 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 11 of Notes to Consolidated Financial Statements. 14 SELECTED FINANCIAL DATA Set forth below is selected financial data with respect to the six months ended June 30, 1999 and 1998, the year ended December 31, 1998 and the period from January 17, 1997 (inception) to December 31, 1997. The selected financial data has been derived from the financial statements, which appear elsewhere in this prospectus. The unaudited financial data for the interim periods reflect, in the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the data for these periods. The results of operations for the interim periods are not necessarily indicative of operating results for the entire year. This data should be read in conjunction with our financial statements, including the related notes, which are included elsewhere in this prospectus. Statement of Operations Data:
January 17, 1997 Six Months Ended June 30, ------------------ ------------------------------------- Year Ended (inception) to 1999 1998 December 31, 1998 December 31, 1997 ----------------- ------------------ --------------------- ------------------ Revenue ....................................... $ 210,820 $ 195,266 $ 576,163 $ 419,130 (Loss) from operations ........................ (445,933) (63,163) (69,533) (324,943) Extraordinary item ............................ -- -- 109,807 -- (Loss) before extraordinary item .............. (435,428) (63,163) (69,533) (824,943) Extraordinary gain ............................ -- -- 109,807 -- Net income (loss) ............................. (435,428) (63,163) 40,274 (824,943) Net income (loss) per share (basic and diluted) (.040) (.008) .005 (.102) Common stock outstanding: Basic ...................................... 10,684,653 8,084,816 8,084,816 8,084,816 Diluted .................................... 10,684,653 8,084,816 8,128,276 8,084,816 Balance Sheet Data: June 30, 1999 December 31, 1998 December 31, 1997 ------------- ------------------ --------------------- Current assets ................................ 1,190,594 148,847 46,908 Working capital ............................... 902,911 (410,934) (634,487) Short-term debt ............................... -- 54,753 74,853 Accumulated deficit ........................... (1,220,097) (784,669) (824,943) Stockholders' equity (deficiency) ............. 1,041,416 (393,946) (607,528)
15 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Six months ended June 30, 1999 and 1998 Our principal source of revenue to date has been the annual $19.95 registration fee, which is paid by our users who become citizens. We also generate revenue from the license of our uniservers and galaxservers and from technical support services which we offer to our licensees. Revenue from advertising has been nominal. We recognize revenue from membership fees ratably over the one-year membership period. We recognize revenue from licenses when the license is granted. Revenue for the six months ended June 30, 1999 increased 8.0%, to $211,000 from $195,000 in the six months ended June 30, 1998. This increase resulted from an increase in registration fees from our citizens, notwithstanding a decline in revenue from the license of our uniservers and galaxservers. Our selling, general and administrative expenses in the six months ended June 30, 1999 increased approximately 216% to $572,000 from $181,000 in the same period in 1998. This increase results principally from approximately $243,000 of legal, accounting and due diligence expenses we incurred in connection with the Circle of Fire Acquisition and the related private placement, as well as additional expenses resulting from our status as a public company. This increase 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 Mr. Richard F. Noll, our president. 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 six months ended June 30, 1999 increased 9.8% to $85,000 from $77,000 in the 1998 period. 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 $11,000 in the first six months of 1999 resulted from the investment of proceeds of our January 1999 private placement. We have a net operating loss carryforward in the amount of $762,000 as of June 30, 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 $435,000, or $.040 per share (basic and diluted), for the six months ended June 30, 1999, as compared with a net loss of $63,163, or $.008 per share (basic and diluted), for the 1998 period. Year Ended December 31, 1998 compared with the period January 17, 1997 to December 31, 1997 Revenue for the year ended December 31, 1998 increased 37.5% to $576,000 in 1998 from $419,000 in 1997. We refer to the period from January 17, 1997 (the date of our inception) to December 31, 1997 as 1997. This increase in revenue reflected increased license revenue from our software and increased revenue from registration fees from our citizens. Revenue for 1997 included $250,000 from an agreement with Philips Multimedia, pursuant to which we granted Philips Multimedia a one-year license to use our source code and our uniserver software and a noncommercial research license to use our software. Selling, general and administrative expenses increased 65.5%, to $486,000 in 1998 from $293,000 in 1997. Since we were organized in 1997, we had a smaller staff during most of 1997. Research and development expenses declined $290,593, or 64.5%, to $160,000 in 1998 from $451,000 in 1997. In 1997, we paid $300,000 in cash to an unaffiliated third party to obtain the rights to the Active Worlds technology, to the extent it had been developed at that time, as well as the right to make further developments. This payment was treated as a research and development expense in 1997. Our research and development expenses, other than this payment, were relatively constant in both years and related principally to the development of our technology. 16 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 and is shown as a litigation settlement in the statement of operations. 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 foregoing, we generated loss before extraordinary item of $70,000, or $.009 per share (basic and diluted) for 1998, as compared with a loss of $825,000 or $.102 per share (basic and diluted) for 1997. 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 $.005 per share (basic and diluted). Financial Condition At June 30, 1999, we had working capital of $903,000, which included cash of $1.1 million. The working capital reflected the remaining cash from the January and June 1999 private placements, from which we received aggregate net proceeds of approximately $1.7 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 six months ended June 30, 1999, we used $501,000 for our operations. Our cash balances represent substantially our only current asset. At June 30, 1999, our accounts receivable were $36,000. 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. Year 2000 Compliance The year 2000 problem is the inability of some software, hardware and systems to determine the correct century commencing on January 1, 2000. For example, software with date-sensitive functions that are not Year 2000 compliant may not be able to determine whether "00" means 1900 or 2000, which may result in computer failures or the failure of the computer to produce accurate information. Our business, operating results and financial position could be materially and adversely affected if our computer systems and third party suppliers are not Year 2000 compliant. 17 We have conducted an internal assessment of all material information technology and non-information technology systems at our headquarters for Year 2000 compliance and believe that all of our systems are Year 2000 compliant. The only outside vendor upon which we rely, other than utility companies and similar business, is the company which provides us with access to the Internet and houses our website. This company has informed us that its system is Year 2000 compliant. Through June 30, 1999, we have not incurred any material costs in identifying or evaluating Year 2000 compliance issues. Most of our expenses have related to, and are expected to continue to relate to, the upgrades or replacements, when necessary, of software or hardware, as well as costs associated with time spent by our employees in the evaluation process and Year 2000 compliance matters generally. These expenses are included in our capital expenditures budget and are not expected to be material to our financial position or results of operations. However, our business could be hurt and if these expenses are higher than we presently anticipate. We cannot assure you that we will not discover Year 2000 compliance problems in our systems that will require substantial revisions or replacements. In the event that the operational facilities that support our business, or our web-hosting facilities, are not Year 2000 compliant, we may be unable to provide our users and licensees with access to our website. Our inability to fix or replace third-party software, hardware or services on a timely basis could result in lost revenues, increased operating costs and other business interruptions, any of which could have a material and adverse effect on our business, results of operations and financial condition. Moreover, the failure to adequately address Year 2000 compliance issues in our software, hardware or systems could result in claims of mismanagement, misrepresentation or breach of contract and related litigation, which could be costly and time-consuming to defend. In addition, there can be no assurance that governmental agencies, utility companies, Internet access companies and others outside our control will be Year 2000-compliant. The failure by these entities to be Year 2000-compliant could result in a systemic failure beyond our control, including, for example, a prolonged Internet, telecommunications or electrical failure, which could also prevent us from delivering our services to our users, decrease the use of the Internet or prevent users from accessing our services, any of which would have a material and adverse effect on our business, results of operations and financial condition. 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. 18 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 galaxserver, on which they can control the content and access; and o allow visitors to our website to enter, move about in and interact with others in a computer-generated, three-dimensional virtual environment. We also offer licensees of our World server technical services to assist them in the development of their worlds or to develop their worlds for them. Unlike a two-dimensional environment which permits movement on a computer screen only along horizontal and vertical axes (up, down, left and right), a three-dimensional virtual environment also enables users to move forward and backward. We generally grant our World server licensees a non-exclusive right to use our uniserver or galaxerver software, which comes with the right to receive any upgrades for a one-year period. Our galaxerver is similar to our uniserver but, unlike the uniserver, which can support a large number of worlds, the galaxerver only supports one world. Our World server licensees can develop their own worlds or they can engage us to develop their worlds for them or assist them in the development of their world. Our world server enables our licensees to create unique three-dimensional objects for use in their worlds and to impose limitations on both the nature of the structures which may be created and the users who may either visit the world or create structures on the world. 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 August 30, 1999, there were approximately 1,000 worlds supported by our uniserver, of which ten worlds are our worlds and the remaining worlds were created by our users or licensees. Approximately 600 of these worlds are running at any one time. The Market for Three-Dimensional Technology The substantial growth of the Internet is well known. The growth of the Internet has been accompanied by a range of applications designed to facilitate both business and personal communications. We believe the three-dimensional multi-user Internet market is a rapidly growing market and a natural evolution of the development of Internet communities. At present, a typical website uses two-dimensional web pages and book-style interfaces, which require the visitor to click to turn pages of a virtual book. We believe that the next stages of development will include three-dimensional interactive environments, which permit visitors to move about in the environment and interact with other users. We believe that three-dimensional technology has a wide variety of applications, including the following: o The entertainment industry, which can use three-dimensional technology to offer virtual settings that allow the user to interact with both the environment and other visitors. We have created virtual worlds for the feature films Godzilla and The 13th Floor. For The 13th Floor, we created a virtual world that was used to launch a virtual premiere of the movie which was attended by the virtual renditions of stars of the movie and other well-known actors. 19 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 900,000 users. This Uniserver receives more than 1,000,000 hits per day, with each hit representing an incidence of access to one of our ten company created worlds such as downloading of building objects. Our primary method of delivering our browser 2.2 is through the Internet. When a user visits any of our worlds, his or her presence is immediately indicated by his or her avatar and the user is greeted by his or her screen name. Citizens can create avatars from a range of formats, while the avatar of a tourist is limited to two forms which identify the visitor as a tourist. The avatar's position is shown 20 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 30 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 June 30, 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 Atlantis, which has an underwater theme and permits the construction of structures appropriate to this environment. 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 Providing businesses with the ability to develop one or more unique worlds as part of their e-commerce strategy, which may be used either for their internal use or for visits by the general public. o Affording advertisers the ability to offer three-dimensional Internet interactive advertising. o Developing three-dimensional e-commerce solutions for businesses seeking to sell goods and services throughout the Internet. o Offering users a community in which they can create virtual structures, move about and communicate with other users. 21 Our Strategy We intend to seek to meet our objective by: Marketing 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 900,000 users have accessed our website and that in a typical day there are more than 1,000,000 hits to the three-dimensional website. We consider a user to have accessed our website if the user has downloaded our browser and used the browser to visit the website. We do not believe that this number is sufficiently large to attract advertisers and e-commerce vendors to our website. Accordingly, we believe that increasing our user base is critical to our ability to generate revenue from advertising and e-commerce. Marketing our website as a site for advertising We intend to make our worlds attractive locations for both advertising and e-commerce. We have developed a virtual mall, @mart, at which more than 100 companies have virtual stores. We intend to expand our effort to attract e-commerce and advertising to our three-dimensional environment by seeking to increase the number of virtual malls located at @mart, as well as market separate worlds dedicated to products and services offered by one company. Although we do not anticipate that revenue from @mart will represent a material portion of our revenue, @mart is important for demonstrating to businesses the application of our technology in an e-commerce environment and providing three-dimensional content for visitors to our website. We believe that we can make our worlds more attractive to advertising by: o Increasing our user base to show sufficient interest in our worlds. o Demonstrating the benefits which three-dimensional technology can offer both advertisers and businesses, both in terms of visual effects and technological features. o Implementing an extensive advertising campaign, using print, radio and television and the Internet. o Implementing an extensive public relations effort involving speaking tours with various news agencies. Our Technology The key element to our three-dimensional environment is our proprietary uniserver software which stores subscriber information, permits world servers to operate and enable: o the creation of three-dimensional worlds; 22 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 20 frames a second and 16 bit sound. Using the browser, a visitor can see and interact with other visitors and the virtual environment. Our platform can accommodate thousands of simultaneous users. Using our software, servers and authoring tools, users can communicate, play games, conduct business and otherwise interact "face-to-face" in our shared three-dimensional worlds on the Internet. Marketing and Sales Since Active Worlds is an Internet-based platform, the potential market for our products is global. Our present marketing effort is directed at: o Businesses and educational institutions, to which we are seeking to license our technology and assist them to develop three-dimensional applications to meet their specific needs. o Users, who we are trying to attract to our website by providing interesting content and access to our technology. o Advertisers, to whom we are trying to demonstrate a user base which meets their demographic requirements. o Educational and non-profit institutions through Education Universe. 23 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. The initial payment of $150,000 is due by December 19, 1999. If payment is not made by that date our sole remedy is to terminate the agreement, in which event neither party will have any obligation to the other. 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 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 September 30, 1999, there were approximately 100 vendors offering products and services, which included books, compact disks, clothes, tickets and computer products. Approximately half of these vendors operate through affiliated merchant programs and we receive a small percentage of any revenue derived from sales made through our @mart link. The other vendors have no obligation to make any payment to us, and they do not pay a fee to us at this time. To date, our revenue from goods and services sold through @mart has not been significant, and we do not anticipate that this revenue will be significant. Pursuant to our agreement with Advanced Shopping Centre, we agreed that we will not directly operate any virtual mall except @mart. Competition All aspects of the Internet market are new, rapidly evolving and intensely competitive, and we expect competition to intensify in the future. Barriers to entry are low, and current and new competitors can easily launch new websites at 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, 24 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 1998 and 1997, only one client accounted for 5% or more of our revenue. During 1998, our largest customer was The Tech Museum in San Jose, which purchased a special browser for $48,000, or 8.3% of revenue. In 1997, our largest customer was Philips Multimedia, which generated revenue of $250,000, or 59.6% of revenue, from a one-year license to use our source code and a uniserver and a noncommercial research license. We also assisted Philips Multimedia on its development of a website that provides an aerial view of Alpha World. Intellectual Property All of our software was either developed by us or acquired from a third party. We do not have any patents on any of our software. We have obtained copyright registration for a version of our source code. We are developing and upgrading our software on an ongoing basis and we do not have registered copyrights for the most recent versions of our software. We rely upon confidentially agreements signed by our employees. We have applied to the United States Patent and Trademark Office for registration of Active Worlds and our AW design as trademarks and service marks. 25 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 $160,000 on research and development in 1998 and approximately $451,000 in 1997. 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 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 September 30, 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. 26 MANAGEMENT Directors and Executive Officers The following table names our directors and executive officers and their age.
Name Age Position - ---- --- -------- 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 .......... Director
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 36 years experience as an applied physicist and businessman specializing in technical marketing matters. Mr. Adelson is President, CEO, and Vice Chair of Antaeus Research, LLC, a new information technology company dedicated to smart Bridge Management Systems. Since 1974, he has led the Technology Resource Group of RTS Research Lab, Inc. (RTS). He acted as a secondary co-founder, and through RTS helped conceive and develop the first portable bar code scanner and acted as program manager for 12 years with Symbol Technologies, Inc. (NYSE: SBL). Mr. Adelson holds over 70 patents and trademarks in the fields of optical electronics, bar code technology, automatic inspection, and medical software. He is a recipient of a Special Congressional Recognition Award for his work as a "Mr. Successful Entrepreneur" and demonstrated "Business Acumen." He was recently honored as Entrepreneur of the Year by his alma mater, Muhhlenberg College, and is a Trustee of that institution. He was awarded a Gold Medal for work done for HBO by the National Retailers of America. He also serves on the Board of Directors of Empire One Telecommunications, Inc., (www.eot.net); Patcomm Corp. Corporation, (www.qth.com/patcommradio); and Base Ten Systems, Inc., (www.base10.com) where he holds the position of Vice Chairman of the Board of Directors. 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 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 underwriters have not designated any person for this position. In November 1999, our board of directors created audit and compensation committees. The members of the audit and compensation committees are and Mr. Adelson. At least a majority of the audit committee and all members of the compensation committee are to be independent directors. 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. Our compensation committee will evaluate our compensation policies, approve executive compensation and executive employment contracts and administer our stock option plan. 27 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. In 1998 and 1997, none of our officers received compensation in excess of $100,000. SUMMARY COMPENSATION TABLE Annual Compensation --------------------------- Name and Principal Position Year Salary Bonus Other - --------------------------- ---- ------ ----- ----- Richard F. Noll, 1998 -- -- -- president and 1997 -- -- -- chief executive officer J.P. McCormick, 1998 -- -- -- chief financial 1997 -- -- -- officer No stock options or other equity incentives were granted to either Richard Noll or J.P. McCormick in 1998 or 1997. During 1998 and 1997, 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 and $30,000 for each of them in 1997. 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 14,000 shares of common stock at $.55 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. 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. Stock Option Plan In January 1999, we adopted a stock option plan, pursuant to which we are authorized to grant options to purchase up to 1,000,000 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. 28 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 September 30, 1999 we have granted options under the plan to purchase an aggregate of 584,023 shares of common stock at exercise prices ranging from $.43 to $.55 per share. These options include options to purchase 14,000 shares of common stock at $.55 per share, which we granted to each of Messrs. Richard F. Noll and J.P. McCormick pursuant to their employment agreements. RELATED PARTY TRANSACTIONS In connection with the organization of Circle of Fire Studios in January 1997, Mr. Richard F. Noll, our president and chief executive officer, transferred his interest in the Circle of Fire Studios sole proprietorship to Circle of Fire Studios in exchange for shares of its common stock, which, as a result of the Circle of Fire Acquisition became 3,849,463 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 3,849,463 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 3,734,219 shares of common stock and the shares purchased by Associated Corporate Services became 115,244 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 $.43 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 $200,000. This amount has been repaid in full with interest at 8% per annum. We believe that the transactions described below between us and our officers, directors and principal stockholders were on terms at least as fair to us as had these transactions been concluded with unaffiliated parties. Since Mr. McCormick and Mr. Noll were our only directors until November 1999, none of the foregoing transactions were approved by any unaffiliated outside directors. We intend that all future related party transactions, including any loans or advances, will be for bona fide business purposes and approved by a majority of our board which will include unrelated directors or by our audit committee, at least a majority of whom are to be unrelated parties. 1999 PRIVATE PLACEMENTS In January 1999, we sold 2,000,000 shares of common stock for $.50 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 two accredited investors, from which we received net proceeds of approximately $780,000. Each private placement unit consisted of 17,600 shares of our common stock and a Series A redeemable common stock purchase warrant to purchase 20,000 shares of common stock at $5.70 per share. The effective price per share of common stock purchased by these investors was $5.68, 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 our underwriters, as exclusive placement agent. We 29 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 15,840 shares of our common stock and a Series A common stock purchase warrant to purchase 18,000 shares of our common stock at $5.70. The warrant we issued to HD Brous terminates on the date of this prospectus. In connection with the private placement, we and our officers, directors and 5% stockholders gave HD Brous a three-year right of first refusal with respect to public and private sales of our securities, including sales pursuant to Rule 144 of the Commission pursuant to the Securities Act. PRINCIPAL STOCKHOLDERS The following table sets forth information as of September 30, 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.
Percentage of Shares Amount and Nature of ------------------------------------- Name and Address of Beneficial Owner(1) Beneficial Ownership(2) Prior to Offering After Offering - --------------------------------------- ------------------------- ------------------- --------------- Richard F. Noll(3) ...................... 3,807,975 34.6% J.P. McCormick(4) ....................... 3,734,219 33.9% Alexander M. Adelson (5) ................ 90,000 00.1% All officers and directors as a group (two persons)(3),(4) ................... 7,542,194 68.5%
- ------------ (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) Includes (a) 24,526 shares of common stock owned by Mr. Noll's wife, as to which Mr. Noll disclaims beneficial interest and (b) 14,000 shares of common stock issuable upon exercise of outstanding options held by Mr. Noll. (4) Includes 14,000 shares of common stock issuable upon exercise of outstanding options held by Mr. McCormick. (5) Includes, 90,000 shares of common stock issuable upon exercise of outstanding options held by Mr. Adelson, which vest over three years in equal amounts of 30,000 shares per year following each year in which Mr. Adelson has served as a director. 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 July 31, 1999, there were 11,015,568 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 30 the common stock. All outstanding shares of common stock are, and those issuable as part of the units or upon exercise of the warrants will be, when issued as provided in this prospectus, validly issued, fully paid, and nonassessable. Stockholders do not have cumulative voting rights. Our board of directors is authorized to issue, from time to time and without further stockholder action, up to 500,000 shares of preferred stock in one or more distinct series. The board of directors is authorized to fix the following rights and preferences, among others, for each series: o The rate of dividends and whether these dividends shall be cumulative. o The price at and the terms and conditions on which shares may be redeemed. o The amount payable upon shares in the event of voluntary or involuntary liquidation. o Whether or not a sinking fund shall be provided for the redemption or purchase of shares. o The terms and conditions on which shares may be converted. o Whether, and in what proportion to any other series or class, a series shall have voting rights other than required by law, and, if voting rights are granted, the number of voting rights per share. We have no plans, agreements or understandings with respect to the designation of any series or the issuance of any shares of preferred stock. We have agreed with the underwriters that we will not create any series of preferred stock or issue any shares of preferred stock without the consent of the underwriters for two years from the date of this prospectus. Units Each unit consists of one share of common stock and one Series B redeemable common stock purchase warrant. The common stock and warrants comprising the units are not separately transferable prior to one year from the date of this prospectus, or earlier at the discretion of the underwriters. Series B Redeemable Common Stock Purchase Warrants Unless previously redeemed by us, you may, upon payment of the exercise price of $ 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 underwriters, 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 31 to the redemption date at the offices of the Company's warrant agent with the form of an Election to Purchase on the reverse side of the certificate(s) filled out and executed as indicated, accompanied by payment of the full exercise price for the number of shares of common stock for which the warrants are being exercised. The warrants contain provisions that protect the holders thereof against dilution by adjustment of the exercise price, and the number of shares in certain specified events, such as stock dividends, stock splits, mergers, sale of substantially all of our assets, and for other similar events. We are not required to issue fractional shares of common stock. We will pay cash in lieu of fractional shares, based upon the current market value of such fractional shares at the date of exercise. A holder of warrants will not possess any rights as a stockholder unless and until he or she exercises the warrants. In the event of any merger, consolidation, sale or lease of substantially all of our assets or reorganization whereby we are not the surviving corporation, we may provide in the agreement relating to the transaction that each warrant shall be converted into such securities of the surviving or acquiring corporation or other entity as has a value equal to the value of the warrants, which shall not exceed the amount by which the consideration to be received per share of common stock exceeds the exercise price of the warrant. The value of the warrants and securities being issued in exchange therefor are to be determined by our board of directors. In the event that, in such a transaction, the value of the consideration to be received per share of common stock is not greater than the exercise price of the warrants, the warrants shall terminate and no consideration will be paid with respect to the warrants. 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 180,000 shares of common stock at an exercise price of $5.70 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 $8.55 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 15,840 shares of common stock and a series A redeemable common stock purchase warrant to purchase 18,000 shares of our common stock. The warrant issued to the underwriter may terminate on the date of this prospectus. We also have outstanding a warrant to purchase 250,000 shares of common stock at $5.70, which has cashless exercise rights, a warrant to purchase 90,000 shares of common stock at $4.06, which has cashless exercise rights, and an option to purchase 250,000 shares of common stock at $3.80, which does not have cashless exercise rights. 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. 32 Shares Eligible for Future Sale After this offering, there will be 12,515,568 shares of common stock outstanding, of which 8,325,096 shares are restricted securities and are not eligible for sale. The restricted securities will become eligible for sale as follows:
Number of Shares Date Shares May be Sold ---------------- ----------------------- 805,638 January 2000 7,517,578 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. 1,880 June 2000
Rule 144 permits the sale of restricted securities, subject to the Rule 144 volume limitations, one year after the date of issuance or the date the share are acquired from one of our affiliates. Pursuant to the Rule 144 volume limitations, a holder of restricted securities held for one year may sell in any three-month period the greater of 1% of the outstanding common stock or the average weekly trading volume. A person who is not an affiliate of the Company and who has held restricted securities for two years may sell such securities without regard to the Rule 144 volume limitations. Our officers, directors and 5% stockholders have agreed not to publicly sell their shares during the six-month period starting with the date of this prospectus, without the prior consent of the underwriters. We cannot predict the effect, if any, that the issuance of shares of common stock upon exercise of options or warrants or the registration of such shares will have on the market for and market price of the common stock. Section 203 of the Delaware General Corporation Law We are subject to the provisions of Section 203 of the Delaware General Corporation Law. That section provides that, with certain exceptions, a Delaware corporation may not engage in any of a broad range of business combinations with a person or affiliate or associate of such person who is an interested stockholder for a period of three years from the date that such person became an interested stockholder unless the transaction resulting in a person's becoming an interested stockholder, or the business combination, is approved by the board of directors of the corporation before the person becomes an interested stockholder, the interested stockholder acquires 85% or more of the outstanding voting stock of the corporation in the same transaction that makes it an interested stockholder (excluding certain employee stock ownership plans) or on or after the date the person becomes an interested stockholder, the business combination is approved by the corporation's board of directors and by the holders of at least 66 2/3% of the corporation's outstanding voting stock at an annual or special meeting, excluding shares owned by the interested stockholder. An "interested stockholder" is defined as any person that is the owner of 15% or more of the outstanding voting stock of the corporation or an affiliate or associate of the corporation and was the owner of 15% or more of the outstanding voting stock of the corporation at any time within the three year period immediately prior to the date on which it is sought to be determined whether such person is an interested stockholder. These provisions could have the effect of delaying, deferring or preventing a change of control. Our stockholders, by adopting an amendment to our certificate of incorporation or bylaws, may elect not to be governed by Section 203, effective twelve months after adoption. Neither our certificate of incorporation nor our bylaws currently excludes us from the restrictions imposed by Section 203. Transfer Agent and Warrant Agent The transfer agent for the common stock and the warrant agent for the warrants is Interwest Transfer Company, P.O. Box 17136, Salt Lake City, Utah 84117. 33 UNDERWRITING Our underwriters, 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, 1,500,000 shares of common stock as follows: HD Brous & Co., Inc. Corinthian Partners, L.L.C. The underwriters are committed severally to purchase and pay for all of the shares on a "firm commitment" basis if they purchase any shares. The underwriters have advised us that they propose to offer the units to the public at the initial public offering prices set forth on the cover page of this prospectus. The underwriters may allow to certain dealers, who are members of the National Association of Securities Dealers, Inc., concessions not exceeding $ per unit, of which not more than $ per unit may be reallowed to other dealers who are members of the National Association of Securities Dealers. After the offering, the offering price, the concession and the reallowance may be changed. 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 225,000 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 150,000 units at an exercise price equal to 120% of the offering price of the units being sold in this offering. The units to be issued upon the exercise of this unit purchase option are identical to the units being sold pursuant to this prospectus. The warrants issuable upon exercise of these units are identical to the warrants included in the units we are selling in this offering. The underwriters' unit purchase option is exercisable for a five year period commencing on the date of this prospectus, except that during the one-year period commencing on the date of this prospectus, neither the unit purchase option nor any securities issuable upon exercise of the unit purchase option may be sold, transferred, assigned or hypothecated, except to the officers or members of the underwriters or to other underwriters and selling group members or officers, partners or members thereof, all of which shall be bound by such restrictions. The holders of the unit purchase options have no voting, dividend or other rights as our stockholders with respect to securities issuable upon exercise of the unit purchase options until the unit purchase options or the underlying warrants, as the case 34 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 17,600 shares of our common stock and a Series A common stock purchase warrants to purchase 20,000 shares of common stock at $5.70 per share. We paid HD Brous a fee of $90,000 and a non-accountable expense allowance of $27,000. We also issued to HD Brous a warrant to purchase one placement agent's unit for $90,000. A placement agent's unit consists of 15,840 shares of our common stock and a Series A common stock purchase warrant to purchase 18,000 shares of our common stock at $5.70 per share. Such warrant will terminate upon the completion of this offering. In connection with the private placement, we and our officers, directors and 5% stockholders gave HD Brous a three-year right of first refusal with respect to public and private sales of our securities, including sales pursuant to Rule 144. The underwriting agreement provides that, during the five-year period following the date of this prospectus, the underwriters will have the right to designate one member to our board of directors or an advisor to the board. The underwriters 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 underwriter has 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 Pepe & Hazard, 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, 1998 and for the year ended December 31, 1998 and the period from January 17, 1997 (inception) to December 31, 1997 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 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 INDEX TO FINANCIAL STATEMENTS
Page ---------- Independent Auditors' Report ............................................................. F-2 Consolidated Financial Statements Consolidated Balance Sheet -- June 30, 1999 (Unaudited) and December 31, 1998 ............ F-3 Consolidated Statement of Operations for the Six Months Ended June 30, 1999 and 1998 (Unauited), Year Ended December 31, 1998 and the Period January 17, 1997 (Date of Inception) to December 31, 1997 ................................................ F-4 Consolidated Statement of Changes in Stockholders' Equity (Deficiency) for the Period January 17, 1997 (Date of Inception) to December 31, 1997, the Year Ended December 31, 1998 and the Six Months Ended June 30, 1999 (Unaudited) ............................ F-5 Consolidated Statement of Cash Flows for the Six Months Ended June 30, 1999 and 1998 (Unaudited), Year Ended December 31, 1998 and the Period January 17, 1997 (Date of Inception) to December 31, 1997 ................................................ F-6 Notes to Consolidated Financial Statements ............................................... F-7 to 15
F-1 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, 1998, and the related consolidated statements of operations, changes in stockholders' equity (deficiency) and cash flows for the year ended December 31, 1998 and the period January 17, 1997 (date of inception) to December 31, 1997. These 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, 1998, and the consolidated results of their operations and their cash flows for the year ended December 31, 1998 and the period January 17, 1997 (date of inception) to December 31, 1997 in conformity with generally accepted accounting principles. /s/ Pannell Kerr Forster, P.C. ---------------------------------- Boston, MA July 30, 1999 F-2 ACTIVEWORLDS.COM, INC. Consolidated Balance Sheet
June 30, December 31, 1999 1998 -------------- ------------- (Unaudited) Assets Current assets Cash ............................................................... $ 1,130,524 $ 86,520 Accounts receivable, trade -- net of allowance for doubtful accounts of $18,000 at both dates ......................................... 36,379 51,836 Other receivables .................................................. 10,700 -- Advances to officer/stockholder/employees .......................... 12,991 10,491 ------------ ---------- Total current assets .............................................. 1,190,594 148,847 ------------ ---------- Property and equipment Leasehold improvements ............................................. 27,334 -- Equipment .......................................................... 61,042 23,034 ------------ ---------- 88,376 23,034 Less: accumulated depreciation ..................................... 18,362 9,987 ------------ ---------- Property and equipment, net ....................................... 70,014 13,047 ------------ ---------- Other assets Organization expense -- net of accumulated amortization of $2,030 and $1,580........................................................ 3,491 3,941 Deferred offering costs ............................................ 65,000 -- ------------ ---------- Total assets ...................................................... $ 1,329,099 $ 165,835 ============ ========== Liabilities and Stockholders' Equity (Deficiency) Current liabilities Accounts payable ................................................... $ 87,091 $ 60,200 Accrued liabilities ................................................ 67,484 20,488 8% note payable to officer/stockholder ............................. -- 54,753 Accrued litigation settlement ...................................... -- 275,000 Deferred revenue ................................................... 128,108 144,340 Customer deposit ................................................... 5,000 5,000 ------------ ---------- Total current liabilities ......................................... 287,683 559,781 ------------ ---------- Commitments and contingencies Stockholders' equity (deficiency) Preferred stock, $.001 par value, 500,000 shares authorized, no shares issued or outstanding ..................................... -- -- Common stock, $.001 par value, 50,000,000 shares authorized, 11,015,568 shares issued and outstanding at June 30, 1999, 8,584,816 shares issued and outstanding at December 31, 1998 ..... 11,015 8,585 Additional paid-in capital ......................................... 2,256,998 382,138 Note receivable for shares issued .................................. (6,500) -- Accumulated deficit ................................................ (1,220,097) (784,669) ------------ ---------- Total stockholders' equity (deficiency) ........................... 1,041,416 (393,946) ------------ ---------- Total liabilities and stockholders' equity (deficiency) ........... $ 1,329,099 $ 165,835 ============ ==========
See notes to consolidated financial statements F-3 ACTIVEWORLDS.COM, INC. Consolidated Statement of Operations
Period January 17, 1997 (date of Year Ended inception) to Six Months Ended June 30 December 31, December 31, 1999 1998 1998 1997 --------------- -------------- -------------- -------------- (Unaudited) (Unaudited) Revenues .............................................. $ 210,820 $ 195,266 $ 576,163 $ 419,130 Operating expenses Selling, general and administrative expenses ......... 571,699 181,005 485,710 293,494 Research and development expenses .................... 85,054 77,424 159,986 450,579 ----------- ---------- --------- ----------- Total operating expenses ........................... 656,753 258,429 645,696 744,073 ----------- ---------- --------- ----------- (Loss) from operations ............................... (445,933) (63,163) (69,533) (324,943) Litigation settlement ................................. -- -- -- (500,000) Interest income ....................................... 10,505 -- -- -- ----------- ---------- --------- ----------- (Loss) before (provision for) benefit from income taxes and extraordinary item ....................... (435,428) (63,163) (69,533) (824,943) (Provision for) benefit from income taxes ............. -- -- -- -- ----------- ---------- --------- ----------- (Loss) before extraordinary item ..................... (435,428) (63,163) (69,533) (824,943) Extraordinary item Gain on extinguishment of debt related to litiga- tion settlement, net of tax effect of .............. -- -- 109,807 -- ----------- ---------- --------- ----------- Net income (loss) .................................. $ (435,428) $ (63,163) $ 40,274 $ (824,943) ----------- ---------- --------- ----------- Earnings per share of common stock -- basic (Loss) before extraordinary item ..................... $ (.040) $ (.008) $ (.009) $ (.102) Extraordinary item ................................... -- -- .014 -- Net income (loss) .................................. $ (.040) $ (.008) $ .005 $ (.102) ----------- ---------- --------- -----------
Earnings per share of common stock -- assuming dilution for the year ended December 31, 1998 is the same as earnings per share of common stock -- basic. See notes to consolidated financial statements F-4 ACTIVEWORLDS.COM, INC. Consolidated Statement of Changes in Stockholders' Equity (Deficiency) Period January 17, 1997 (date of inception) to December 31, 1997, Year Ended December 31, 1998 and the Six Months Ended June 30, 1999 (Unaudited)
Preferred Stock Common Stock Shares Amount Shares Amount -------- -------- ------------ ---------- Balances at January 17, 1997 (date of inception), as restated (note 1) . -- $ -- 8,084,816 $ 8,085 Stockholder/employee contributions......... Issuance of stock options recognized as compensation .......................... Net (loss) for period ..................... ---- ---- Balances at December 31, 1997, as restated ............................ -- -- 8,084,816 8,085 Issuance of common stock in con- nection with acquisition of net assets of Vanguard (note 1) .............. 500,000 500 Stockholder/employee contributions......... Issuance of stock options recognized as compensation .......................... Net income for year ....................... Balances at December 31, 1998 -- -- 8,584,816 8,585 Issuance of common stock, net of offering costs ........................... 2,365,752 2,365 Issuance of common stock for note receivable ............................... 65,000 65 Net (loss) for period ..................... Balances at June 30, 1999 (unaudited) ............................ -- $ -- 11,015,568 $ 11,015 ---- ---- ---------- --------
Note Total Additional Receivable Stockholders' Paid-In Accumulated for Shares Equity Capital Deficit Issued (Deficiency) -------------- --------------- ------------ -------------- Balances at January 17, 1997 (date of inception), as restated (note 1) . $ 118,915 $ 127,000 Stockholder/employee contributions......... 74,165 74,165 Issuance of stock options recognized as compensation .......................... 16,250 16,250 Net (loss) for period ..................... $ (824,943) (824,943) ------------ ----------- Balances at December 31, 1997, as restated ............................ 209,330 (824,943) (607,528) Issuance of common stock in con- nection with acquisition of net assets of Vanguard (note 1) .............. 983 1,483 Stockholder/employee contributions......... 168,575 168,575 Issuance of stock options recognized as compensation .......................... 3,250 3,250 Net income for year ....................... 40,274 40,274 ------------ ----------- Balances at December 31, 1998 382,138 (784,669) (393,946) Issuance of common stock, net of offering costs ........................... 1,868,425 1,870,790 Issuance of common stock for note receivable ............................... 6,435 $ (6,500) __ Net (loss) for period ..................... (435,428) (435,428) ------------ ----------- Balances at June 30, 1999 (unaudited) ............................ $ 2,256,998 $ (1,220,097) $ (6,500) $ 1,041,416 ----------- ------------ --------- -----------
See notes to consolidated financial statements F-5 ACTIVEWORLDS.COM, INC. Consolidated Statement of Cash Flows
Period January 17, 1997 (date of Six Months Ended June 30 Year Ended inception) to ------------------------------- December 31, December 31, 1999 1998 1998 1997 --------------- -------------- ------------- ----------------- (Unaudited) (Unaudited) Operating activities $ 40,274 $ (824,943) Net income (loss) ................................................ $ (435,428) $ (63,163) Adjustment to reconcile net income (loss) to net cash provided (used) by operating activities 7,526 4,167 Depreciation and amortization ................................... 8,825 3,654 9,661 -- Abandoned improvements .......................................... -- 9,661 32,575 5,165 Common stock issued for services ................................ 140,500 16,280 3,250 16,250 Options issued for services ..................................... -- 1,600 Officers'/employees' compensation waived and contributed to 136,000 69,000 additional paid-in capital ..................................... -- 68,000 Gain on extinguishment of debt related to (109,807) -- litigation settlement .......................................... -- -- 477 -- Cash received in acquisition of Vanguard ........................ -- -- Changes in operating assets and liabilities which provided (used) cash (23,662) (28,174) Accounts receivable ............................................ 15,457 28,174 -- -- Other receivables .............................................. (10,700) -- (10,491) -- Advances to officer/stockholder ................................ (2,500) -- (37,136) 40,547 Accounts payable ............................................... 26,891 (69,556) 20,492 441,595 Accrued liabilities ............................................ (228,004) 8,763 5,000 -- Customer deposit ............................................... -- -- 19,940 124,400 Deferred revenue ............................................... (16,232) 32,897 ---------- ----------- ----------- ---------- Net cash provided (used) by operating 94,099 (151,993) activities ................................................... (501,191) 36,310 ---------- ----------- ----------- ---------- Investing activities -- (4,515) Organization costs ............................................... -- -- Purchases of equipment and leasehold (6,213) (26,611) improvements .................................................... (65,342) -- ---------- ----------- ----------- ---------- (6,213) (31,126) Net cash (used) by investing activities ...................... (65,342) -- ---------- ----------- ----------- ---------- Financing activities -- 127,000 Proceeds from sale of stock ...................................... 1,730,290 -- Proceeds from 8% note payable to -- 108,850 officer/stockholder ............................................. -- -- (20,100) (33,997) Payments on 8% note payable to officer/stockholder ............... (54,753) -- -- -- Deferred offering costs .......................................... (65,000) -- ---------- ----------- ----------- ---------- Net cash provided (used) by financing (20,100) 201,853 activities .................................................. 1,610,537 -- ---------- ----------- ----------- ---------- 67,786 18,734 Net increase in cash 1,044,004 36,310 18,734 -- Cash at beginning of period ....................................... 86,520 18,734 ---------- ----------- ----------- ---------- $ 86,520 $ 18,734 Cash at end of period ........................................ $ 1,130,524 $ 55,044 ---------- ----------- ----------- ---------- Supplemental disclosure information $ 6,075 $ 4,003 Cash paid for interest during the period ......................... $ -- $ 1,700 ---------- ----------- ----------- ---------- $ -- $ -- Cash paid for income taxes during the period ..................... $ -- $ -- ---------- ----------- ----------- ---------- Supplemental schedule of noncash investing activities Officers'/employee's compensation waived and contributed to $ 136,000 $ 69,000 additional paid-in capital ....................................... $ 68,000 ---------- ----------- ---------- $ 6,500 Shares issued for note receivable ................................ ---------- Noncash assets acquired in acquisition of Vanguard ............... $ 1,006 ----------
See notes to consolidated financial statements F-6 Activeworlds.com, Inc. Notes to Consolidated Financial Statements Note 1--Organization and basis of presentation On January 22, 1999, Activeworlds.com, Inc., a 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 8,084,816 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 639,535 shares of the Company's common stock. At the time of the 1999 Acquisition, Vanguard has 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 financial statements presented for all periods are those of Circle of Fire. All intercompany accounts and transactions are eliminated in consolidation. The 1999 Acquisition is being accounted for as if it had taken place on December 31, 1998. The consolidated balance sheet at December 31, 1998 reflects the consolidated balance sheets of Vanguard and Circle of Fire at that date, and the results of operations and cash flows for the year ended December 31, 1998 and the period January 17, 1997 (date of inception) to December 31, 1997 reflect the operations of Circle of Fire. The 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 200,000 shares of common stock to an investment banker and sold 2,000,000 shares of common stock at $.50 per share in a private placement. All share and per share information in these 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, and (b) the one-for-two reverse split. Unless the context indicates otherwise, references in these 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 unaudited consolidated financial statements included herein have been prepared based upon prescribed guidance of the Securities and Exchange Commission. As such, they do not include all disclosures required by generally accepted accounting principles, and should be read in conjunction with the audited consolidated statements as of and for the year ended December 31, 1998 and for the period January 17, 1997 (date of inception) to December 31, 1997, all included herein. In the opinion of management, the accompanying unaudited interim consolidated financial statements include all adjustments, consisting of normal and recurring adjustments, necessary for a fair presentation of the financial position and results of operations and cash flows for the periods presented when read in conjunction with the audited consolidated financial statements, included herein, and related notes thereto. The results of operations for the respective six-month periods ended June 30, 1999 and June 30, 1998 are not necessarily indicative of the results that should be expected for a full fiscal year. F-7 Activeworlds.com, Inc. Notes to Consolidated Financial Statements -- (Continued) 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 is depreciated using accelerated methods. The estimated life of depreciable equipment is five years. Depreciation expense totaled $6,623 and $3,490 for 1998 and the period January 17, 1997 (date of inception) to December 31, 1997, respectively. Depreciation expense for the six months ended June 30, 1999 and 1998 (unaudited) totaled $8,375 and $3,330, respectively. Organization expense is amortized over five years on a straight-line basis. 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 taxes 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. Revenue Memberships are recognized as revenue ratably over the periods the membership are in effect. Advances on royalties from licensing agreements are recognized over the period the royalties are earned. Revenue from licensing the Company's uniservers, galaxservers and worlds are recognized when the license is granted and the Company has performed all of its obligations under the license agreement. Revenue from technical services are recognized when the services are performed. F. Selling, general and administrative expenses Selling, general and administrative expenses for the year ended December 31, 1998 and the period January 17, 1997 (date of inception) to December 31, 1997 includes the value of services rendered by the Company's chief executive officer and chief financial officer, who received no compensation during either of such periods, and a key employee who received stock options during such period in lieu of compensation. (See note 4.) 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 and $60,000 in the aggregate for the period January 17, 1997 (date of inception) to December 31, 1997. 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 and $9,000 for the period January 17, 1997 to December 31, 1997. F-8 Activeworlds.com, Inc. Notes to Consolidated Financial Statements -- (Continued) Note 2--Summary of significant accounting policies -- (Continued) G. Research and development of software Research and development costs are expensed as incurred. During the period January 17, 1997 (date of inception) to December 31, 1997, the Company expensed the $300,000 paid to obtain the rights to the Active Worlds technology (to the extent it had been developed). H. 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 period. See also note 10. Note 3--Operating lease 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. Rental expense was $9,354 and $17,729 for 1998 and the period January 17, 1997 (date of inception) to December 31, 1997, respectively. The Company moved to other facilities in April, 1999. Note 4--Stock options During 1998 and the period January 17, 1997 (date of inception) to December 31, 1997, the Company granted nonqualified stock options to its employees and independent contractors. The options expire five years from issuance or upon termination of employment and other specified events. The table below sets forth information as to options granted during such period. December 31, 1998 ------------------------- Weighted Average Shares Exercise Subject to Price per Options Share ------------ ---------- Outstanding at beginning of year ......... 302,326 $ .237 Granted during the year .................. 337,209 .430 Exercised during the year ................ -- -- Expired during the year .................. -- -- Outstanding at end of year ............... 639,535 .340 Exercisable at end of year ............... 581,395 .331 The foregoing options were granted by Circle of Fire. Pursuant to the 1999 Acquisition the foregoing options were cancelled and options to purchase the Company's common stock were granted. (See note 1.) 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) as if the fair value accounting method of SFAS 123 were used. The value of the options was estimated to be $.129 per option. The methodology used in estimating the fair value of the stock options is the Minimum Value Method adjusted for facts and circumstances of the stock option agreements. Significant assumptions included a risk free interest rate of 6% and an expected life of two years. Accordingly, 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. In situations where the fair value of the stock options was considered compensation, F-9 Activeworlds.com, Inc. Notes to Consolidated Financial Statements -- (Continued) Note 4--Stock options -- (Continued) compensation expense was recorded with recognition of options outstanding recorded as additional paid-in capital in the stockholders' equity (deficiency) section of the balance sheet. Compensation costs recognized for stock options were $3,250 and $16,250 for 1998 and the period January 17, 1997 (date of inception) to December 31, 1997, respectively. The exercise prices of the options consist of 488,372 options exercisable at $.430 and 151,163 exercisable at $.043. The stock options expire five years from issuance or upon termination of employment or other specified events. Note 5--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. As a result of litigation concerning the parties' rights under the settlement agreement, in January 1999, the Company entered into an agreement with the two former employee-stockholders pursuant to which its obligations under the notes were reduced to $275,000, which amount has been paid. Accordingly, a partial extinguishment of debt was recorded at 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 6--Deferred revenue Deferred revenue consists of the following: December 31, June 30, 1999 1998 --------------- ------------- (Unaudited) Deferred memberships .......... $ 95,108 $ 96,340 Advances on royalties ......... 33,000 48,000 --------- --------- $ 128,108 $ 144,340 --------- --------- Note 7--Related party transactions In 1997, an officer/stockholder provided $108,850 of working capital funds to the Company. The unsecured loan payable bears interest at 8% and is due on demand. Payments are made on the loan as funds become available. The outstanding principal balance at December 31, 1998 was $54,753. Amounts paid to the officer/stockholder during 1998 and the period January 17, 1997 (date of inception) to December 31, 1997 totaled $26,000 (including interest expense of $5,900) and $38,000 (including interest expense of $4,003), respectively. An officer/stockholder of the Company is 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 at December 31, 1998 totaled $10,491. Reference is also made to notes 2F and 11. Note 8--Pro forma information (unaudited) Pro Forma Compensation: The Company issued options to purchase 116,279 shares of common stock to an employee. The fair value of these options has been estimated at $.129 per share. During the period from June 1, 1997 to May 31, 1998, F-10 Activeworlds.com, Inc. Notes to Consolidated Financial Statements -- (Continued) Note 8--Pro forma information (unaudited) -- (Continued) 58,140 of the options vested. The vesting period for the remaining 58,139 options is June 1, 1998 to May 31, 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 $7,500 and $-0- for 1998 and the period January 17, 1997 (date of inception) to December 31, 1997, respectively.
Period January 17, 1997 (date Year Ended of inception) to December 31, December 31, 1998 1997 -------------- ----------------- Proforma information (Loss) before (provision for) benefit from income taxes and extraor- dinary item, per statement of operations ......................... $ (69,533) (824,943) Proforma adjustment for fair value of stock options ................ (7,500) ---------- Proforma (loss) before extraordinary item .......................... (77,033) (824,943) Gain on extinguishment of debt related to litigation settlement, net of tax effect of $-0- ............................................ 109,807 -- ---------- -------- Proforma net income (loss) ......................................... $ 32,774 $ (824,943) ---------- -----------
Note 9--Income taxes At December 31, 1998, the Company has a net operating loss carryforward of $124,800 that may be used to offset future taxable income. If not used, the carryforward will expire with the year 2017. The temporary difference for income tax reporting on a cash basis results in additional losses of $453,192. 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:
December 31, June 30, 1999 1998 --------------- ------------- (Unaudited) Net operating loss carryforward ....................... $ 330,847 $ 33,192 Accrual basis versus cash basis tax reporting ......... 100,522 198,676 --------- -------- Deferred tax asset before valuation allowance ......... 431,369 231,868 Valuation allowance ................................... 431,369 231,868 --------- -------- Net deferred tax asset ................................ $ -- $ -- --------- --------
The effective combined Federal and State tax rate used in the calculation of the deferred tax asset was 40% for both periods. 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. F-11 Activeworlds.com, Inc. Notes to Consolidated Financial Statements -- (Continued) Note 10--Earnings per share of common stock The following table sets forth the number of shares on which the basic earnings per share of common stock has been calculated:
Weighted Period Number of Shares - -------------------------------------------------------------------------- ----------------- Period January 17, 1997 (date of inception) to December 31, 1997 ......... 8,084,816 Year ended December 31, 1998 ............................................. 8,084,816 Six Months ended (unaudited) June 30, 1998 ......................................................... 8,084,816 June 30, 1999 ......................................................... 10,684,653
The diluted earnings per share of common stock for the year ended December 31, 1998 has been calculated using 8,128,276 weighted average number of shares for the year. Diluted earnings per share of common stock has not been presented for other periods since the effect of including the stock options outstanding during the respective periods (note 4) would be antidilutive for those periods. Note 11--Subsequent events A. Private placement offering In June 1999, the Company sold nine private placement units at $100,000 per unit. Each private placement unit consisted of 17,600 shares of common stock and a five-year warrant to purchase 20,000 shares of common stock at $5.70 per share. The price of the units reflects a price of $5.682 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 15,840 shares of common stock and a warrant to purchase 18,000 shares of common stock at $5.70 per share. The warrants may be redeemed commencing in June 2001 if the price of the common stock is at least 150% of the exercise price. The warrants also give the holders cashless exercise rights. B. Employment contracts Effective January 21, 1999, the Company entered into three-year employment agreements with the Company's 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 14,000 shares of the Company's common stock at an exercise price of $.55 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-12 Activeworlds.com, Inc. Notes to Consolidated Financial Statements -- (Continued) Note 11--Subsequent events -- (Continued) C. Issuance of options In April 1999 the Company entered into an agreement with a marketing firm for it to provide advertising services. Under the agreement, stock options were issued in lieu of payment for services. The contract was cancelled in July 1999. At the time of cancellation, 250,000 stock options had been issued for advertising services. The Company issued 12,250 options for services rendered by a contractor through June 30, 1999. The value of the services was $12,250. In May 1999, the Company issued to an investor a warrant to purchase 250,000 shares of common stock at $5.70 per share. The warrant was issued in consideration of the waiver by the investor of registration and other rights the Company had granted in connection with its services relating to the 1999 Acquisition. D. Issuance of common stock During January, 1999 the Company issued 65,000 shares of common stock to an employee for a $6,500 note. The Company issued 1,880 shares of common stock for purchases of furniture with a value of $8,500 in 1999. The Company issued 5,472 shares of common stock for consulting services rendered in 1999. E. Office lease obligation In March, 1999 the Company entered into a lease for office space with a 3 year term. The annual minimum rental payments under the lease will be approximately $31,500. The future minimum rental payment under the lease for the five years succeeding December 31, 1998 are as follows: Year Ending December 31 Amount - --------------------------- ----------- 1999 .................... $ 26,250 2000 .................... 31,500 2001 .................... 31,500 2002 .................... 5,250 2003 .................... -- -------- Total ................... $ 94,500 F-13 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- No dealer, salesman or any other person has been authorized to give any information or representations other than those contained in this Prospectus, and if given or made, such information or representations must not be relied upon as having been authorized by the Company or the underwriters. This Prospectus does not constitute an offer to buy any security offered by this Prospectus, or an offer to sell or a solicitation of an offer to buy any security, by any person in any jurisdiction in which such offer or solicitation would be unlawful. Neither the delivery of this Prospectus nor any sale made hereunder shall under any circumstances, imply that the Information in this Prospectus is correct as of any time subsequent to the date of this Prospectus. ----------------------------------- TABLE OF CONTENTS Page ----- Prospectus Summary .......................... Our Business ................................ The Offering ................................ Summary Financial Information ............... Risk Factors ................................ Forward-Looking Statements .................. Dilution .................................... Market for Common Stock; Dividends .......... Use of Proceeds ............................. Capitalization .............................. Selected Financial Data ..................... Management's Discussion and Analysis of Financial Condition and Results of Operations ............................... Business .................................... Related Party Transactions .................. 1999 Private Placements ..................... Principal Stockholders ...................... Description of Securities ................... Underwriting ................................ Legal Matters ............................... Experts ..................................... Additional Information ...................... Index to Financial Statements ............... ----------------------------------- Until _________, 1999 (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 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- [ACTIVEWORLDS.COM, INC. LOGO] 1,500,000 Units ACTIVEWORLDS.COM, INC. Each Unit Consisting of One Share of Common Stock and a Series B Redeemable Common Stock Purchase Warrants to Purchase One Share of Common Stock -------------------------------------------- PROSPECTUS -------------------------------------------- HD BROUS & CO., INC. CORINTHIAN PARTNERS, L.L.C. ____________, 1999 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART II Item 24. Indemnification of Directors and Officers Section 145 of the Delaware General Corporation Law and our Bylaws (Exhibit 3.6) provide us with broad power to indemnify our directors and officers. Reference is made to Paragraph 7 of the Underwriting Agreement (Exhibit 1.1) with respect to indemnification of the us and the underwriters. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, offices or controlling persons of the registrant, pursuant to the foregoing provisions, or otherwise, the registrant has been advised that, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered hereunder, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. Item 25. Other Expenses of Issuance and Distribution The following table sets forth the estimated expenses in connection with the issuance and distribution of the securities being registered, excluding the Representative's nonaccountable expense allowance, all of which expenses will be paid by the Registrant:
SEC registration fee $ 3,379.00 NASD registration fee Nasdaq listing fee 10,000.00 Boston Stock Exchange Listing Fee ,000.00 Printing and engraving ,000.00* Accountants' fees and expenses ,000.00* Legal fees and expenses ,000.00* Transfer agent's and warrant agent's fees and expenses 5,000.00* Blue Sky fees and expenses 60,000.00* Representative's non-accountable expense allowance ,000.00 Miscellaneous xx,xxx.xx* ----------- Total $xxx,000.00* =========== * Estimated
II-1 Item 26. Recent Sales of Unregistered Securities During the past three years, we sold the following securities pursuant to exemptions from the registration requirements of the Securities Act of 1933, as amended. All information reflects a one-for-two reverse split in our common stock, which was effective on January 21, 1999. 1. In September 1995, the founders of Vanguard were issued 450,000 shares of common stock for the amount of $25,000. The sale of these shares was exempt from the registration provisions of the Securities Act pursuant to Section 4(2). 2. In January 1996, Vanguard completed a public offering of 50,000 shares of our common stock for the amount of $10,000. The sale of these shares was exempt from the registration requirements of the Securities Act pursuant to Rule 504. There was no underwriter for this sale. 3. On January 21, 1999, we issued to the ten former stockholders of Circle of Fire Studios, Inc. an aggregate of 8,149,816 shares of common stock in exchange for their shares of Circle of Fire Studios common stock. As part of the acquisition, options to purchase shares of Circle of Fire Studios common stock were exchanged for options to purchase 639,535 shares of our common stock. The issuance of these shares and options was exempt from the registration requirements of the Securities Act pursuant to Section 4(2). We also issued 200,000 shares of common stock to Baytree Capital Associates, LLC, for services relating to this acquisition. 4. In January 1999, we sold 2,000,000 shares of common stock in a private placement for $.50 per share to unaffiliated parties. The sale of these shares was exempt from the registration requirements of the Securities Act pursuant to Rule 504. No general solicitation was made in connection with this private placement, and no underwriter was engaged for this sale. 5. Pursuant to an April 1999 agreement, we granted to a marketing firm stock options to purchase 250,000 shares of common stock at $ 3.80 per share, in consideration of advertising services. The issuance of the options was exempt from registration pursuant to Section 4(2) of the Securities Act. 6. In January 1999, we sold 65,000 shares of common stock to Shamus Young, who was an employee, for $6,500, which was paid by the issuance of a 8% promissory note due December 31, 2000. Such sale was exempt from registration pursuant to section 4(2) of the Securities Act. These shares were issued upon exercise of an option. 7. During the period from January through June 1999, we granted options to purchase 12,250 shares of common stock at $8.75 per share to a contractor for services performed over such period and valued at approximately $12,250. The issuance of the options was exempt from registration pursuant to Section 4(2) of the Securities Act. 8. In April 1999, we issued 1,880 shares of common stock as payment for furniture valued at $8,500. The issuance of the shares was exempt from registration pursuant to Section 4(2) of the Securities Act. 9. In May 1999, we issued to Baytree Capital Associates, LLP, a warrant to purchase 250,000 shares of common stock at $5.70 per share. The warrant was issued in consideration of the waiver by Baytree Capital Associates of registration and other rights we had granted to Baytree in connection with the acquisition of Circle of Fire Studios. The issuance of this warrant was exempt from registration pursuant to Section 4(2) of the Securities Act. 10. In June 1999, we sold nine private placement units at $100,000 per unit to four accredited investors: SoundShore Holdings Ltd., SoundShore Opportunity Holding Fund Ltd., Hull Overseas, Ltd. and Duck Partners, L.P. Each private placement unit consisted of 17,600 shares of common stock and a Series A common stock purchase warrants to purchase 20,000 shares of common stock at $5.70 per share. The effective price per share of common stock purchased by these investors was $5.68 per share, assuming that no value is allocated to the warrants. In connection with this private placement, we engaged HD Brous & Co., Inc. as exclusive placement agent. We paid HD Brous a fee of $90,000 and a non-accountable expense allowance of $27,000. We also issued HD Brous a warrant to purchase one placement agent unit for $90,000. A placement agent unit consists of 15,840 shares of our common stock and a Series A common stock purchase warrant to purchase 18,000 shares of our common stock at $5.70 per share. The warrant to HD Brous will terminate upon the completion of this offering. II-2 In connection with the private placement, we and our officers, directors and 5% stockholders gave HD Brous a three-year right of first refusal with respect to public and private sales of our securities. The issuance of these securities was exempt from registration pursuant to Rule 506 and Sections 4(2) and 4(6) of the Securities Act. Item 27. Exhibits
1.1 Form of Underwriting Agreement between the Issuer and the Underwriters.** 1.2 Form of Underwriters' Unit Purchase Option.** 2. Plan of reorganization between Vanguard Enterprises, Inc. and Circle of Fire Studios, Inc. dated January 13, 1999.* 3.1 Certificate of Incorporation of the Issuer as filed with the Delaware Secretary of State on September 5, 1995.* 3.2 Certificate of Amendment to Certificate of Incorporation of the Issuer as filed with the Delaware Secretary of State on September 29, 1995.* 3.3 Certificate of Amendment to Certificate of Incorporation of the Issuer as filed with the Delaware Secretary of State on October 12, 1995.* 3.4 Certificate for Renewal and Revival of Certificate of Incorporation of the Issuer as filed with the Delaware Secretary of State on September 10, 1997.* 3.5 Certificate of Amendment to Certificate of Incorporation of the Issuer as filed with the Delaware Secretary of State on January 21, 1999.* 3.6 Bylaws of the Issuer.* 4.1 Form of Common Stock Certificate.* 4.2 Form of Warrant Agreement, including form of Series B Redeemable Common Stock Purchase Warrant.** 4.3 Form of Series A Redeemable Common Stock Purchase Warrant.* 4.4 Form of Unit Certificate.*** 5. Opinion of Pepe & Hazard, LLP.*** 10.1 Activeworlds.com, Inc. 1999 Stock Option Plan.* 10.2 Lease Agreement dated February 27, 1999 between the Issuer and Robert L. Wood.* 10.3 Amended and Restated Employment Agreement, dated as of January 21, 1999, between the Issuer and Richard F. Noll.* 10.4 Amended and Restated Employment Agreement, dated as of January 21, 1999, between the Issuer and J. P. McCormick.* 10.5 Stock Option Agreement between the Issuer and Richard F. Noll.** 10.6 Stock Option Agreement between the Issuer and J. P. McCormick.** 10.7 Agreement dated October , 1999, between the Issuer and Advance Shopping Centre Management Pty. Limited.** 23.1 Consent of Pannell Kerr Forster PC (included on Page II-7).** 23.2 Consent of Pepe & Hazard, LLP (included in Exhibit 5).*** 24. Power of Attorney (included on the Signature Page).** 27. Financial Data Schedule (for SEC purposes only)*
- ------------ * Previously filed. ** Filed herewith. *** To be filed by amendment. Item 28. Undertakings Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended, may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense II-3 of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The Registrant hereby undertakes: (1) To file during any period in which offers or sales are being made, a post-effective amendment to this registration statement to: (i) Include any prospectus required by Section 10(a)(3) of the Securities Act of 1933, as amended (the "Securities Act"); (ii) Reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement; notwithstanding the foregoing, any increase or decrease in volume of securities offered and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement, and (iii) Include additional or changed material information on the plan of distribution, and PROVIDED, HOWEVER, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the registration statement is on Form S-8, and the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports filed by the registrant pursuant to Section 13 or Section 15(d) of the Exchange Act that are incorporated by reference in the registration statement. (2) That for purposes of determining liability under the Securities Act, treat each post-effective amendment as a new registration statement of the securities offered, and the offering of the securities at that time to be the initial bona fide offering. (3) File a post-effective amendment to remove from registration any of the securities that remain unsold at the end of the offering. (4) That for purposes of determining liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Company pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (5) That for purposes of determining any liability under the Securities Act of 1933, as amended, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (6) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (7) To provide the underwriters, at the closing specified in the Underwriting Agreement, certificates representing the units in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser. II-4 SIGNATURES In accordance with the requirements of the Securities Act of 1933, as amended, the Registrant certifies it has reasonable grounds to believe it meets all the requirements for filing on this Form SB-2 and authorized this Amendment No. 1 to the registration statement to be signed on its behalf by the undersigned, in the City of Newburyport, Commonwealth of Massachusetts, on this 5th day of November, 1999. ACTIVEWORLDS.COM, INC. By:_____________________________ Richard F. Noll, President POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS that each individual whose signature appears below constitutes and appoints J.P. McCormick and Richard F. Noll, and each of them, his true and lawful attorneys-in-fact and agents with full power of substitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement, and to sign any registration statement for the same offering covered by the Registration Statement that is to be effective upon filing pursuant to Rule 462(b) promulgated under the Securities Act of 1933, as amended, and all post-effective amendments thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or his, her or their substitute or substitutes, may lawfully do or cause to be done or by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities and on the date indicated.
Signatures Title Date ---------- ----- ---- /s/ Richard F. Noll President and chief executive November 5, 1999 - -------------------------- Richard F. Noll officer and director (principal executive officer) /s/ J.P. McCormick Chief financial officer and November 5, 1999 - -------------------------- J.P. McCormick director (principal financial and accounting officer) /s/ Alexander M. Adelson Director November 5, 1999 - -------------------------- Alexander M. Adelson
II-5 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the use in this Registration Statement on Form SB-2 of our report dated July 30, 1999, accompanying the financial statements of Activeworlds.com, Inc. for the year ended December 31, 1998 and the period January 17, 1997 (date of inception) to December 31, 1997 and to the use of our name and the statements with respect to us as appearing under the heading "Experts" in the Prospectus. PANNELL KERR FORSTER P.C. Boston, Massachusetts November 4, 1999 II-6 EXHIBIT INDEX
Exhibit No. Description --- ----------- 1.1 Form of Underwriting Agreement between the Issuer and the Underwriters.** 1.2 Form of Underwriters' Unit Purchase Option.** 2. Plan of reorganization between Vanguard Enterprises, Inc. and Circle of Fire Studios, Inc. dated January 13, 1999.* 3.1 Certificate of Incorporation of the Issuer as filed with the Delaware Secretary of State on September 5, 1995.* 3.2 Certificate of Amendment to Certificate of Incorporation of the Issuer as filed with the Delaware Secretary of State on September 29, 1995.* 3.3 Certificate of Amendment to Certificate of Incorporation of the Issuer as filed with the Delaware Secretary of State on October 12, 1995.* 3.4 Certificate for Renewal and Revival of Certificate of Incorporation of the Issuer as filed with the Delaware Secretary of State on September 10, 1997.* 3.5 Certificate of Amendment to Certificate of Incorporation of the Issuer as filed with the Delaware Secretary of State on January 21, 1999.* 3.6 Bylaws of the Issuer.* 4.1 Form of Common Stock Certificate.* 4.2 Form of Warrant Agreement, including form of Series B Redeemable Common Stock Purchase Warrant.** 4.3 Form of Series A Redeemable Common Stock Purchase Warrant.* 4.4 Form of Unit Certificate.*** 5. Opinion of Pepe & Hazard, LLP.*** 10.1 Activeworlds.com, Inc. 1999 Stock Option Plan.* 10.2 Lease Agreement dated February 27, 1999 between the Issuer and Robert L. Wood.* 10.3 Amended and Restated Employment Agreement, dated as of January 21, 1999, between the Issuer and Richard F. Noll.* 10.4 Amended and Restated Employment Agreement, dated as of January 21, 1999, between the Issuer and J. P. McCormick.* 10.5 Stock Option Agreement between the Issuer and Richard F. Noll.** 10.6 Stock Option Agreement between the Issuer and J. P. McCormick.** 10.7 Agreement dated September , 1999, between the Issuer and Advance Shopping Centre Management Pty. Limited.** 23.1 Consent of Pannell Kerr Forster PC (included on Page II-7).** 23.2 Consent of Pepe & Hazard, LLP (included in Exhibit 5).*** 24. Power of Attorney (included in the Signature Page).** 27. Financial Data Schedule (for SEC purposes only).*
- ------------ * Previously filed. ** Filed herewith. *** To be filed by amendment. EX-1.1 2 EXHIBIT 1.1 Exhibit 1.1 1,500,000 Units ACTIVEWORLDS.COM, INC. Each Unit consisting of one share of Common Stock and a Series B Redeemable Common Stock Purchase Warrant to purchase one share of Common Stock Underwriting Agreement As of , 1999 HD Brous & Co, Inc. Corinthian Partners, L.L.C. As Representatives of the several Underwriters named in Schedule I annexed to this Agreement 40 Cuttermill Road Great Neck, New York 11021 Dear Sirs: Activeworlds.com, Inc., a Delaware corporation (the "Company"), proposes to issue and sell to the several underwriters named in Schedule I to this Agreement for whom HD Brous & Co., Inc., a New York corporation ("Brous"), and Corinthian Partners, L.L.C. ("Corinthian") are the representatives (the "Representatives"). The Representatives, along with such other underwriters named on Schedule I, are referred to in this Agreement collectively as the "Underwriters." Upon the basis of the representations, warranties, and agreements of the Company contained in this Agreement and, subject to the terms and conditions of this Agreement, the Underwriters propose to purchase from the Company, an aggregate of 1,500,000 Units, each Unit to consist of one (1) share of the Company's common stock, par value $.001 per share ("Common Stock"), and a Series B Redeemable Common Stock Purchase Warrant ("Warrant") to purchase one (1) share of Common Stock at a price of $ per share, subject to adjustment. The 1,500,000 Units are hereinafter collectively referred to as the "Firm Units." The shares of Common Stock issuable upon exercise of the Warrants are presently authorized but unissued shares of the Common Stock of the Company. In addition, the Company proposes to grant the Underwriters the option to purchase from the Company up to an additional 225,000 Units (collectively "Option Units") solely for the purpose of covering over-allotments, if any, in connection with the sale of the Firm Units. The Option Units may by purchased by the Representatives for their own account or for the account of the several Underwriters, as the Representatives may determine. The Company also proposes to issue and sell to the Representative or its designees, Unit Purchase Options (collectively, the "Unit Purchase Option") to purchase 150,000 Units (collectively the "Purchase Option Units") as more fully described in Paragraph 5(a) of this Agreement. The Warrants included in the Firm Units, the Option Units and the Purchase Option Units are referred to in this Agreement collectively as the "Warrants." The Firm Units, Option Units and Purchase Option Units are referred to in this Agreement collectively as the "Securities." The Company hereby confirms the agreement made by it with respect to the purchase of the Firm Units and the Option Units by the Underwriters, as follows. The Representative hereby represents and warrants that, if any Underwriters other than the Representative are named on Schedule I to this Agreement, the Representative is acting as the representative of the several Underwriters and you have been authorized by each of the other Underwriters to enter into this Underwriting Agreement on its behalf and to act for it in the manner herein provided. 1. Purchase, Sale, and Delivery of the Securities (a) Purchase and Sale of Firm Units. Subject to the terms and conditions of this Agreement, and upon the basis of the representations and warranties contained in this Agreement, the Company agrees to issue and sell to the Underwriters, and each of the Underwriters agrees, severally and not jointly, to purchase from the Company, at a price of and /100 dollars ($ . ) per Unit, the number of Firm Units set forth opposite such Underwriter's name on Schedule I to this Agreement. The Underwriters plan to offer the Firm Units for sale to the public at the price and upon the terms set forth in the Prospectus (the "Public Offering") as soon as practicable after the date the Registration Statement, as hereinafter defined, is declared effective (the "Effective Date") by the Securities and Exchange Commission (the "Commission"). The Company acknowledges that the Underwriters shall have the right to enter into agreements with co-underwriters and with selected dealers for the sale of the Units to the public. (b) Over-Allotment Option. (i) The Company hereby grants to the Underwriters an option (the "Over- Allotment Option") to purchase from the Company, solely for the purpose of covering over-allotments in connection with the sale of Firm Units, all or any portion of the Option Units for a period of forty-five (45) days from the date of this Agreement at the same purchase price payable by the Underwriter for Firm Units as provided in Paragraph 1(a) of this Agreement. The Option Units shall be purchased from the Company, either for the accounts of the Representatives on their own behalf or for the account of the several Underwriters, severally and not jointly, in proportion to the number of Firm Units set opposite the Underwriters' respective names in Schedule I to this Agreement, as the Representatives shall determine, except that the respective purchase obligations of each Underwriter shall be adjusted by the Representatives so that no Underwriter shall be obligated to purchase fractional Option Units. (ii) The Over-Allotment Option may be exercised during the term thereof by written notice to the Company from the Representatives. Such notice shall set forth the aggregate number of Option Units as to which the option is being exercised and the time and date of payment and delivery therefor. Such time and date of delivery shall not be earlier than either the Closing Date (as defined below) or the second business day after the day on which the option shall have been exercised, nor later than the fifth business day after the date of such exercise, as determined by the Representatives (the "Option Closing Date"). Delivery and payment for such Option Units shall be at the offices set forth below for delivery and payment of the Firm Units. (iii) The obligation of the Underwriters to purchase and pay for any of the Option Units is subject to the accuracy and completeness (as of the date of this Agreement and as of the Option Closing Date) of and compliance in all material respects with the representations and warranties of the Company in this Agreement, to the accuracy and completeness of the - 2 - statements of the Company or its officers made in any certificate or other documents to be delivered by the Company pursuant to this Agreement, to the performance in all material respects by the Company of its obligations hereunder, to the satisfaction by the Company of the conditions as of the date of this Agreement and as of the Option Closing Date set forth in Paragraph 1(c) of this Agreement and to the delivery to the Underwriters of opinions, certificates and letters dated the Option Closing Date substantially similar in scope to those specified in Paragraph 6 of this Agreement, but with each reference to the "Closing Date" being deemed to be the "Option Closing Date." Notwithstanding the exercise of the Over-Allotment Option, the Underwriters may, at any time prior to the payment for the purchase price of the Option Units, cancel, in whole or in part, the exercise of the Over-Allotment Option, in which event, the Underwriters shall only be obligated to purchase and pay for those only Option Units, if any, remaining subject to the exercise of the Over-Allotment Option after such cancellation. (c) Delivery of and Payment for Securities. (i) Delivery of the stock and warrant certificates representing the securities comprising the Firm Units shall be made to the Underwriters at the offices of Brous, 40 Cuttermill Road, Great Neck, New York 11021, or such other location as you shall determine and advise the Company upon at least two (2) full business days' notice in writing, against payment therefor by certified or bank cashier's check drawn in New York clearing house funds or similar next day funds or by wire transfer payable to the order of the Company, at 10:00 A.M., Eastern Time, on ____________, 1999, or at such other time and business day (Saturdays, Sundays, and legal holidays in New York, New York not being considered business days for the purposes of this Agreement), not later than the 10th business day following the Effective Date, as shall be determined by the Representatives, which time and date are herein called the "Closing Date." (ii) Delivery of certificates for the Common Stock and Warrants comprising the Units shall be made in registered form in such name or names and in such denominations as you shall specify to the Company upon at least two (2) full business days' notice in writing prior to the Closing Date or the Option Closing Date, as the case may be. The Company will make the certificates available to the Underwriters for examination at the offices of Brous, 40 Cuttermill Road, Great Neck, New York 11021, Attention: Howard D. Brous, Chairman, or at such other location as you shall specify to the Company, not later than 2:00 P.M., Eastern Time, on the business day immediately preceding the Closing Date or the Option Closing Date, as the case may be. At the request of the Representatives, delivery of the Common Stock and Warrants comprising the Units shall be made through the facilities of Depository Trust Company ("DTC"). (d) Use of Preliminary Prospectus. The Company hereby confirms its authorization to the Underwriters to use, and to make available for use by prospective dealers, the Preliminary Prospectus, and the Company hereby authorizes the Underwriters, all selected dealers, and all other dealers to whom any of the Securities may be sold by the Underwriters or selected dealers, to use the Prospectus, as from time to time amended or supplemented, in connection with the sale of the Securities in accordance with the applicable provisions of the Securities Act of 1933, as amended (the "Securities Act"), the rules and regulations (the "Regulations") of the Commission thereunder, and applicable state law until completion of the Public Offering and for such longer period as an Underwriter may request if the Prospectus is required to be delivered in connection with sales of the Securities by an Underwriter or a dealer. - 3 - 2. Representations and Warranties of the Company. The Company represents and warrants to, and agrees with, the Underwriters that: (a) Filing of Registration Statement. The Company has prepared in conformity with the requirements under the Securities Act and the Regulations, and has filed with the Commission under the Securities Act, a registration statement on Form SB-2, File No. 333-85095, including the related preliminary prospectus, for the registration of the Securities. The conditions for the use of a registration statement on Form SB-2 set forth in the General Instructions thereto have been satisfied with respect to the Company, the transactions contemplated by this Agreement, and the Registration Statement. As used in this Agreement, the term "Registration Statement" means such registration statement of the Company, as amended, on file with the Commission at the time the registration statement becomes effective under the Securities Act (including all financial statements and financial schedules, exhibits, all other documents filed as a part thereof or incorporated by reference therein, and all the information contained in any final prospectus filed with the Commission pursuant to Rule 424(b) under the Securities Act or deemed by virtue of Rule 430A of this Commission under the Securities Act to be part of the Registration Statement). The term "Prospectus" as used in this Agreement means the final prospectus included as part of the Registration Statement, including, if applicable, the information contained in any final prospectus filed with the Commission pursuant to Rule 424(b) of the Commission under the Securities Act or deemed by virtue of Rule 430A of the Commission under the Securities Act to be part of the Registration Statement. The term "Preliminary Prospectus" refers to and means any prospectus included in the Registration Statement or any amendment thereto prior to the Registration Statement becoming effective under the Securities Act. (b) Use and Accuracy of Preliminary Prospectus. To the Company's Knowledge, the Commission has not issued any order preventing or suspending the use of any Preliminary Prospectus or any part thereof, and each Preliminary Prospectus delivered to the Representatives for dissemination in connection with the offering, at the time of filing thereof and delivery to the Representatives for such dissemination, did not contain any untrue statement of a material fact, or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; the foregoing shall not apply, however, to statements in, or omissions from, any Preliminary Prospectus that are based upon and conform to written information furnished to the Company with respect to any Underwriter (or any affiliate or associate thereof) by or on behalf of the Representatives or such Underwriter specifically for use in the preparation thereof. As used in this Agreement, the term "the Company's Knowledge" or words of like import shall mean and include (i) actual knowledge of the Company or any executive officer or director of the Company and (ii) that knowledge which a prudent businessperson could reasonably have obtained in the management of such person's business affairs after exercising reasonable due diligence. (c) Effectiveness and Accuracy of Registration Statement. The Registration Statement and the Prospectus, from the Effective Date through the Closing Date and, if Option Units are purchased, up to the Option Closing Date, will comply as to form in all material respects with the applicable requirements of the Securities Act and the Regulations, and neither the Registration Statement nor the Prospectus will, on such dates, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, and, on such dates, no event will have occurred that should have been set forth in an amendment - 4 - or supplement to the Registration Statement or the Prospectus that has not then been set forth in such an amendment or supplement; the foregoing shall not apply, however, to statements in, or omissions from, the Registration Statement or Prospectus that are based upon and conform to written information furnished to the Company with respect to any Underwriter (or any affiliate or associate thereof) by or on behalf of such Underwriter specifically for use in the preparation thereof. The descriptions in the Registration Statement and the Prospectus of contracts and other documents of the Company are accurate and present fairly the information required to be disclosed, and there are no contracts or other documents required to be described in the Registration Statement or Prospectus or to be filed as exhibits to the Registration Statement under the Securities Act or the Regulations which have not been so described or filed as required. (d) Independent Public Accountants. Panel Kerr Forrester, PC, the accountants whose reports on the financial statements of the Company are filed with the Commission as a part of the Registration Statement, are, and were during the periods covered by its report, independent public accountants with respect to the Company as required by the Securities Act and the Regulations. (e) Organization and Qualification. Each of the Company and its wholly-owned subsidiary, Activeworlds, Inc., a Nevada Corporation (the "Subsidiary"), is (i) a corporation duly organized and existing in good standing under the laws of the state of its incorporation and has the requisite corporate power to own its properties and to carry on its business as now being conducted and (ii) qualified to conduct business as a foreign corporation to do business and in good standing in every jurisdiction in which the nature of the business conducted by it makes such qualification necessary and where the failure so to qualify would have a Material Adverse Effect. Other than the Subsidiary, the Company has no subsidiaries and has no equity interest in, and, the Company has no loans to or guarantee of obligations of, any other corporation, limited liability company, partnership or other entity. As used in this Agreement, the term "Material Adverse Effect" means any material adverse effect on (A) the Common Stock and the Warrants; (B) the ability of the Company to perform its obligations under this Agreement, the Warrant Agreement or the Unit Purchase Option or (C) the business, operations, properties, financial condition or prospects of the Company or the Subsidiary. (f) No Other Interests of Investments. Except for the Company's ownership of and advances to the Subsidiary, neither the Company nor the Subsidiary controls, directly or indirectly, or has any direct or indirect interest or investment in any corporation, firm, partnership, association, limited liability company, business trust or other business organization, and does not own any shares of stock or any other securities of (other than bank certificates of deposit, shares or units of interest in "money market" funds, or as set forth in the Prospectus) and, except as set forth in the Prospectus, neither the Company nor the Subsidiary has made any loans (other than advances to employees in the ordinary course of business, none of which are material or made to officers or directors) to or guaranteed any obligations of, any other corporation, firm, partnership, association, limited liability company, business trust or other business organization. (g) Capitalization and Legality of Securities. (i) The authorized, issued and outstanding capital stock of the Company is as set forth in the Prospectus under the caption "Capitalization." The capital stock and other securities of the Company conform to the descriptions thereof contained in the Prospectus under the caption "Description of Capital Stock." Except as - 5 - otherwise set forth in the Prospectus, there are no outstanding options, warrants, or other rights to purchase any shares of Common Stock or other capital stock, or to purchase any other securities convertible into or exchangeable for Common Stock. The outstanding securities of the Company and the outstanding securities of the Subsidiary have been duly authorized and validly issued and are fully paid and non-assessable. All the shares of Common Stock which are (i) registered pursuant to the Registration Statement, (ii) issuable upon exercise of the Warrants registered pursuant to the Registration Statement, and (iii) issuable upon exercise of the Unit Purchase Option and the warrants issuable upon exercise of the Unit Purchase Option have been duly authorized and, when issued and delivered against payment therefor as provided in this Agreement, the Prospectus, Warrant Agreement or the Unit Purchase Option, as applicable, will be validly issued, fully paid and nonassessable. (ii) The Company owns all of the issued and outstanding capital stock of the Subsidiary. The Subsidiary has not granted any options, warrants or rights or issued any convertible notes, debentures, preferred stock or other securities or entered into any agreement or understanding upon the exercise or conversion of which or pursuant to the terms of which any shares of any class or series of capital stock of the Subsidiary may be issued. (iii) This Agreement constitutes, and the Warrant Agreement, the Warrants, Unit Purchase Option and the Warrants issuable upon exercise of the Unit Purchase Option will constitute, when sold and delivered as contemplated, valid and binding obligations of the Company enforceable in accordance with their respective terms, except to the extent that enforcement thereof may be limited by (A) bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance, and similar laws and court decisions now or hereafter in effect relating to or affecting creditors' rights and remedies generally and (B) general principles of equity (regardless of whether such enforcement is considered in a proceeding at law or in equity). A sufficient number of shares of Common Stock have been reserved for issuance upon sale of the Securities and Purchase Option Units and upon the exercise of all of the above-referenced Warrants. (h) Financial Statements. The financial statements (audited and unaudited) of the Company and the related financial exhibits and schedules included in the Prospectus or filed with and as part of the Registration Statement present fairly the consolidated financial position of the Company (and the Subsidiary) as of the balance sheet dates and the results of its consolidated operations and cash flows for the respective periods then ended, and such financial statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods involved; all adjustments that are necessary for a fair presentation of the results for such periods have been made. The financial statements filed with the Registration Statement or included in the Prospectus are the only financial statements required under the Securities Act or the Regulations to be included in the Registration Statement and Prospectus. (i) Material Loss. Neither the Company nor the Subsidiary has, since the date of the latest financial statements included in the Prospectus, sustained any material loss or interference with its business from fire, explosion, flood, or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order, or decree, other than as set forth in the Prospectus. Since the respective dates as of which information is set forth in the Prospectus, and except as otherwise set forth therein: (i) there has not been any change in the capital stock, or material - 6 - increase in the long-term debt, of the Company or the Subsidiary; (ii) there has not been any material adverse change in the condition (financial or otherwise), business, results of operations, general affairs, or management of the Company or the Subsidiary, whether or not arising in the ordinary course of business; (iii) no event has occurred that would result in a material write-down of assets of the Company or the Subsidiary; (iv) neither the Company nor the Subsidiary has incurred any material liability or obligation, direct or contingent, or entered into any material transaction, other than those in the ordinary course of business; (v) neither the Company nor the Subsidiary has purchased any of the Company's outstanding capital stock; (vi) there has been no dividend or distribution of any kind declared, paid, or made by the Company or the Subsidiary in respect of the Common Stock; (vii) there has not been any material interruption in the availability of materials, supplies, or equipment necessary for the conduct of the business of the Company or the Subsidiary; and (viii) there has not been any execution or imposition of any material lien, charge, or encumbrance upon any property or assets of the Company or the Subsidiary. (j) Compliance with Documents and Laws. Neither the Company nor the Subsidiary is in violation of its certificate of incorporation, by-laws, or other governing documents, or in material default in the due performance of any material lease or other material contract, indenture, mortgage, deed of trust, note, loan, or other material agreement or instrument to which the Company or the Subsidiary is a party or by which it or any of its properties or businesses are subject or bound, or, to the Knowledge of the Company, any applicable material license, franchise, certificate, permit, authorization, statute, rule or regulation of or from any public, regulatory, or governmental agency or authority having jurisdiction over the Company or the Subsidiary or any of their respective properties or assets, or any approval, consent, order, judgment or decree, except such as could not reasonably be expected to have a Material Adverse Effect. The execution and performance of this Agreement by the Company will not conflict with or result in a breach or violation of, or default under, any material lease or other material contract, indenture, mortgage, deed of trust, note, loan, or other material agreement or instrument to which the Company or the Subsidiary is a party or by which the Company, the Subsidiary or any of their respective properties or businesses are subject, and no consent, approval, authorization, or order of any court or governmental authority or agency having jurisdiction over any of the Company, the Subsidiary or any of their respective properties or assets is required to be obtained by the Company for the consummation by the Company of the transactions contemplated by this Agreement, except such as have been obtained or may be required under the Securities Act, the Regulations, the Securities Exchange Act of 1934, as amended (the "Exchange Act") and the regulations of the Commission thereunder or state securities (or "Blue Sky") laws or the applicable rules and regulations promulgated thereunder. (k) Authorization of Agreements. Each of this Agreement, the Warrant Agreement, the Warrant, the Unit Purchase Options, has been duly authorized, executed and delivered by the Company and constitutes the valid, binding and enforceable obligation of the Company. The execution, delivery and performance of this Agreement, the Warrant Agreement, the Warrants, and the Unit Purchase Options by the Company, the consummation by the Company of the transactions herein and therein contemplated, and the compliance by the Company with the terms of this Agreement, the Warrant Agreement, the Warrants, the Unit Purchase Option have been duly authorized by all necessary corporate action and do not and will not, with or without the giving of notice or the lapse of time, or both, (i) result in any violation of the certificate of incorporation and by-laws of the Company, (ii) result in a breach of or conflict with any of the - 7 - terms or provisions of, or constitute a default under, or result in the modification or termination of, or result in the creation or imposition of any lien, security interest, charge or encumbrance upon any of the properties or assets of the Company or the Subsidiary pursuant to any indenture, mortgage, note, contract, commitment or other agreement or instrument to which the Company or the Subsidiary is a party or which the Company or the Subsidiary or any of their respective properties or assets are or may be bound or affected, (iii) violate any existing applicable law, rule, regulation, judgment, order or decree of any governmental agency or court, domestic or foreign, having jurisdiction over the Company, the Subsidiary or any of their respective properties or business, or (iv) violate any permit, certification, registration, approval, consent, license or franchise applicable to the business or properties of the Company or the Subsidiary. (l) Title to Property. The Company has good title to, and valid and enforceable leasehold estates in, all items of property described in the Registration Statement or Prospectus as owned or leased by it, as the case may be, or that are material to the conduct of the Company's businesses, free and clear of all liens, encumbrances, claims, security interests, and other restrictions, other than those described in the Prospectus and those that individually or in the aggregate could not reasonably be expected to have a Material Adverse Effect. The leases, licenses or other contracts or instruments under which the Company leases, holds or is entitled to use any property, real or personal, are valid, subsisting and enforceable as against the Company and, to the Company's Knowledge, the other parties thereto, with only such exceptions as are not material and do not interfere with the use of such property made, or proposed to be made, by the Company, and all rentals, royalties or other payments accruing thereunder which became due prior to the date of this Agreement have been duly paid, and neither the Company nor, to its Knowledge, any other party is in default thereunder and, to the Company's Knowledge, no event has occurred which, with the passage of time or the giving of notice, or both, would constitute a default thereunder. The Company has not received notice of any violation of any applicable law, ordinance, regulation, order or requirement relating to its owned or leased properties except any such violation that could not reasonably be expected to have a Material Adverse Effect. The Company has insured their respective properties against loss or damage by fire or other casualty and maintain such other insurance which management of the Company believes is adequate for the Company's present and proposed business operations. (m) Copyrights, Trademarks and Intellectual Property Rights. Except as set forth in the Prospectus, the Company owns or possesses the requisite licenses or rights to use all trademarks, copyrights, service marks, service names, and trade names, if any, presently used in or necessary to conduct their respective businesses as described in the Prospectus. To the Company's Knowledge, neither the Company nor the Subsidiary has infringed the rights of another in any patent, trademark, copyright, service mark, service name, trade name, trade secret, confidential information, or any other such intellectual property, and there is no outstanding claim of others alleging any such infringement. To the Company's Knowledge, there is no claim or action by any person pertaining to, or proceeding pending, or threatened, which challenges the exclusive rights of the Company or the Subsidiary with respect to any trademarks, copyrights, service marks, service names and trade names used in the conduct of the Company's or the Subsidiary's business. (n) Litigation. There is no litigation or governmental or other proceeding or investigation before any court or before or by any public, regulatory, or governmental agency or authority (or any judgment, decree, or - 8 - order of such court, agency, or authority) pending or, to the Company's Knowledge, threatened, to which the Company or the Subsidiary is a party or of which the business or property of the Company is the subject that is material to the Company and is not disclosed in the Prospectus. There are no outstanding orders, judgments or decrees of any court, governmental agency or other tribunal naming the Company or the Subsidiary and enjoining the Company or the Subsidiary from taking, or requiring the Company or the Subsidiary to take, any action, or to which the Company, the Subsidiary or their respective properties or businesses are bound or subject. (o) Prohibited Payments. Neither the Company nor the Subsidiary nor any of their respective directors or officers acting in any capacity on behalf of the Company or the Subsidiary nor, to the Company's Knowledge, any of the Company's or the Subsidiary's sales agents, directly or indirectly, has used any corporate funds for unlawful contributions, gifts, entertainment, or other unlawful expenses relating to political activity; made any unlawful payment to foreign or domestic government officials or employees or to foreign or domestic political parties or campaigns from corporate funds; violated any provision of the Foreign Corrupt Practices Act of 1977, as amended; or made any bribe, rebate, payoff, influence payment, kickback, or other unlawful payment. (p) Internal Accounting Controls. The Company and the Subsidiary maintain a system of internal accounting controls which, taken as a whole, is sufficient to meet the broad objectives of preventing and detecting errors or irregularities in amounts that would be material to the Company's and the Subsidiary's financial statements, and neither the Company nor the Subsidiary has received any formal or informal notice from its independent accountants to the contrary. Except as specifically disclosed in the Prospectus, neither the Company nor any of its employees or agents has made any payment or transfer of any funds or assets of the Company, conferred any personal benefit by the use of the assets of the Company or received any funds, assets, or personal benefit in violation of any law, rule, or regulation, which is required to be stated in the Prospectus or necessary to make the statements therein not misleading. (q) Tax Returns. The Company and the Subsidiary have filed all Federal, state, and local tax returns required to be filed through the date of this Agreement, including but not limited to franchise tax returns, or has obtained valid extensions with respect to such filings not made; neither the Company nor the Subsidiary is in default in the payment of any taxes or other amounts that were payable pursuant to said returns or any assessments with respect thereto; and neither the Company nor the Subsidiary is aware of any tax or other payment deficiency outstanding, proposed, or assessed against the Company or the Subsidiary that could, in the aggregate, have a Material Adverse Effect. Except as disclosed in writing to the Representatives, neither the Company nor the Subsidiary has executed or filed with any taxing authority, foreign or domestic, any agreement extending the period for assessment or collection of any income taxes and is not a party to any pending action or proceeding by and foreign or domestic governmental agency for assessment or collection of taxes; and no claims for assessment or collection of taxes have been asserted against the Company or the Subsidiary. (r) Employee Plans. Except as set forth in the Prospectus, the Company does not have any employee benefit plans (including, without limitation, pension, profit sharing, and welfare benefit plans, but excluding health and disability insurance plans and disability provisions of employment contracts) or deferred compensation arrangements. - 9 - (s) Labor Disputes. No labor dispute exists or, to the Company's Knowledge, is imminent with the employees or other persons engaged by the Company or the Subsidiary which could reasonably be expected to result in a Material Adverse Effect. (t) Registration Rights. No person, firm or entity of any nature whatsoever has any right to require the Company to register or attempt to register under the Securities Act or any other securities law any shares of Common Stock or securities convertible into or exchangeable or exercisable for any shares of Common Stock, by reason of the filing of the Registration Statement with the Commission, and, except as set forth in the Prospectus, no person, firm or entity has any rights which may require the Company to file a registration statement within eighteen (18) months from the Effective Date. (u) Stabilization. Neither the Company nor any person that controls, is controlled by or is under common control with the Company has taken or will take, directly or indirectly, any action designed to, or that might reasonably be expected to, cause or result in under the Exchange Act, stabilization or manipulation of the price of any security in order to facilitate the sale or resale of any of the Securities. (v) Finder or Broker. The Company has not retained or dealt with any broker or finder with respect to the transactions contemplated hereby, and the Company knows of no outstanding claims for services in the nature of a finder's fee or origination fee with respect to the sale of the Securities. The Company will indemnify and hold harmless Underwriters with respect to any claim for a finder's fee by any party claiming to be owed such fee based on contacts, conversations or arrangements with the Company. (w) Employment Agreements. The employment agreements between the Company and its officers named under the caption "Management -- Employment Agreements" in the Prospectus, are binding and enforceable obligations upon the respective parties thereto in accordance with their respective terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, moratorium or other similar laws or arrangements affecting creditors' rights generally and subject to principles of equity, and public policy considerations. (x) Contracts. Each material contract or other instrument (however characterized or described) to which the Company or the Subsidiary is a party or by which it or its property or business is or may be bound or affected and to which reference is made in the Prospectus has been duly and validly executed by the Company or by the Subsidiary, as applicable, is in full force and effect in all material respects and, assuming that each other party has full power, corporate or other, to execute, deliver and perform such contracts, is enforceable against the parties thereto in accordance with its terms, and none of such contracts or instruments has been assigned by the Company or the Subsidiary, and neither the Company or the Subsidiary, nor, to the Company's Knowledge, any other party is in default thereunder and, to the Company's Knowledge, no event has occurred which, with the lapse of time or the giving of notice, or both, would constitute a default thereunder. None of the material provisions of such contracts or instruments violates any existing applicable law, rule, regulation, judgment, order or decree of any governmental agency or court having jurisdiction over the Company or the Subsidiary or any of their assets or businesses, where such violation or default would have a Material Adverse Effect. - 10 - (y) Year 2000 Compliance. To the Company's Knowledge, except as disclosed in the Prospectus, the Company's and the Subsidiary's computer systems and products are designed to be year 2000 compliant, and the disclosure in the Prospectus concerning Year 2000 compliance is true and correct in all material respects. 3. Covenants of the Company. The Company covenants and agrees with the Underwriters that: (a) Effectiveness of Registration Statement. The Company will use its best efforts to cause the Registration Statement and any subsequent amendments thereto to become effective as promptly as possible. The Company will notify you promptly (i) when the Registration Statement or any subsequent amendment thereto has become effective or any supplement to the Prospectus has been filed and (ii) of the receipt of any requests, and the nature and substance thereof, by the Commission for any amendment or supplement to the Registration Statement or Prospectus or for any other additional information. The Company will prepare and file with the Commission, promptly upon your reasonable request, any amendments or supplements to the Registration Statement or Prospectus that may be necessary or advisable in connection with the distribution of the Securities or any of the Securities. The Company will file no amendment or supplement to the Registration Statement or Prospectus (other than any document required to be filed under the Exchange Act that upon filing is deemed to be incorporated by reference therein) to which you shall reasonably object by notice to the Company after having been furnished a copy within a reasonable time, but no later than three (3) business days, prior to the proposed filing thereof. The Company will furnish to you at or prior to the filing thereof a copy of any document that upon filing is deemed to be incorporated by reference in whole or in part in the Registration Statement or Prospectus. (b) Notice of Stop Order. The Company will advise you promptly, and confirm in writing, when and if it receives notice or obtains Knowledge of (i) the issuance by the Commission of any stop order or other order preventing or suspending the use of any Preliminary Prospectus or the Prospectus or the effectiveness of the Registration Statement, (ii) the suspension of the qualification of any of the Securities for offering or sale in any jurisdiction in which they were previously qualified, or (iii) the initiation or threat of any proceeding for that purpose. The Company will promptly use its best efforts to prevent the issuance, and to obtain the withdrawal if such issuance is not prevented, of any such stop order or other suspension. (c) Compliance with the Securities Act and the Exchange Act. Within the time during which a prospectus relating to the Securities is required to be delivered under the Securities Act, the Company will use its best efforts to comply with all requirements imposed upon it by the Securities Act and the Exchange Act, as now and hereafter amended, and by the Regulations, as from time to time in force to permit the continuance of sales of or dealings in the distribution of the Securities as contemplated by the provisions therein, in this Agreement, and in the Prospectus. If during such period any event as to which the Company has Knowledge occurs as a result of which the Prospectus as then amended or supplemented includes an untrue statement of a material fact or omits to state a material fact necessary to make the statements therein, in the light of the circumstances then existing, not misleading, or if during such period it is necessary to amend the Registration Statement or supplement the Prospectus to comply with the Securities Act, the Company will notify you promptly, will amend the Registration Statement or supplement the Prospectus to comply with the Securities Act, the Company will notify you promptly, will amend - 11 - the Registration Statement or supplement the Prospectus (at the expense of the Company) so as to correct such statement or omission or otherwise to effect such compliance, and will furnish without charge to Underwriters and to any dealer in securities as many copies of such amended or supplemented Prospectus as you may from time to time reasonably request. (d) Copies of Registration Statement. The Company will deliver to Representatives, from time to time without charge, such number of copies of the Registration Statement (at least one of which delivered to you shall be manually signed and will include all exhibits), each Preliminary Prospectus, the Prospectus, and all amendments and supplements thereto, in each case as soon as available and in such quantities and to such persons as requested by you. (e) Blue Sky Qualifications. The Company will use its best efforts, in cooperation with you and your counsel, to register or qualify the Securities for offering and sale under the securities laws of such jurisdictions as you reasonably designate, and will continue such qualifications in effect for so long as may be necessary to complete the distribution of such Securities; provided that in no event shall the Company be required in connection therewith to qualify to do business in any jurisdiction where it is not now so qualified or to take any action which would subject it to general service of process in any jurisdiction where it is not now so subject. (f) Section 11(a) Earnings Statement. The Company will make generally available to its security holders (within the meaning of Section 11(a) of the Securities Act) and deliver to you as soon as practicable (but not later than fifteen (15) months after the Effective Date), an earnings statement that shall satisfy the requirements of Section 11(a) and Rule 158 under the Securities Act, covering a period of at least twelve (12) consecutive months after the Effective Date. (g) Information to the Representatives. Until the earlier of the third (3rd) anniversary of the Effective Date or such date as of which the Warrants and the Unit Purchase Option have been exercised or have expired, the Company will, at its cost and expense, furnish or cause to be furnished to you and your counsel, with reasonable promptness, copies of (i) annual audited balance sheets and audited statements of operations and changes in cash flows of the Company, and quarterly balance sheets and statements of income of the Company (which need not be audited), (ii) all reports, if any, to its stockholders, (iii) all reports filed by the Company with the Commission, and any securities exchange or the National Association of Securities Dealers, Inc. ("NASD") and (iv) such other material documents and information with respect to the Company and its affairs as you may from time to time reasonably request and which the Company can produce at reasonable cost; provided, however, that the Company shall not be required to produce such information or documents if the Company has received the opinion of its counsel that providing such information to the Representatives is reasonably likely to create liability under applicable Federal and state securities laws. Upon request, the Company shall also provide the Representatives with current lists of its stockholders. In addition to the foregoing, during the six months following the Effective Date, the Company shall, at its cost and expense, furnish or cause to be furnished to the Representatives, (x) daily issuer transfer sheets by Depository Trust Company ("DTC"), which shall be transmitted to the Representatives by fax daily, and (y) weekly transfer sheets provided by the Company's transfer agent, which shall be - 12 - provided to the Representatives at the end of each week. For the three years subsequent to such six month period, upon request of the Representatives, the Company shall furnish or cause to be furnished to the Representatives with copies of the Company's monthly DTC transfer sheets and transfer sheets from the Company's transfer agent. (h) Listing in Securities Manual; Investor Relations Firm. The Company shall, as soon as practicable after the Effective Date, use its best efforts to obtain listing on an expedited basis in Standard and Poor's Corporation Records or such other recognized securities manuals for which it may qualify for listing, and the Company shall use its best efforts to maintain such listings for at least three (3) years after the Closing Date. The Company further agrees at any time during the three (3) year period following the Closing Date, to engage within sixty (60) days of a written request by you, the services of an investor relations firm reasonably acceptable to you, who will act as investor relations liaison during such three (3) year period, which spokesperson is not required to be the same person during the duration of the three (3) year period, to consult with and advise the Company regarding communications and relations with stockholders and the financial and investment communities. (i) Listing on Nasdaq. The Company shall apply for the inclusion of the Units, Common Stock and Warrants on The Nasdaq SmallCap Market (the "SmallCap Market") under the symbols AWLDV, AWLD and AWLDW or another symbol acceptable to the Representatives, to take effect on the Effective Date; provided, that if the Common Stock and Warrants are not separately transferable on the Effective Date, then the Warrants need not be included in the SmallCap Market at such date; provided, however, that, on the date on which the Common Stock and Warrants first become separately transferable, the Warrants shall be listed on the Small Cap Market. At such time as the Company meets the eligibility requirements for the inclusion of the Common Stock on the Nasdaq National Market ("NNM"), the Company shall use its best efforts to obtain such listing. The Company shall use its best efforts to maintain the Nasdaq listing provided for in this Paragraph 3(i) for at least three (3) years after the date of this Agreement. (j) Exchange Act Filings. The Company shall file such registration statement and take such other reasonable action, including the filing of a registration statement on Form 8-A and requesting effectiveness not later than the date the Registration Statement becomes effective, to register Common Stock and the Warrants pursuant to Section 12(g) of the Exchange Act, such registration statement to become effective simultaneously with the effectiveness of the Registration Statement, and shall thereafter use its best efforts to keep such registration effective. The Company shall comply with the Securities Act, the Regulations, the Exchange Act and the rules and regulations promulgated Commission under the Exchange Act, the applicable rules and regulations of the Nasdaq, and applicable state securities laws so as to permit the continuance of sales of and dealings in the Securities in compliance with applicable provisions of such laws, rules, and regulations, including the filing with the Commission and the Nasdaq of all reports required to be so filed, and the Company will deliver to the holders of the Securities all reports required to be provided to such holders pursuant to such laws, rules, or regulations. (k) Use of Proceeds. The Company shall apply the net proceeds received from the sale of the Securities in the manner set forth under the caption "Use of Proceeds" in the Prospectus. The Company shall report the use of proceeds from the Offering in accordance with the Regulations and will provide a copy of each such report to you and your counsel. - 13 - (l) Board Meetings and Membership. (i) For a period of five (5) years commencing on the Closing Date, the Representatives shall have the right to designate one nominee (reasonably acceptable to the Company based on the designee's character and reputation) for election to the Company's Board of Directors. The Company shall initially elect such designee as soon as possible after the identity of such designee is provided to the Company and thereafter shall include the Representatives' designee as a member of the board of directors' slate. Following the election of such nominee as a director, such person shall receive the same compensation, including options, that is paid to other non-employee directors of the Company and shall be entitled to receive reimbursement for all reasonable costs incurred in attending such meetings including, but not limited to, food, lodging and transportation. The Company agrees to indemnify and hold such director harmless to the maximum extent permitted by law, against any and all claims, actions, awards and judgments arising out of his or her service as a director and, in the event the Company maintains a liability insurance policy affording coverage for the acts of its officers and directors, to include such director as an insured under such policy. Such director shall also serve on the Company's audit, compensation and, if such committees are appointed, nominating and executive committees. The rights and benefits of such indemnification and the benefits of such insurance shall, to the extent possible, extend to the Representatives insofar as it may be or may be alleged to be responsible for such director, without additional cost to the Company. (ii) In lieu of designating a member of the board of directors pursuant to Paragraph 3(l)(i) of this Agreement, the Representatives shall have the right, during the five-year period commencing on the Closing Date, to have one observer to attend all meetings of the Board of Directors of the Company and its executive, audit, compensation and such other committees as shall be designated by the Representatives. Such observer shall be entitled to the same compensation and reimbursement for expenses of attending meetings as is provided to non-employee directors and committee members and, to the extent it may legally do so, such indemnity as is provided to the Company's non-employee directors. (m) Future Sales. Except for the permitted issuances described below, for a period of one (1) year from the Effective Date, the Company shall not sell or otherwise dispose of any Common Stock (or securities convertible into or exercisable for Common Stock) or Preferred Stock of the Company or any subsidiary of the Company without the Representatives' prior written consent. Permitted issuance shall mean shares of Common Stock issuable (i) upon the exercise or conversion of options or warrants specifically contemplated in the Prospectus or provided for in this Agreement, (ii) pursuant to and in order to consummate a merger with or acquisition of an unaffiliated party in a transaction negotiated at arms' length and approved by (A) a majority of the Company's Board of Directors, and (B) all of the non-employee directors; (iii) in a public offering approved by the Representatives, and (iv) pursuant to a private placement, at a price per share, or, with respect to convertible securities and warrants, having an exercise or conversion price, not less than 80% of the average of the closing bid prices of the Common Stock for ten (10) consecutive trading days ending not earlier than three (3) days prior to the date of such sale or on other terms acceptable to the Representatives. (n) Preferred Stock. The Company shall not create any series of preferred stock or issue any shares of preferred stock for two years from the Effective Date without the consent of the Representatives. - 14 - (o) Press Releases. Prior to the later of the Closing Date or the Option Closing Date, if any, the Company will not issue, directly or indirectly, without your prior written consent (which consent shall not be unreasonably withheld), any press release or other public communication or hold any press conference with respect to the Company, its activities, or the public offering, other than trade releases in the ordinary course of the Company's business. (p) Undertakings. The Company will comply with the provisions of all undertakings contained in the Registration Statement or made in connection with any application to register or qualify any of the Securities under blue sky laws. (q) Certain Deliveries to the Representatives. The Company will obtain from its officers, counsel, and accountants those certificates, opinions, and letters referred to in Paragraph 6 of this Agreement. (r) Key Man Life Insurance. The Company will obtain on or before the Closing Date, and use its best efforts to maintain thereafter for the term of their respective employment with the Company, key man life insurance policies in the amount of $1,000,000 insuring the lives of Richard F. Noll, J. P. McCormick and ______________________, with the Company named as sole beneficiary. (s) Employment Agreements. The Company has entered into employment agreements with Richard F. Noll and J. P. McCormick on the terms that are disclosed in the Prospectus. (t) Redemption and Dividends. For a period of two (2) years from the Closing Date, the Company shall not redeem any of its securities and shall not pay any dividends or make any other cash distribution without obtaining the Representatives' prior written consent. The Representatives shall either approve or disapprove such contemplated redemption of securities or dividend payment or distribution within ten (10) business days from the date the Representatives receives written notice of the Company's proposal with respect thereto; a failure of the Representatives to respond within the ten (10) business day period shall be deemed approval of the transaction. Nothing in this Paragraph 3(t) shall be construed to prohibit the Company from calling the Warrants for redemption subsequent to one year from the Effective Date. (u) Restrictions on Sales, Options by Affiliates. The Company will cause each of its officers, directors, five percent (5%) stockholders to agree in writing that such person will not, during the six (6) month period immediately following the Effective Date (the "Lockup Period"), offer, pledge, sell (which term includes a short sale or sale against the box), contract to sell, grant any option for the sale of, or otherwise transfer or dispose of, directly or indirectly, any shares of the Company's Common Stock without obtaining the Representatives' prior written approval; provided that such persons may transfer such securities in a private transaction to a person who agrees to be subject to these restrictions. (v) Outstanding Warrants, Options and Other Rights. There shall not be outstanding on the Closing Date any warrants, options, or other rights to purchase any shares of Common Stock, except as otherwise set forth in the Prospectus. During the two (2) years following the Effective Date, the Company shall not, without the prior written consent of the Representatives, - 15 - grant options, rights or warrants or sell any securities to its officers, directors, employees or consultants under its stock option plan as described in the Prospectus or otherwise except at an exercise, purchase or conversion price which is not less than the market price of the Common Stock on the date of grant, issuance or sale, as the case may be. (w) Restrictions on Filing Registration Statements. During the eighteen (18) months following the Effective Date, the Company will not, without the prior written consent of the Representatives, register any securities pursuant to the Securities Act, except that such restriction shall not apply to the registration of Common Stock issuable pursuant to the Company's present stock option plan, as described in the Prospectus, on a Form S-8 registration statement. (x) Waiver of Registration Rights. The Company shall obtain a waiver of so-called "piggy-back" registration rights from any holders of any securities of the Company who have the right to require inclusion of any or all of their securities in the Registration Statement contemplated by this Agreement. (y) Directors and Officers Liability Insurance. Within ninety (90) days after the effective date of the Registration Statement, the Company will use its best efforts to obtain Directors and Officers Liability Insurance in an amount no less than $5,000,000 per occurrence. (z) Accounting Firm. The Company shall retain an independent public accounting firm reasonably acceptable to the Representatives for a period of three (3) years from the Effective Date. The Representatives agree that the firm of Panel Kerr Forrester, PC, is acceptable to the Representatives. In addition, for a period of two years from the Effective Date, the Company, at its expense, shall cause its independent accounting firm to review, but not audit, the Company's financial statements for each of the first three fiscal quarters prior to the announcement of quarterly financial information, the filing of the Company's quarterly report on Form 10-QSB and the mailing of quarterly financial information to stockholders, if applicable. (aa) Restrictions on Acquisitions. During the one (1) year following the Closing Date, without the prior consent of the Representatives, the Company shall not enter into any agreement to acquire any other business or the assets of any other business. The term "acquire" shall be broadly construed and shall include the acquisition of assets, the merger with or into another corporation or entity, whether directly by the Company or through a subsidiary, or the acquisition of stock or other equity interests, however defined, of another corporation, partnership, limited liability company, business trust, sole proprietorship or other entity of any kind or description. 4. Offering Expenses and Related Matters (a) General. Whether or not the Public Offering is consummated, the Company will pay all costs and expenses incident to the performance of the obligations of the Company hereunder, including without limiting the generality of the foregoing, (i) the preparation, printing, filing, and copying of the Registration Statement, Prospectus, this Agreement, blue sky memoranda, the Agreement Among Underwriters, if any, a selected dealers agreement, if any, and other underwriting documents, if any, and any drafts, amendments or supplements thereto, including the cost of all copies thereof supplied to the Underwriters in such quantities as reasonably requested by the Representatives, the costs of mailing Prospectuses to offerees and purchasers of - 16 - the Securities, and the out-of-pocket travel expenses of the Representatives and counsel to the Representatives or other professionals designated by the Representatives to visit the Company's facilities or its counsel's offices for purposes of discharging due diligence responsibilities; (ii) the printing, engraving, issuance and delivery of certificates representing Common Stock and Warrants, including any transfer or other taxes payable thereon; (iii) the registration or qualification of the Securities under state securities or "blue sky" laws, including the reasonable fees and disbursements of counsel (regardless of whether such counsel is also counsel to the Representatives, subject to the limitation set forth in Paragraph 4(c) of this Agreement) and filing fees in connection therewith; (iv) all reasonable fees and expenses of the Company's counsel and accountants; (v) all filing fees in connection with review of the terms of the Public Offering by the NASD; (vi) all costs and expenses of any listing of the Securities, Common Stock and Warrants on the SmallCap Market or the NNM and/or any other stock exchange and/or in Standard and Poor's Stock Guide and/or any other securities manuals; (vii) all costs and expenses of four (4) bound volumes provided to the Representatives and their counsel of all closing documents, paper exhibits, correspondence and records forming the materials included in the Public Offering; (viii) the reasonable costs and expenses of all pre-closing and post-closing advertisements relating to the Public Offering (such as tombstone adds), in addition to fifteen (15) lucite cubes;(ix) all costs of holding informational meetings and "road shows;" and (x) all other costs and expenses incurred or to be incurred by the Company in connection with the transactions contemplated by this Agreement. The obligations of the Company under this Paragraph 4(a) shall survive any termination or cancellation of this Agreement. (b) Non-Accountable Expense Allowance. In addition to the Company's responsibility for payment of the foregoing expenses, the Company shall pay to the Representatives a non-accountable expense allowance equal to three percent (3%) of the gross proceeds of the Public Offering, including in such amount the proceeds from any sale of Option Units. The non-accountable expense allowance due shall be paid at the Closing Date and any Option Closing Date, as applicable, and shall include fees and disbursements of Representatives counsel (exclusive of legal fees for state registration and qualification as provided in Paragraph 4(c) of this Agreement), but shall not include fees of the Company's counsel, state registration filing fees, NASD filing fees, Nasdaq listing fees, printing and mailing to members of the underwriting or selling group, and any and all other expenses customarily paid by the issuer in a public offering of securities. You hereby acknowledge your prior receipt from the Company of $________, which amount shall be applied to the non-accountable expense allowance due when and if the Public Offering is closed. If the Public Offering does not close, then any portion of such amount in excess of your accountable reimbursable expenses shall be returned promptly by you to the Company. (c) Compliance with Blue Sky Laws. You shall determine in which states or jurisdictions the Securities shall be registered or qualified for sale. Copies of all applications and related documents for the registration or qualification of securities (except for the Registration Statement and Prospectus) filed with the various states shall be supplied to the Company's counsel not later than one business day following their transmission to the various states, and copies of all comments and orders received from the various states shall be made available promptly to the Company's counsel. Immediately - 17 - prior to the Effective Date, counsel for the Representatives shall advise counsel for the Company in writing of all states in which the offering has been registered or qualified for sale or has been canceled, withdrawn, or denied, the date of each such event, and the number of Securities registered or qualified for sale in each such state. The Company shall be responsible for the cost of state registration or qualification filing fees and the legal fees of Representatives' counsel in connection with such filings, which filing fees are payable to Representatives' counsel in advance of such filings. The legal fees payable by the Company with respect to blue sky filings by Representatives' counsel shall be fifty thousand dollars ($50,000), of which twenty five thousand dollars ($25,000) has been paid. The Company hereby acknowledges that any remaining balance with respect to legal fees or blue sky filing fees is immediately due and payable. 5. Unit Purchase Option; Other Financial Arrangements (a) Unit Purchase Option. On the Closing Date, the Company will sell to the Representatives, for an aggregate price of $10, the Unit Purchase Option to purchase an aggregate of one hundred fifty thousand (150,000) Units from the Company at an exercise price equal to one hundred twenty percent (120%) of the public offering price of the Units. The Unit Purchase Option and the underlying securities shall be non-transferable (other than to officers or partners of members of the underwriting or selling group or as otherwise may be permitted by the NASD) during the one (1) year period commencing on the Effective Date. The Unit Purchase Option and the terms of the underlying securities shall be exercisable for a period of four (4) years commencing one (1) year from the Effective Date. The Unit Purchase Option shall be in substantially the form provided by the Representatives and filed as an Exhibit to the Registration Statement. (b) M/A Agreement. (i) The Company hereby agrees that if, during the five (5) year period commencing on the Effective Date, the Representatives shall introduce to the Company another party or entity (the "Introduced Party"), and, as a result of such introduction, a Transaction is consummated with such Introduced Party, the Company shall pay to the Representatives a finder's fee (the "Fee") equal to six percent (6%) of the first five million dollars ($5,000,000) of the consideration paid or received in such Transaction; plus five percent (5%) of the consideration in excess of five million dollars ($5,000,000) and up to six million dollars ($6,000,000); plus four percent (4%) of the consideration in excess of six million dollars ($6,000,000) and up to seven million dollars ($7,000,000); plus three percent (3%) of the consideration in excess of seven million dollars ($7,000,000) and up to eight million dollars ($8,000,000); plus two percent (2%) of the consideration in excess of eight million dollars ($8,000,000). As used in this Paragraph 5(b), a "Transaction" shall mean any of the following (i) the sale of all or substantially all of the assets and properties of the Company or all or substantially all of the stock of the Company, (ii) the merger or consolidation of the Company with or into any other corporation or other entity (other than a merger with a company owned or controlled by the Company), (iii) the acquisition by the Company of the assets or stock of another business entity in which the Company may be involved, or (iv) a joint venture, licensing or marketing agreement or arrangement, however structured. (ii) The Fee shall be paid in cash at the closing of the particular Transaction, regardless of whether the Transaction involves installment payments or the consideration paid includes securities or a - 18 - combination of securities and cash; provided, however, that in the event that the Transaction is a marketing or license or other agreement pursuant to which a stream of revenue or cash receipts may be generated or other Transaction where it is impossible to determine the value of the consideration to be paid or received or in the event that there are contingent payments, the Fee shall be paid with respect to each payment at the same time as the payment is made or received, as the case may be, regardless of when the payment is received as long as the original agreement pursuant to which the payment is made was entered into during the five (5) year period commencing on the Effective Date. No modification of payment or other terms of any agreement shall impair the Representatives' right to the Fee. In the event that the Transaction involves a merger or sale of assets or tender offer or sale of stock where the consideration is paid to any or all of the Company's stockholders, the consideration paid to such stockholders shall be included in the consideration paid or received for purposes of computing the Fee. All references to the Company in the context of a Transaction shall include Activeworlds.com, Inc., any of its present or future subsidiaries or any affiliate of the Company, regardless of whether such party shall pay or receive the consideration paid in the Transaction. (iii) In determining the value of the consideration paid or received, the following provisions shall apply: (A) Any securities which are regularly traded on a securities exchange or in the over-the-counter market shall be valued at the average of the closing prices in the case of securities listed on the New York or American Stock Exchange or the Nasdaq Stock Market (or the closing bid price if there are no transactions on any of such days) or the average of the closing bid prices, as reported by Nasdaq or the National Quotation Bureau, Inc. or similar recognized reporting agency, in the case of securities not traded on such exchanges or in such markets on the ten (10) trading days prior to the earlier of (I) the date of the agreement or (II) in the event that a press release or other announcement is made by the Company and/or the Introduced Party concerning the Transaction and the consideration provided for in the agreement includes the transfer of a fixed number of securities, the date of such press release or announcement. (B) Any debt securities which are not regularly traded on a securities exchange or on the over-the-counter market shall be valued at the principal amount thereof if such obligations bear a stated interest rate or, if no interest rate is stated, at the present value of the payments due, discounted using an interest rate equal to the prime rate of Chemical Bank in effect on the second business day prior to the closing date. (C) The consideration received in a joint venture shall be based on the consideration paid to the joint venture by the Introduced Party plus any additional consideration paid by or on behalf of the joint venture partner to the Company. (D) In the event that the Transaction involves the receipt by the Company of property or equipment the consideration shall be fair value of the property and equipment. - 19 - (E) In the event that the fair market value of any property cannot be determined pursuant to the application of Paragraph 5(b)(iii) of this Agreement and the Company and the Representatives shall not be able to agree on a value, the value shall be determined by an appraiser jointly selected by the Company and the Representatives. (iv) Notwithstanding anything in this Paragraph 5(b) to the contrary, if the Company shall, within one hundred eighty (180) days immediately following the expiration of five (5) years from the Effective Date, consummate a Transaction with an Introduced Party which was introduced by the Representatives to the Company during such five (5) year period, the Company shall pay the Representatives the Fee in the same manner as is otherwise provided in this Paragraph 5(b). 6. Conditions to the Obligations of the Underwriters. The obligation of Underwriters to purchase and pay for the Securities shall be subject to the accuracy in all material respects, as of the date of this Agreement and each Closing Date (whether the Closing Date with respect to the Firm Units or an Option Closing Date with respect to the Option Units), as if made on such Closing Date, of the representations and warranties of the Company contained in this Agreement and the following additional conditions: (a) Effectiveness of Registration Statement. (i) The Registration Statement shall have become effective not later than 5:30 P.M., Eastern Time, on the date of this Agreement, or such later time or date as shall have been consented to by you in writing (the "Effective Date"). (ii) On the Closing Date, no stop order suspending the effectiveness of the Registration Statement or the qualification or registration of the Securities under the blue sky laws of any jurisdiction (whether or not a jurisdiction specified by the Underwriters) shall have been issued, and no proceeding for that purpose shall have been initiated or shall be threatened or contemplated by the Commission or the authorities of any such jurisdiction. (iii) Any request of the Commission or any such authorities for additional information to be included in the Registration Statement or Prospectus or otherwise shall have been complied with to the reasonable satisfaction of counsel for the Underwriters. (b) Representations; Compliance with Agreement. The representations and warranties of the Company in this Agreement shall be true and correct on and as of the Closing Date, with the same effect as if made on the Closing Date, and the Company shall have complied with all the agreements and satisfied all the obligations required to be performed or satisfied by it at or prior to the Closing Date. (c) No Untrue Statements. The Registration Statement and the Prospectus shall contain all statements required to be stated therein in accordance with the Securities Act and the Regulation and the Registration Statement and the Prospectus shall not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and, since the Effective Date, there shall not have occurred any event required to be set forth in an amended or supplemented Prospectus that has not been so set forth (except any such statement or omission based upon information furnished in writing by or on behalf of the Underwriters for inclusion in the Registration Statement). - 20 - (d) No Material Change. Subsequent to the respective dates as of which information is given in the Registration Statement and Prospectus, and except as set forth or contemplated in the Prospectus, (i) there shall have been no material adverse changes with respect to the officers, directors, operations, capitalization, contractual obligations, legal proceedings, proposed use of proceeds from the sale of the Securities, business, plans or prospects, net assets or liabilities or obligations, properties, or any other aspect of the financial condition or results of operations of the Company or the Subsidiary, (ii) neither the Company nor the Subsidiary shall have entered into any material transaction not in the ordinary course of business, (iii) neither the Company nor the Subsidiary shall have paid or declared any dividends or other distributions on its capital stock, (iv) the conduct of the business and operations of the Company and the Subsidiary shall not have been materially interfered with by strike, fire, flood, hurricane, accident or other calamity (whether or not insured), or by any court or governmental action, order or decree, and the properties of the Company and the Subsidiary shall not have sustained any material loss or damage (whether or not insured) as a result of any such occurrence, and (v) except as set forth in the Prospectus, there are no actions, suits, proceedings or investigations pending before any arbitrator, court or governmental agency, authority or body or, to the Company's Knowledge, threatened, to which the Company or the Subsidiary is a party or of which the business or property of the Company or the Subsidiary is the subject and which, if adversely decided, could reasonably be expected to have a material adverse affect on the business, property, condition (financial or otherwise), results of operations or general affairs of the Company or the Subsidiary, and there have been no material adverse development in any such suits, actions, proceedings or investigations. (e) NASD. The NASD shall have indicated that it has no objection to the underwriting arrangements pertaining to the sale of the Securities by the Underwriters. No action shall have been taken by the Commission or the NASD the effect of which would make it improper, at any time prior to the Closing Date, for any member firm of the NASD to execute transactions (as principal or as agent) in the Securities, Common Stock or Warrants and no proceedings for the purpose of taking such action shall have been instituted or shall be pending, or, to the Representatives' or the Company's Knowledge, shall be contemplated by the Commission or the NASD. The Company represents at the date of this Agreement, and shall represent as of the Closing Date or Option Closing Date, as the case may be, that it has no Knowledge that any such action is in fact contemplated by the Commission or the NASD. (f) Certificates, Bylaws and Proceedings. The Company's Certificate of Incorporation and By-Laws, and all proceedings taken in connection with the authorization, issuance, or sale of the Securities as herein contemplated, shall be reasonably satisfactory in form and substance to you. (g) Officers' Certificate. The Company shall have furnished to the Representatives a certificate of the President and of the Chief Financial Officer of the Company, dated the day of the Closing Date, to the effect that each signer of such certificate has examined the Registration Statement, the Prospectus, and this Agreement, and confirming, in form satisfactory to the Representatives, that the compliance by the Company of the conditions set forth in Paragraphs 6(a) through (d) of this Agreement have been satisfied. - 21 - (h) Opinion of Company Counsel. The Company shall have furnished to the Representatives the opinion of Pepe and Hazard, LLP, counsel for the Company, dated the Closing Date, in form and substance reasonably satisfactory to counsel to the Representatives and substantially in the form of Exhibit A attached hereto. In rendering the opinion, such counsel may rely as to matters of fact, to the extent they deem proper, upon certificates of the Company's officers and governmental officials. (i) Accountants' Letter. At the time this Agreement is executed and as of the Closing Date, Panel Kerr Forrester, PC, independent public accountants for the Company, shall have furnished to you a letter addressed to the Representatives and dated the date of this Agreement or the Closing Date, as applicable, in form and substance previously approved by the Representatives and its counsel. (j) Agreements with Stockholders. The Representatives shall have received the agreements, in form and substance satisfactory to the Representatives, as contemplated by Paragraph 3(u) of this Agreement. (k) Change in Capitalization. Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, there shall not have been any material adverse change or decrease in the capital stock or long-term debt obligations of the Company or any decreases in stockholders' equity, net assets or current net assets of the Company or any material adverse change in the financial position, revenues, expenses or results of operations of the Company or the Subsidiary, each as compared with the amounts shown in the most recent financial statements included in the Registration Statement, except as disclosed in the Prospectus, that makes it impractical or inadvisable in the reasonable judgment of the Representatives to proceed with the Public Offering or the delivery of the Securities, as the case may be, as contemplated in the Prospectus. (l) Other Agreements. The Company shall have executed and delivered to the Representatives the Warrant Agreement and the Unit Purchase Option to purchase one hundred fifty thousand (150,000) Units. (m) Opinion of Representatives' Counsel. The Representatives shall have received an opinion from Esanu Katsky Korins & Siger, LLP, counsel for the Representatives, as to the organization of the Company, the validity of the Securities, the form of the Registration Statement and the Prospectus, and such other related matters as you may request, and such counsel shall have been furnished by the Company such papers and information as they request to enable them to pass upon such matters. It is understood that such counsel will express no opinion with respect to the financial statements and other financial, accounting, and statistical data included in the Registration Statement and the Prospectus. In rendering the foregoing opinion, such counsel shall be entitled to rely upon the opinion delivered to the Representatives pursuant to Paragraph 6(h) of this Agreement as to matters of Federal securities law, and may rely as to matters of fact upon such certificates and other documents and information as they may reasonably request for purposes of such opinion. (n) Other Information. Prior to the Closing Date, the Company shall have furnished to the Representatives such further information, certificates, and documents in connection with the Company's obligations set forth in this Agreement as you may reasonably request. - 22 - If any of the conditions specified in this Paragraph 6 shall not have been fulfilled when and as required by this Agreement, this Agreement and all obligations of the Underwriters hereunder may be terminated by you at, or at any time prior to, the Closing Date. Notice of such termination shall be given to the Company in writing, or by facsimile transmission or telephone and confirmed in writing. 7. Indemnification (a) Indemnification by the Company. The Company agrees to indemnify and hold harmless each Underwriter and each person who controls any Underwriter within the meaning of the Securities Act, from and against any and all losses, claims, damages or liabilities, joint or several, to which they or any of them may become subject under the Securities Act, the Exchange Act, or other Federal or state statutory law or regulation, at common law or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of a material fact made by the Company in this Agreement, (ii) any untrue statement or alleged untrue statement of a material fact made by the Company contained in the Registration Statement, or any amendment thereof, or in any Preliminary Prospectus or the Prospectus, or any amendment thereof or supplement thereto, or in any blue sky application or other document executed by the Company specifically for that purpose (or based upon written information furnished by the Company) filed in any state or other jurisdiction in order to qualify any of the Securities or other Securities under the securities laws thereof (any such application, document or information being referred to as a "Blue Sky Application"); or (iii) the omission or alleged omission to state in any such Registration Statement, Preliminary Prospectus or Prospectus, or amendment thereof or supplement thereto, or Blue Sky Application a material fact required to be stated therein or necessary to make the statements made therein not misleading, and agrees to reimburse each such indemnified party for any legal or other expenses reasonably incurred by it in connection with investigating or defending against any such loss, claim, damage, liability or action; provided, however, that the Company will not be liable in any such case to the extent that any such loss, claim, damage, or liability arises out of or is based upon any such untrue statement or alleged untrue statement or omission or alleged omission made therein or omitted therefrom in reliance upon and in conformity with written information furnished to the Company by or on behalf of you or such Underwriter specifically for use in connection with the preparation thereof, and further provided, however, that the foregoing indemnity with respect to any untrue statement, alleged untrue statement, omission, or alleged omission contained in any Preliminary Prospectus shall not inure to the benefit of any Underwriter from whom the person asserting any such loss, claims any of, damage, or liability purchased any of the securities that are the subject thereof (or to the benefit of any person who controls such Underwriter), if a copy of the Prospectus was not delivered to such person with or prior to the written confirmation of the sale of such security to such person. This indemnity agreement will be in addition to any liability that the Company may otherwise have. (b) Indemnification by Underwriters. Each Underwriter, severally, but not jointly, agrees to indemnify and hold harmless the Company, each of its directors, each of its officers who has signed or signs the Registration Statement, and each person who controls the Company within the meaning of the Securities Act, from and against any and all losses, claims, damages or liabilities, joint or several, to which they or any of them may become subject under the Securities Act, the Exchange Act, or other Federal or state statutory law or regulation, at common law or otherwise, insofar as such - 23 - losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement, or any amendment thereof, or in any Preliminary Prospectus or the Prospectus, or any amendment thereof or supplement thereto, or in a Blue Sky Application, or (ii) the omission or the alleged omission to state in any such Registration Statement, Preliminary Prospectus or Prospectus, amendment thereof or supplement thereto, or Blue Sky Application a material fact required to be stated therein or necessary to make the statements made therein not misleading, in each case to the extent, but only to the extent, that the same was made therein or omitted therefrom in reliance upon and in conformity with written information furnished to the Company by or on behalf of you or such Underwriter specifically for use in the preparation thereof, and agrees to reimburse each such indemnified party for any legal or other expenses reasonably incurred by it in connection with investigating or defending against any such loss, claim, damage, liability or action. This indemnity agreement will be in addition to any liability that the Underwriters may otherwise have. (c) Claims. Within five (5) days after receipt by an indemnified party under Paragraph 7(a) or (b) of this Agreement of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against an indemnifying party under such subsection, notify the indemnifying party in writing of the commencement thereof; the failure so to notify the indemnifying party shall relieve the indemnifying party from any liability under this Paragraph 7 as to the particular item for which indemnification is then being sought, unless such indemnifying party has otherwise received actual notice of the action at least thirty (30) days before any answer or response is required by the indemnifying party in its defense of such action, but will not relieve it from any liability that it may have to any indemnified party otherwise than under this Paragraph 7. If any such action is brought against any indemnified party and it notifies the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate therein and, to the extent that it may elect by written notice delivered to the indemnified party promptly after receiving the aforesaid notice from such indemnified party, to assume the defense thereof; provided, that if the defendants in any such action include both the indemnified party and the indemnifying party and either (i) the indemnifying party or parties agree, or (ii) representation of both the indemnifying party or parties and the indemnified party or parties by the same counsel is inappropriate under applicable standards of professional conduct because of actual or potential conflicting interests between them, then the indemnified party or parties shall have the right to select separate counsel to assume such legal defense and to otherwise participate in the defense of such action. The indemnifying party will not be liable to such indemnified party under this Paragraph 7 for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof unless (i) the indemnified party shall have employed counsel in connection with the assumption of legal defenses in accordance with the proviso to the immediately preceding sentence (it being understood, however, that the indemnifying party shall not be liable for the expenses of more than one separate counsel approved by the indemnifying party for all indemnified parties), (ii) the indemnifying party shall not have employed counsel to represent the indemnified party within a reasonable time after notice of commencement of the action, or (iii) the indemnifying party has authorized the employment of counsel for the indemnified party at the expense of the indemnifying party. In no event shall an indemnifying party be liable under this Paragraph 7 for any settlement, effected without its written consent, which consent shall not be unreasonably withheld, of any claim or action against an indemnified party. - 24 - (d) Contribution. In order to provide for just and equitable contribution under the Securities Act in any case in which (i) an indemnified party makes a claim for indemnification pursuant to Paragraphs 7(a) or (b) of this Agreement (subject to the limitations thereof) but is judicially determined, by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal, that such indemnification may not be enforced in such case notwithstanding that the provisions of this Paragraph 7 provide for indemnification in such case, or (ii) contribution under the Securities Act may be required on the part of any indemnified or indemnifying party in circumstances for which indemnification is provided under Paragraphs 7(a) or (b) of this Agreement, then, and in each such case, the Company and the Underwriters shall contribute to the aggregate losses, claims, damages, or liabilities to which they may be subject (after contribution from all others) in such proportion so that the Underwriters is responsible for that portion represented by the percentage that the underwriting discount appearing on the cover page of the Prospectus bears to the Public Offering Price appearing thereon, and the Company is responsible for the remaining portion; provided, however, that if such allocation is not permitted by applicable law, then the relative fault of the Company and the Underwriters in connection with the statements or omissions that resulted in such losses, liabilities, claims, and damages and other relevant equitable considerations shall also be considered. The relative fault shall be determined by reference to, among other things, whether in the case of an untrue statement of a material fact or the omission to state a material fact, such statement or omission relates to information supplied by the Company or by the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statement or omission. The Company and the Underwriters agree that it would not be just and equitable if the respective obligations of the Company and the Underwriters to contribute pursuant to this Paragraph 7(d) were to be determined by pro rata or per capita allocation of the aggregate damages (even if the Underwriters and their respective controlling persons in the aggregate were treated as one entity for such purpose) or by any other method of allocation that does not take account of the equitable considerations referred to in the first sentence of this Paragraph 7(d). For purposes of this Paragraph 7(d), the term "damages" shall include any legal or other expenses reasonably incurred by the indemnified party in connection with investigating or defending against or appearing as a third party witness in any action or claim that is the subject of the contribution provisions of this Paragraph 7(d). Notwithstanding the provisions of this Paragraph 7(d), an Underwriter and its controlling persons collectively shall not be required to contribute any amount in excess of the difference between the total price of the Securities purchased by the Underwriter, directly or indirectly, from the Company pursuant to this Agreement and the amount of any damages that such Underwriter and its controlling persons collectively have been required to pay by reason of such untrue statement or omission other than pursuant to this Paragraph 7(d). No person guilty of a fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For the purposes of this Paragraph 7(d), any person who controls an Underwriter within the meaning of Section 15 of the Securities Act or Section 20(a) of the Exchange Act shall have the same rights to contributions as the Underwriter and each director of the Company, each officer of the Company who signed the Registration Statement, and each person, if any, who controls the Company within Section 15 of the Securities Act or Section 20(a) of the Exchange Act shall have the same rights to contribution as the Company. - 25 - The foregoing contribution agreement shall in no way affect the contribution liabilities of any person having liability under Section 11 of the Securities Act other than the Company and the Underwriters and persons controlling the Company or the Underwriters. After receipt by any party to this Agreement of notice of the commencement of any action, suit, or proceeding, such person will, if a claim for contribution in respect thereof is to be made against another party (the "contributing party"), notify the contributing party of the commencement thereof within a reasonable time thereafter, but the failure so to notify the contributing party will not relieve the contributing party from any liability that it may have to any party other than for contribution pursuant to this Paragraph 7(d). Any notice given pursuant to any other provision of this Paragraph 7 shall be deemed to be like notice pursuant to this Paragraph 7(d). If any such action, suit or proceeding is brought against any party, and such person notifies a contributing party of the commencement thereof, the contributing party will be entitled to participate therein with the notifying party and any other contributing party similarly notified, subject to the provisions of Paragraph 7(c) of this Agreement. (e) Survival. The respective indemnity and contribution agreements by the Underwriters and the Company contained in this Paragraph 7, and the covenants, representations and warranties of the Company set forth in this Agreement, shall remain operative and in full force and effect regardless of (i) any investigation made by the Underwriters or on their behalf or by or on behalf of any person who controls any Underwriter, by the Company or any controlling person of the Company or any director or any officer of the Company, (ii) acceptance of the Securities and payment therefor, or (iii) any termination of this Agreement, and shall survive the delivery of the Securities, and any successor to the Company or to any Underwriter or any person who controls any Underwriter or the Company, as the case may be, shall be entitled to the benefit of such respective indemnity and contribution agreements. 8. Effectiveness. This Agreement shall become effective contemporaneously with the effectiveness of the Registration Statement, or at such date after the effective time of the Registration Statement as you, in your discretion, shall first release the Securities for sale to the public; provided, however, that the provisions of Paragraphs 4, 6, and 7 of this Agreement shall at all times be in full force and effect. For the purposes of this Paragraph 8, the Securities shall be deemed to have been released for sale to the public upon release by you after effectiveness of the Registration Statement of a newspaper advertisement relating to the Securities or upon release by you thereafter of telegrams advising securities dealers of the effectiveness of the Registration Statement, whichever shall first occur. 9. Termination. This Agreement may be terminated, in your absolute discretion, by notice given to the Company prior to the Closing Date if the Company shall have failed, refused, or been unable, prior to the Closing Date, to perform any material agreement required to be performed by it hereunder, or if any other condition of the Underwriters' obligations hereunder required to be fulfilled by the Company is not fulfilled. In addition, this Agreement may be terminated, as set forth above, if, prior to the Closing Date, any of the following shall have occurred: (a) material governmental restrictions (not in force and effect on the date of this Agreement) have been imposed on trading in securities on the New York Stock Exchange or American Stock Exchange or in the over-the-counter market; (b) the determination by you that there shall have occurred a material adverse change, beyond normal fluctuations, in general financial market or economic conditions from such conditions on the date of this - 26 - Agreement; (c) a material interruption in mail or telecommunications service or other general means of communications within the United States after the execution and delivery of this Agreement; (d) a banking moratorium has been declared by Federal or New York state authorities; (e) an outbreak of major international hostilities or other national or international calamity has occurred; (f) the passage by the Congress of the United States or by any state legislative body of any act or measure, or the adoption of any orders, rules, or regulations by any governmental body or executive or any authoritative accounting institute or board, that you believe will have a Material Adverse Effect on the business, financial condition, or financial statements of the Company or the distribution of the Securities or market for the Securities; or (g) any material adverse change has occurred, since the respective dates of which information is given in the Registration Statement and Prospectus, in the condition of the Company, financial or otherwise, whether or not arising in the ordinary course of business. Any such termination shall be without liability of any party to any other party, except as provided in Paragraph 7 in this Agreement and except that the Company shall remain obligated to pay costs and expenses pursuant to Paragraph 4 in this Agreement. If you elect to prevent this Agreement from becoming effective, or to terminate this Agreement, as provided in this Paragraph 9, you shall promptly notify the Company by telecopier or telephone, and confirm by letter, and the Underwriters shall not be under any liability to the Company. 10. Default by One or More Underwriters or Selected Dealers. (a) If one or more of the Underwriters or selected dealers shall fail at the Closing Date to purchase the Firm Units that it or they are obligated to purchase pursuant to this Agreement or a selected dealers agreement (the "Defaulted Securities"), the Representatives shall have the right, within 24 hours thereafter, to make arrangements for one or more of the non-defaulting Underwriters or selected dealers, to purchase all, but not less than all, of the Defaulted Securities in such amounts as may be agreed upon and upon the terms in this Agreement set forth; if, however, the Representatives shall not have completed such arrangements within such 24-hour period, then: (i) If the number of Defaulted Securities does not exceed 10% of the total number of Firm Units, the non-defaulting Underwriters and the non-defaulting selected dealers shall be obligated to purchase the full amount thereof in the proportions that their respective underwriting obligations bear to the underwriting obligations of the non-defaulting Underwriters and selected dealers. (ii) If the number of Defaulted Securities exceeds 10% of the total number of Firm Units, this Agreement shall terminate without liability on the part of any non-defaulting Underwriter or selected dealer. (b) In the event of any such default that does not result in a termination of this Agreement, either the Representatives or the Company shall have the right to postpone the Closing Date for a period not exceeding seven days in order to effect any required changes in the Registration Statement or Prospectus or in any other documents or arrangements. (c) Any action taken under this Paragraph 10 shall not release any defaulting Underwriter or selected dealer from liability in respect of such default. - 27 - 11. Survival of Representations, Warranties, and Indemnities. The respective agreements, representations, warranties, and indemnities contained in this Agreement will remain in full force and effect regardless of any investigation made by or on behalf of you, any Underwriter or the Company, or any of your or their respective officers or directors or controlling persons, and will survive delivery of and payment for the Securities and the Unit Purchase Option. 12. Notices. All notices and other communications hereunder (unless otherwise expressly provided for in this Agreement) shall be in writing and shall be deemed given when delivered in person or by overnight courier service or Express Mail, on the business day (before 5:00 P.M.) transmitted if sent by facsimile transmission or similar means of communication if receipt if confirmed or if transmission is confirmed as otherwise provided in this Paragraph 12, or the fifth (5th) day after mailing if mailed if sent by registered or certified mail (return receipt requested) to the party to receive the same at the following addresses (or at such other address for a party as shall be specified by like notice): If to the Company: Activeworlds.com.,Inc. 95 Parker Street Newburyport, MA 01950 Facsimile: (978) 499-0221 Attention: Richard F. Noll, President With a copy to: Pepe & Hazard, LLP 150 Federal Street, 28th Floor Boston, MA 02110-1745 617-695-9255-Fax Attention: John A. Kostrubanic, Esq. If to the Underwriters: HD Brous & Co., Inc. 40 Cuttermill Road Great Neck, New York 11021 Facsimile: (516) 773-1805 Attention: Mr. Howard D. Brous, Chairman and Corinthian Partners, L.L.C. 10 East 53rd Street New York, NY 10022-5244 Facsimile: (212) 287-1589 Attention: With a copy to: Esanu Katsky Korins & Siger, LLP 605 Third Avenue New York, New York 10158 Facsimile: (212) 953-6899 Attention: Asher S. Levitsky P.C. - 28 - 13. Successors. This Agreement will inure to the benefit of and be binding upon the parties hereto and their respective successors. Except as to the several Underwriters for whom you are acting as their representative, and except and only to the extent stated in Paragraph 7 of this Agreement with respect to the officers, directors and controlling persons referred to in such Paragraph 7, no person other than the parties hereto and their respective successors will have any right or obligation hereunder. The terms "successor" and "successors and assigns" as used in this Agreement shall not include any buyer, as such, of any of the Securities from the Underwriters. 14. Entire Understanding. This Agreement contains the entire understanding between the parties to this Agreement and supersedes any prior or contemporaneous oral or prior written agreement, understandings or letter of intent, and may not be modified or amended nor may any right be waived except by a writing signed by all parties in the case of a modification or amendment or the party to be charged in the case of a waiver. No course of conduct or dealing and no trade custom or practice shall be construed to modify any of the provisions of this Agreement. 15. Counterparts. This Agreement may be executed in multiple counterparts, each of which shall be an original but all of which taken together shall constitute one and same agreement. 16. Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of New York applicable to agreements executed and to be performed wholly within such State. Please confirm, by signing and returning to the Company counterparts of this Underwriting Agreement, that the foregoing correctly sets forth the understanding between the Company and you, whereupon this Agreement will constitute a binding agreement among us. Very truly yours, ACTIVEWORLDS.COM, INC. By:________________________________ Richard F. Noll, President Confirmed and Accepted as of the date first above-written: HD BROUS & CO, INC. By:______________________________ Howard D. Brous, Chairman CORINTHIAN PARTNERS, L.L.C. By:______________________________ - 29 - Exhibit A Opinion of Company Counsel 1. The Company and the Subsidiary (a) has been duly incorporated and is a validly existing corporation in good standing under the laws of the state of its incorporation, with full corporate power and authority to own and operate its properties and to carry on its business as set forth in the Registration Statement and Prospectus; (b) on the Effective Date has authorized and outstanding capital stock as set forth in the Prospectus, and (c) is duly licensed or qualified as a foreign corporation in Massachusetts and all other jurisdictions in which by reason of owning or leasing real property in such jurisdiction it is required to be so licensed or qualified except where failure to be so qualified or licensed would have no Material Adverse Effect. 2. All of the outstanding shares of Common Stock are duly and validly authorized and issued and outstanding, fully paid and non-assessable, conform to the description set forth in the Prospectus and do not have any, and were not issued in violation of any, preemptive rights under the Company's certificate of incorporation or by-laws or any other agreement known to such counsel. 3. The Company has authorized and reserved for issuance the shares of Common Stock issuable (a) upon exercise of the outstanding options or warrants (other than the Warrants) in accordance with the terms of the applicable options or warrants, (b) upon exercise of the Warrants, including Warrants issued upon exercise of the Unit Purchase Option, pursuant to the terms of the Warrants and the Warrant Agreement, and (c) upon exercise of the Unit Purchase Option, and when issued upon such exercise, such shares of Common Stock will be duly and validly authorized and issued, fully paid and non-assessable and not subject to any preemptive rights or rights of first refusal pursuant to the Company's certificate of incorporation or by-laws or other agreement known to such counsel. 4. The shares of Common Stock included in the Units offered pursuant to the Prospectus (a) are duly and validly authorized and issued, fully paid and non-assessable, (b) have not been issued in violation of the pre-emptive rights or rights of first refusal pursuant to the Company's certificate of incorporation or any agreement known to such counsel and (c) are not subject to any liens, encumbrances, claims, security interests, stockholders agreements, voting trusts or restrictions on voting or transfer other than as disclosed in the Prospectus or as may be imposed under Federal and state securities laws. 5. The Warrants and the Unit Purchase Option, when issued as provided in this Agreement and/or the Unit Purchase Option, will constitute the valid, binding and enforceable obligations of the Company, subject to bankruptcy, insolvency and other laws of general applications affecting the enforceability of creditors' rights and subject to the discretionary nature of any remedies in the nature of equitable relief and except that no opinion is given with respect to the indemnification and contribution provisions of the Representatives' Warrants. 6. The shares of Common Stock and Warrants included in the Units offered pursuant to the Prospectus, when issued pursuant to this Agreement upon payment of the consideration provided for in this Agreement, will, to such counsel's knowledge, be free of all liens, encumbrances, claims, security interests, restrictions (other than those disclosed in the Prospectus or imposed by Federal or state securities laws), stockholders' agreements and voting trusts resulting from agreements known to such counsel to which the Company is a party. A-1 7. The shares of Common Stock issuable upon exercise of the Unit Purchase Option and upon exercise of the Warrants issuable upon exercise of the Unit Purchase Option have been duly and validly authorized for issuance, and when issued pursuant to the terms of the Unit Purchase Option and/or the Warrant Agreement, as the case may be, will be validly issued, fully paid and non-assessable; the Warrants issuable upon exercise as provided in the Unit Purchase Option, will constitute the valid and binding obligations of the Company, subject to bankruptcy, insolvency and other laws of general applications affecting the enforceability of creditors' rights and subject to the discretionary nature of any remedies in the nature of equitable relief in any legal or equitable action. 8. Except as set forth in or contemplated by the Prospectus, to such counsel's knowledge, as of the date of this Agreement, there were no outstanding options, warrants or other rights providing for the issuance of any class of capital stock of the Company, or any security convertible into, or exchangeable for, any shares of any class of capital stock of the Company. 9. To such counsel's knowledge, neither the filing of the Registration Statement nor the offering of the Units as contemplated by this Agreement gives rise to any registration rights or other rights, other than those which have been waived or satisfied, relating to the registration under the Act of any shares of Common Stock. 10. The certificates evidencing the shares of Common Stock and Warrants are in proper legal form. 11. To such counsel's knowledge, no consents, approvals, authorizations or orders of agencies, officers or other regulatory authorities are necessary for the valid authorization, issue or sale of the Securities pursuant to this Agreement, except such as may be required under the Securities Act, the Exchange Act or state securities or blue sky laws or pursuant to the NASD's rules, regulations and policies or as required under the regulations of the Nasdaq SmallCap Market. 12. This Agreement, the Warrant Agreement and the Unit Purchase Option have been duly authorized and executed by the Company and constitute the valid and binding agreements of the Company, enforceable in accordance with their respective terms, subject to bankruptcy, insolvency and other laws of general applications affecting the enforceability of creditors' rights and subject to the discretionary nature of any remedies in the nature of equitable relief and except that no opinion is given with respect to the provisions of Paragraph 7 of this Agreement. 13. The Company has corporate power and authority to authorize, issue and sell the Securities on the terms and conditions set forth in this Agreement, the Warrant Agreement, the Unit Purchase Option, as the case may be, and in the Registration Statement and in the Prospectus, and the execution and delivery of this Agreement, the consummation of the transactions contemplated by this Agreement, the Warrant Agreement and the Unit Purchase Option and compliance by the Company with the terms of this Agreement, the Warrant Agreement and the Unit Purchase Agreement will not conflict with, or constitute a default under, the certificate of incorporation or by-laws of the Company or any indenture, A-2 mortgage, deed or trust, note or any other agreement or instrument known to such counsel to which the Company or the Subsidiary is a party or by which they or their respective businesses or their properties are bound, or, to such counsel's knowledge, any law, order, rule or regulation, writ, injunction or decree of any government, governmental instrumentality, or court having jurisdiction over the Company, the Subsidiary or their respective businesses or properties. 14. Such counsel knows of no actions, suits or proceedings at law or in equity of a material nature pending, or to such counsel's knowledge, threatened, against the Company before or by any state commission, regulatory body, or administrative agency or other governmental body, wherein an unfavorable ruling, decision or finding would materially adversely affect the business or financial condition of the Company or which question either (a) the validity of the issuance of the Securities, the execution of the Underwriting Agreement, the Warrant Agreement or the Unit Purchase Option by the Company, or (b) any action taken or to be taken by the Company pursuant to the Underwriting Agreement, the Warrant Agreement or the Unit Purchase Option, which are not disclosed in or contemplated by the Prospectus. 15. The Registration Statement has become effective under the Act. Furthermore, the Registration Statement and the Prospectus (except as to the financial statements and other financial, statistical and accounting information contained therein or omitted therefrom, as to which no opinion is expressed), comply as to form in all material respects with the requirements of the Act and the rules and regulations (the "Rules") of the Commission under the Securities Act. In passing upon the form of such documents, such counsel has assumed the correctness and completeness of the statements made or included therein by the Company and take no responsibility for the accuracy, completeness or fairness of the statements contained therein except insofar as such statements relate to the description of the Securities or relate to such counsel. However, in the course of the preparation by the Company of the Registration Statement and the Prospectus, such counsel had conferences with officers and directors of the Company in connection with the preparation of the Registration Statement and Prospectus, and, without independently verifying the accuracy, completeness or fairness of the statements contained in the Registration Statement and the Prospectus and relying on the Company's officers regarding materiality, no facts have come such counsel's attention which gave such counsel reason to believe that the Registration Statement, as of the effective date thereof (except as to the financial statements and other financial, statistical and accounting information contained therein or omitted therefrom, as to which no opinion is expressed), contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; or that the Prospectus (except as to the financial statements and other financial, statistical and accounting information contained therein or omitted therefrom, as to which no opinion is expressed) contained any untrue statement of a material fact or omits to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. Such counsel does not know of any documents which are required to be filed as exhibits to the Registration Statement which have not been so filed. A-3 SCHEDULE I Underwriting Agreement Dated ___________, 1999 Underwriter Number of Firm Units to be Purchased HD Brous & Co., Inc. Corinthian Partners, L.L.C. A-4 EX-1.2 3 EXHIBIT 1.2 Exhibit 1.2 UPO- Option to Purchase Units ACTIVEWORLDS.COM, INC. Unit Purchase Option Dated: , 1999 THIS CERTIFIES THAT and its registered assigns (herein sometimes called the "Holder") is entitled to purchase from Activeworlds.com, Inc., a Delaware corporation (hereinafter called the "Company"), at the price and during the period as hereinafter specified, up to Units ("Units"), each Unit consisting of one share of the Company's Common Stock, par value $.001 per share ("Common Stock"), and one Series B Redeemable Common Stock Purchase Warrant of the Company (a "Warrant" and collectively, the "Warrants") to purchase one (1) share of Common Stock. Each Warrant to purchase one share of Common Stock entitles the holder to purchase one share of Common Stock at an exercise price of and /100 dollars ($ ) per share, subject to adjustment as provided in the Warrant Agreement, as hereinafter defined. 1. This option (this "Option"), together with options of like tenor, constituting in the aggregate options (the "Options") to purchase an aggregate of one hundred fifty thousand (150,000) Units, was originally issued pursuant to an underwriting agreement (the "Underwriting Agreement") between the Company, HD Brous & Co., Inc. ("Brous") and Corinthian Partners, L.L.C. ("Corinthian") in connection with a public offering of one million five hundred thousand (1,500,000) Units, at an aggregate price of $10 for the Options. Brous and Corinthian are referred to in this Agreement collectively as the "Underwriters". Except as specifically otherwise provided in this Option, the Common Stock and the Warrants issued upon exercise of the Option shall bear the same terms and conditions as described under the captions "Description of Securities" and "Underwriting" in the Company's Registration Statement on Form SB-2, File No. 333-85095 (the "Registration Statement") which was declared effective by the Securities and Exchange Commission (the "Commission") on , 1999 (the "Effective Date"). Pursuant to the Underwriting Agreement, Options to purchase one hundred fifty thousand (150,000) Units are being issued to the Underwriters and/or selected dealers. The Holder shall have registration rights under the Securities Act of 1933, as amended (the "Securities Act"), for this Option, the Units issuable upon exercise of this Option, the Common Stock and the Warrants included in the Units issuable upon exercise of this Option and the shares of Common Stock issuable upon exercise of the Warrants, as more fully described in Paragraph 7 of this Option. The Warrants issuable upon exercise of this Option shall be issued pursuant to the warrant agreement (the "Warrant Agreement") dated as of , 1999, between the Company and as warrant agent. 2. During the five-year period commencing on the Effective Date until 5:30 P.M., New York City time, on , 2004, inclusive (the "Term"), the Holder shall have the option to purchase the Units pursuant to this Option at a price of and /100 dollars ($ ) per Unit (the "Initial Exercise Price"), representing 120% of the initial public offering price of the Units offered pursuant to the Registration Statement. 3. This Option may be exercised at any time during the Term, in whole or in part, by the surrender of this Option (with the purchase form at the end of this Option properly executed) at the principal executive office of the Company (or such other office or agency of the Company as it may designate by notice in writing to the Holder at the address of the Holder appearing on the books of the Company) accompanied by payment to the Company of the Option Exercise Price, as hereinafter defined, for the number of Units specified in the above-mentioned purchase form together with applicable stock transfer taxes, if any, and delivery to the Company of a duly executed agreement (an "Assumption Agreement"), which may be incorporated in the purchase form, signed by the person(s) designated in the purchase form as the person in whose name the underlying securities are to be issued (the "Purchaser") to the effect that such person(s) agree(s) to be bound by the provisions of Paragraphs 8(b), (c) and (d) of this Option. This Option shall be deemed to have been exercised, in whole or in part to the extent specified in said purchase form, immediately prior to the close of business on the date this Option is surrendered and payment is made in accordance with the foregoing provisions of this Paragraph 3, and the person or persons in whose name or names the certificates for shares of Common Stock and Warrants shall be issuable upon such exercise shall become the holder or holders of record of such Common Stock - 2 - and Warrants at that time and date. The Common Stock and Warrants and the certificates for the Common Stock and Warrants so purchased shall be delivered to the Holder or other Purchaser within a reasonable time, not exceeding ten (10) days, after this Option shall have been so exercised; provided, that the Company shall not be required to deliver certificates for the securities unless the Purchaser shall have delivered the Assumption Agreement to the Company. If the Option is exercised subsequent to expiration or redemption of the Warrants (including any extensions thereof), the Holder of the Option shall exercise the Warrants contemporaneously with the exercise of the Option. 4. Neither this Option nor the Common Stock or Warrants comprising the Units issuable upon exercise of this Option nor the Common Stock issuable upon exercise of such Warrants shall be transferred, sold, assigned, or hypothecated during the one-year period commencing on the Effective Date, except that such securities may be transferred during such period to successors of the Holder, and may be assigned in whole or in part to any person who is an officer or member of either of the Underwriters, a member of the underwriting or selling group or any officer, partner or member of the underwriting or selling group. Any person who is a permitted transferee may transfer the Option by will or trust or pursuant to the laws of descent and distribution. Commencing one year from the Effective Date, this Option and the securities issuable upon exercise of this Option may be transferred without restriction as long as such transfer is in compliance with applicable Federal and state securities laws. Any such assignment during such period shall be effected by the Holder executing the form of assignment at the end of this Option and surrendering this Option for cancellation at the office of the Company or other office or agency as provided in Paragraph 3 of this Agreement accompanied by a certificate (signed by an officer of the Holder if the Holder is a corporation), stating that each transferee is a permitted transferee under this Paragraph 4; whereupon the Company shall issue, in the name or names specified by the Holder (including the Holder) a new Option or Options of like tenor and representing in the aggregate rights to purchase the same number of Units as are purchasable hereunder. 5. The Company covenants and agrees that all shares of Common Stock which are sold as part of the Units purchased pursuant to this Option, and all shares of Common Stock - 3 - which may be issued upon exercise of the Warrants have been, and will be, duly authorized and, will, upon issuance, be duly and validly issued, fully paid and nonassessable and no personal liability will attach to the holder thereof. The Company covenants and agrees that the Warrants which are issued as part of the Units purchased pursuant to this Option have been duly authorized and, when issued and delivered, will have been duly executed, issued and delivered and will constitute the valid and legally binding obligations of the Company enforceable in accordance with their terms. The Company further covenants and agrees that during the period within which this Option may be exercised, the Company will at all times have authorized and reserved a sufficient number of shares of its Common Stock to provide for the exercise of this Option and that it will have authorized and reserved a sufficient number of shares of Common Stock for issuance upon exercise of the Warrants. 6. This Option shall not entitle the Holder to any voting rights or other rights as a stockholder of the Company. 7. (a) The Company shall advise the Holder, whether the Holder holds this Option or has exercised this Option and holds Units or any of the underlying securities, as hereinafter defined, by written notice (certified or registered mail) at least twenty (20) days prior to the filing of any post-effective amendment to the Registration Statement or of any new registration statement or post-effective amendment thereto under the Securities Act covering any securities of the Company (other than a registration statement on Form S-8, S-4 or subsequent similar forms), and will during the term of the Option and for a period of two years thereafter, upon the request of the Holder, at the Company's cost and expense, include in any such post-effective amendment (if permitted by law) or registration statement, such information as may be required to permit a public offering of all or any of the Units underlying this Option, the Common Stock or Warrants issued as part of the Units, or the Common Stock issuable upon the exercise of the Warrants (collectively "underlying securities"). In connection with any such registration statement, the Company shall supply prospectuses, use its best efforts to qualify any of the described securities for sale in such states as such Holder reasonably designates and furnish indemnification in the manner provided in Paragraph 8 of this Option. The Holder(s) participating - 4 - in any such registration shall furnish information and indemnification as set forth in said Paragraph 8. (b) In connection with any underwritten public offering relating solely to an offering of the Company's securities by the Company, the Holder will agree to defer any sale of such securities for up to ninety (90) days from the effective date of the applicable registration statement, unless the applicable registration statement is filed pursuant to Paragraph 7(c) of this Option, provided that the underwriter or managing underwriter has requested such deferral on the grounds that the offering by the Company would be materially adversely affected by the earlier sale of such securities and the Company agrees to keep the registration statement current for nine (9) months after the effective date of the registration statement or such longer period as such registration statement is otherwise being kept effective. This Paragraph 7(b) shall not be applicable with respect to any registration statement filed pursuant to Paragraph 7(c) of this Option. (c) If any majority holder (as defined below) shall give notice to the Company at any time to the effect that such holder desires to register under the Securities Act the Units or any of the underlying securities under such circumstances that a public distribution (within the meaning of the Securities Act) of any such securities will be involved then the Company will promptly, but no later than thirty (30) business days after date such notice is given (the "Notice Date"), time being of the essence, file a post-effective amendment to the current Registration Statement or a new registration statement pursuant to the Securities Act, to the end that the Units and/or any of the underlying securities, as the Holder shall determine, may be publicly sold under the Securities Act as promptly as practicable thereafter and the Company will use its best efforts to cause such registration to become effective; provided, that such holder shall furnish the Company with appropriate written information as to the Holder and the proposed plan of distribution and indemnification as set forth in Paragraph 8. The majority holder may, at its option, request the filing of a post-effective amendment to the Registration Statement or a new registration statement under the Securities Act on two occasions during the term of the Option. Within ten (10) business days after receiving any such notice pursuant to this Paragraph 7(c), the Company shall give notice to the other Holders of the Options, advising that the Company is proceeding with such post-effective amendment or registration statement and offering to include therein the Units and/or the underlying securities of the other Holders, provided that they shall - 5 - furnish the Company with such appropriate information (relating to the intentions of such holders) in connection therewith as the Company shall request in writing. The costs and expense of the first such post-effective amendment or new registration statement shall be borne by the Company, except that each Holder shall bear the fees of his own counsel and/or accountants and any underwriting discounts or commissions applicable to any of the securities sold by him. The costs and expenses of the second such registration statement shall be borne by the Holders. The Company will maintain and keep such registration statement current under the Securities Act for a period of at least nine (9) months from the effective date of such registration statement. The Company shall supply prospectuses, use its best efforts to qualify any of the described securities for sale in such states as such holder reasonably designates and furnish indemnification in the manner provided in Paragraph 8 of this Agreement. (d) If, on the date of receipt by the Company of notice from any majority holder requesting registration of Units and/or any of the underlying securities pursuant to Paragraph 7(c) of this Option, the Company has previously notified the Holder pursuant to Paragraph 7(a) of this Option that the Company intends to file a post-effective amendment to the Registration Statement or a new registration statement under the Securities Act covering any securities of the Company and offering to include the Units and/or the underlying securities of the Holder in such Registration Statement or provides notice to the Holder pursuant to Paragraph 7(a) of this Option within seven (7) days after receipt of such notice from any majority holder, the Holder agrees that the demand registration request shall be withdrawn and that if he so elects, he may participate in the Registration Statement filed by the Company pursuant to Paragraph 7(a) of this Option; provided that (x) the Registration Statement or post-effective amendment to the Registration Statement covering the Holder's Units and/or underlying securities is filed within sixty (60) days and declared effective within one hundred fifty (150) days after the earlier of the date of such notice to the Company from the majority holder pursuant to Paragraph 7(c) or the date of such notice to the Holder from the Company pursuant to Paragraph 7(a); and (y) the majority holder will not be deemed to have exercised any demand registration right pursuant to Paragraph 7(c) of this Option. (e) The term "majority holder" as used in this Paragraph 7 shall mean the holder of at least a majority of the Common Stock (including the Common Stock issued or issuable upon exercise of the Warrants) for which the Options (considered in the aggregate) are exercisable and - 6 - shall include any owner or combination of owners of such securities, which ownership shall be calculated by determining the number of shares of Common Stock held by such owner or owners resulting from the exercise of any Option after giving effect to any stock dividend, split, reverse split or other recapitalization, the number of shares of Common Stock issuable upon exercise of any unexercised Option, the number of shares of Common Stock issuable upon exercise of any then outstanding Warrants issued upon exercise of any Option, and the number of shares of Common Stock issuable upon exercise of any Warrants issuable upon exercise of any Option. (f) In connection with any registration described in Paragraph 7(a) of this Option, the Holder may request inclusion of the Option in such registration statement; provided, however, that the Company shall not be required to maintain any public market in the Options. 8. (a) Whenever, pursuant to Paragraph 7 of this Option, a registration statement relating to this Option or any underlying securities is filed under the Securities Act or is amended or supplemented, the Company will indemnify and hold harmless each holder of the securities covered by such registration statement, amendment or supplement (such holder being hereinafter called the "Distributing Holder"), and each person, if any, who controls (within the meaning of the Securities Act) the Distributing Holder, and each underwriter (within the meaning of the Securities Act) of such securities and each person, if any, who controls (within the meaning of the Securities Act) any such underwriter, against any losses, claims, damages or liabilities, joint or several, to which the Distributing Holder, any such controlling person or any such underwriter may become subject, under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or action in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any such registration statement or any preliminary prospectus or final prospectus constituting a part thereof or any amendment or supplement thereto, or arise out of or are based upon the omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; and will reimburse the Distributing Holder and each such controlling person and underwriter for any legal or other expenses reasonably incurred by the Distributing Holder or such controlling person or underwriter in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the Company will not be liable in any such case to the extent that any - 7 - such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in said registration statement, said preliminary prospectus, said final prospectus or said amendment or supplement in reliance upon and in conformity with written information furnished by such Distributing Holder or for any other Distributing Holder, expressly for use in the preparation thereof. (b) The Distributing Holder will indemnify and hold harmless the Company, each of its directors, each of its officers who have signed said registration statement and such amendments and supplements thereto, each person, if any, who controls the Company (within the meaning of the Securities Act) and each underwriter participating in such offering (within the meaning of the Securities Act) and each person, if any, who controls (within the meaning of the Securities Act) any such underwriter, against any losses, claims, damages or liabilities to which the Company or any such director, officer, controlling person or underwriter may become subject, under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities arise out of or are based upon any untrue or alleged untrue statement of any material fact contained in said registration statement, said preliminary prospectus, said final prospectus, or said amendment or supplement, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in said registration statement, said preliminary prospectus, said final prospectus or said amendment or supplement in reliance upon and in conformity with written information furnished by such Distributing Holder expressly for use in the preparation thereof; and will reimburse the Company or any such director, officer or controlling person for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action. (c) Promptly after receipt by an indemnified party under this Paragraph 8 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party, give the indemnifying party notice of the commencement thereof. (d) In case any such action is brought against any indemnified party, and it notifies an indemnifying party of the commencement thereof, the indemnifying party will be entitled - 8 - to participate in, and, to the extent that it may wish, join with any other indemnifying party similarly notified to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party, and, after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party under this Paragraph 8 for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation; provided, that if the defendants in any such action include both the indemnified party and the indemnifying party and either (i) the indemnifying party or parties agree, or (ii) representation of both the indemnifying party or parties and the indemnified party or parties by the same counsel is inappropriate under applicable standards of professional conduct because of actual or potential conflicting interests between them, then the indemnified party or parties shall have the right to select separate counsel to assume such legal defense and to otherwise participate in the defense of such action. The indemnifying party will not be liable to such indemnified party under this Paragraph 8 for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof unless (i) the indemnified party shall have employed counsel in connection with the assumption of legal defenses in accordance with the proviso to the immediately preceding sentence (it being understood, however, that the indemnifying party shall not be liable for the expenses of more than one separate counsel approved by the indemnifying party for all indemnified parties), (ii) the indemnifying party shall not have employed counsel to represent the indemnified party within a reasonable time after notice of commencement of the action, or (iii) the indemnifying party has authorized the employment of counsel for the indemnified party at the expense of the indemnifying party. In no event shall an indemnifying party be liable under this Paragraph 8 for any settlement, effected without its written consent, which consent shall not be unreasonably withheld, of any claim or action against an indemnified party. 9. The number and kind of securities purchasable upon the exercise of the Option shall be subject to adjustment from time to time upon the happening of certain events as hereinafter provided, except that, unless the Company elects to issue additional Warrants pursuant to Paragraph 9(i) of the Warrant Agreement, the provisions of this Paragraph 9 shall not apply to the Warrants issuable upon exercise of this Option. The number and kind of securities purchasable - 9 - upon exercise of the Option shall be subject to adjustment (with no change in the Option Exercise Price) as follows: (a) In case the Company shall pay a dividend or make a distribution or a split with respect to its shares of Common Stock in shares of Common Stock, subdivide or reclassify its outstanding Common Stock into a greater number of shares, or combine or reclassify its outstanding Common Stock into a smaller number of shares or otherwise effect a reverse split, the number of shares of Common Stock issuable upon exercise of this Option shall, as of the time of the record date for such dividend or distribution or of the effective date of such subdivision, combination or reclassification, be proportionately adjusted so that the Holder of any Option exercised after such date shall be entitled to receive the aggregate number and kind of shares which, if such Option had been exercised immediately prior to such time, he would have owned upon such exercise and such shares as he would have been entitled to receive upon such dividend, subdivision, combination or reclassification. Such adjustment shall be made successively whenever any event listed in this Paragraph 9(a) shall occur. (b) No adjustment in the Option Exercise Price shall be required unless such adjustment would require an increase or decrease of at least five cents ($.05) in such price; provided, however, that any adjustments which by reason of this Paragraph 9(b) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Paragraph 9 shall be made to the nearest cent or to the nearest one-hundredth of a share of Common Stock as the case may be. Anything in this Paragraph 9 to the contrary notwithstanding, the Company shall be entitled, but shall not be required, to make such changes in the Option Exercise Price, in addition to those required by this Paragraph 9, as it in its discretion shall determine to be advisable in order that any dividend or distribution in shares of Common Stock, subdivision, reclassification or combination of Common Stock, issuance of warrants to purchase Common Stock or distribution of evidences of indebtedness or other assets (excluding cash dividends) referred to hereinabove in this Paragraph 9 hereafter made by the Company to the holders of its Common Stock shall not result in any tax to the holders of its Common Stock or securities convertible into Common Stock. (c) Whenever the Option Exercise Price is adjusted, as herein provided, the Company shall promptly cause a notice setting forth the adjusted Option Exercise Price and adjusted number of shares of Common Stock issuable upon exercise of the Option as to each - 10 - Unit to be mailed to the Holders at their last address appearing in the Option register maintained by the Company, and shall cause a certified copy thereof to be mailed to its transfer agent. The Company may retain a firm of independent public accountants of recognized standing selected by the Board of Directors (who may be the regular accountants employed by the Company) to make any computation required by this Paragraph 9, and a certificate signed by such firm shall be evidence of the correctness of such adjustment. (d) In the event that at any time, as a result of an adjustment made pursuant to Paragraph 9(a) of this Option, the Holder of any Option thereafter shall become entitled to receive any shares of the Company, other than Common Stock, thereafter the number of such other shares so receivable upon exercise of any Option shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Common Stock contained in this Paragraph 9. (e) Irrespective of any adjustments in the Option Exercise Price or the number or kind of shares purchasable upon exercise of Options, Options theretofore or thereafter issued may continue to express the same price and number and kind of shares as are stated in the similar Options initially issuable pursuant to this Agreement. IN WITNESS WHEREOF, the Company has caused this Option to be signed by its duly authorized officers this day of , 1999. ACTIVEWORLDS.COM, INC. Attest: By:___________________ Richard F. Noll President ______________________________ , Secretary - 11 - PURCHASE FORM (To be signed only upon exercise of Option) The undersigned, the holder of the foregoing Option, hereby irrevocably elects to exercise the purchase rights represented by such Option for, and to purchase thereunder, Units of Activeworlds.com, Inc., each Unit consisting of one share of Common Stock and one Series B Redeemable Common Stock Purchase Warrant (the "Warrants") to purchase one (1) share of Common Stock and herewith makes payment of $ thereof, agrees to be bound by the provisions of Paragraphs 8(b), (c) and (d) of the Option, and requests that the certificates for shares of Common Stock and Warrants be issued in the name(s) of, and delivered to _________________________________________________ whose address(es) is (are)____________________________________________________ _______________________________________________________________________________. Dated: , 19 . _______________________ By:_____________________ Address:___________________________________ ___________________________________ - 12 - TRANSFER FORM (To be signed only upon transfer of the Option) For value received, the undersigned hereby sells, assigns, and transfers unto the right to purchase Units represented by the foregoing Option to the extent of Units, and appoints attorney to transfer such rights on the books of ACTIVEWORLDS.COM, INC. with full power of substitution in the premises. Dated: , 19 . _______________________ By:_____________________ Signature Medallion Guaranteed _______________________ - 13 - EX-4.2 4 EXHIBIT 4.2 Exhibit 4.2 WARRANT AGREEMENT AGREEMENT, dated as of this day of , 1999, by and between Activeworlds.com, Inc., a Delaware corporation (the "Company"), and , as Warrant Agent (the "Warrant Agent"). W I T N E S S E T H: WHEREAS, in connection with a public offering of 1,500,000 units (the "Units"), each Unit consisting of one share of common stock, par value $.001 per share ("Common Stock"), and a Series B Redeemable Common Stock Purchase Warrant (collectively, the "Warrants") to purchase one share of Common Stock, pursuant to an underwriting agreement (the "Underwriting Agreement") dated as of , 1999, between the Company and the several underwriters named therein of which HD Brous & Co., Inc. ("Brous") and Corinthian Partners, L.L.C. ("Corinthian") are the representatives (the "Representatives"), the Company may issue Warrants to purchase up to One Million Five Hundred Thousand (1,500,000) shares of Common Stock; and WHEREAS, in connection with the issuance, pursuant to the Underwriting Agreement, to the Representatives and their designees of options (the "Unit Purchase Options" and each a "Unit Purchase Option") to purchase up to one hundred fifty thousand (150,000) Warrants, the Company may issue warrants to purchase up to one hundred fifty thousand (150,000) shares of Common Stock; and WHEREAS, the Company desires the Warrant Agent to act on behalf of the Company, and the Warrant Agent is willing to so act, in connection with the issuance, registration, transfer, exchange and redemption of the Warrants, as hereinafter defined, the issuance of certificates representing the Warrants, the exercise of the Warrants, and the rights of the holders thereof; NOW, THEREFORE, in consideration of the premises and the mutual agreements hereinafter set forth and for the purpose of defining the terms and provisions of the Warrants and the certificates representing the Warrants and the respective rights and obligations thereunder of the Company, the holders of certificates representing the Warrants and the Warrant Agent, the parties hereto agree as follows: 1. Definitions. As used in this Agreement, the following terms shall have the following meanings, unless the context shall otherwise require: (a) "Corporate Office" shall mean the office of the Warrant Agent (or its successor) at which at any particular time its principal business shall be administered, which office is located at the date of this Agreement at . (b) "Effective Date" shall mean the date that the Registration Statement is declared effective by the Securities and Exchange Commission (the "Commission"). (c) "Exercise Date" shall mean, as to any Warrant, the date on which the Warrant Agent shall have received both (a) the Warrant Certificate representing such Warrant, with the exercise form thereon duly executed by the Registered Holder thereof or his attorney duly authorized in writing, and (b) payment in cash, or by official bank or certified check made payable to the Company, of an amount in lawful money of the United States of America equal to the Purchase Price; provided, however, that, subject to Paragraph 4 of this Agreement, if payment shall be made by personal or corporate check, the exercise of the Warrant shall not be effective until the Warrant Agent shall be satisfied that the check shall have cleared; provided, further, that if such payment is made prior to the Warrant Expiration Date or the expiration of a period during which a reduced Purchase Price is in effect pursuant to Paragraph 9(f) of this Agreement and the check shall not have cleared until after the Warrant Expiration Date or such other date, then the Warrant shall be deemed to have been exercised immediately prior to 5:00 P.M. New York City time on the Warrant Expiration Date. (d) "Purchase Price" shall mean the purchase price per share to be paid upon exercise of each Warrant in accordance with the terms hereof, which price shall be and /100 dollars ($ ) per share for the Warrants, subject to adjustment from time to time pursuant to the provisions of Paragraph 9 of this Agreement. (e) "Redemption Price" shall mean the price at which the Company may, at its option, redeem the Warrants, in accordance with the terms of this Agreement, which price shall be ten cents ($.10) per Warrant. The Redemption Price shall not be subject to adjustment pursuant to this Agreement. (f) "Registration Statement" shall mean the Company's registration statement on Form SB-2, File No. 333-85095, which was declared effective by the Commission on , 1999. (g) "Registered Holder" shall mean, as to any Warrant and as of any particular date, the person in whose name the certificate representing the Warrant shall be registered on that date on the books maintained by the Warrant Agent pursuant to Paragraph 6 of this Agreement. (h) "Transfer Agent" shall mean , as the Company's transfer agent, or its authorized successor, as such. (i) "Warrant Certificate" shall mean the certificate for the Warrants in the form attached as Exhibit A to this Agreement. (j) "Warrant Expiration Date" shall mean 5:00 P.M. New York City time on the first to occur of (i) , 2004, or (ii) the business day immediately preceding the Redemption - 2 - Date, as defined in Paragraph 8(c) of this Agreement; provided, that if such date shall in the State of New York be a holiday or a day on which banks are authorized or required to close, the Warrant Expiration Date shall be the next day which is not such a date. Upon notice to all warrant holders the Company shall have the right to extend the Warrant Expiration Date. (k) "Warrant Shares" shall mean the shares of Common Stock issuable upon exercise of the Warrants. 2. Warrants and Issuance of Warrants Certificates. (a) Each Warrant initially shall entitle the Registered Holder of the Warrant Certificate representing such Warrant to purchase, upon the exercise thereof, in accordance with the terms of this Agreement, subject to modification and adjustment as provided in Paragraph 9 of this Agreement, such number of shares of Common Stock as is set forth on the certificate representing the Warrants. (b) Upon execution of this Agreement, Warrant Certificates representing the number of Warrants initially issuable pursuant to the Underwriting Agreement shall be executed by the Company and delivered to the Warrant Agent. Upon written order of the Company signed by its President or Chairman or a Vice President and by its Secretary or an Assistant Secretary or its Treasurer or an Assistant Treasurer, the Warrant Certificates shall be countersigned, issued and delivered by the Warrant Agent. (c) From time to time, up to the Warrant Expiration Date, the Transfer Agent shall countersign and deliver stock certificates in required whole number denominations representing the shares of Common Stock issuable upon the exercise of Warrants in accordance with this Agreement. (d) From time to time, up to the Warrant Expiration Date, the Warrant Agent shall countersign and deliver Warrant Certificates in required whole number denominations to the persons entitled thereto in connection with any transfer or exchange permitted under this Agreement; provided that no Warrant Certificates shall be issued except (i) those initially issued hereunder or otherwise issuable pursuant to the Underwriting Agreement, including those issuable in exchange for certain outstanding warrants, (ii) those issued on or after the date of this Agreement, upon the exercise of fewer than all Warrants represented by any Warrant Certificate, to evidence any unexercised Warrants held by the exercising Registered Holder, (iii) those issued upon any transfer or exchange pursuant to Paragraph 6 of this Agreement, (iv) those issued in replacement of lost, stolen, destroyed or mutilated Warrant Certificates pursuant to Paragraph 7 of this Agreement, (v) those issued pursuant to the Representatives' Option, and (vi) at the option of the Company, in such form as may be approved by the Board of Directors, to reflect any adjustment or change in the Purchase Price or the number of shares of Common Stock - 3 - purchasable upon exercise of the Warrants made pursuant to Paragraph 9 of this Agreement. In addition, at the discretion of the Company, the Company may authorize the issuance of additional Warrants, which shall be subject to the provisions of this Agreement. 3. Form and Execution of Warrant Certificates. (a) The Warrant Certificates for the Warrants shall be substantially in the form annexed as Exhibit A to this Agreement, (the provisions of which are hereby incorporated herein) and may have such letters, numbers or other marks of identification or designation and such legends, summaries or endorsements printed, lithographed or engraved thereon as the Company may deem appropriate and as are not inconsistent with the provisions of this Agreement, or as may be required to comply with any law or with any rule or regulation made pursuant thereto or with any rule or regulation of any stock exchange on which the Warrants may be listed, or to conform to usage or to the requirements of Paragraph 2(b) of this Agreement. The Warrant Certificates shall be dated the date of issuance thereof (whether upon initial issuance, transfer or exchange in lieu of mutilated, lost, stolen, or destroyed Warrant Certificates) and issued in registered form. Warrant Certificates shall be numbered serially with the letter M or other letters acceptable to the Company and the Warrant Agent. (b) Warrant Certificates shall be executed on behalf of the Company by its Chairman of the Board, President or any Vice President and by its Secretary or an Assistant Secretary, by manual signatures or by facsimile signatures printed thereon, and shall have imprinted thereon a facsimile of the Company's seal. Warrant Certificates shall be manually countersigned by the Warrant Agent and shall not be valid for any purpose unless so countersigned. In case any officer of the Company who shall have signed any of the Warrant Certificates shall cease to be an officer of the Company or to hold the particular office referenced in the Warrant Certificate before the date of issuance of the Warrant Certificates or before countersignature by the Warrant Agent and issue and delivery thereof, such Warrant Certificates may nevertheless be countersigned by the Warrant Agent, issued and delivered with the same force and effect as though the person who signed the Warrant Certificates had not ceased to be an officer of the Company or to hold such office. After countersignature by the Warrant Agent, Warrant Certificates shall be delivered by the Warrant Agent to the Registered Holder without further action by the Company, except as otherwise provided by Paragraph 4 of this Agreement. 4. Exercise. Each Warrant may be exercised by the Registered Holder thereof at any time after the issuance thereof, but not after the Warrant Expiration Date, upon the terms and subject to the conditions set forth herein and in the Warrant Certificate. A Warrant shall be deemed to have been exercised immediately prior to the close of business on the Exercise Date and the person entitled to receive the securities deliverable upon such exercise shall be treated - 4 - for all purposes as the holder of those securities upon the exercise of the Warrant as of the close of business on the Exercise Date. As soon as practicable on or after the Exercise Date, the Warrant Agent shall deposit the proceeds received from the exercise of a Warrant and shall notify the Company in writing of the exercise of the Warrant. Promptly following, and in any event within five (5) days after the date of such notice from the Warrant Agent, the Warrant Agent, on behalf of the Company, shall cause to be issued and delivered by the Transfer Agent, to the person or persons entitled to receive the same, a certificate or certificates for the securities deliverable upon such exercise, (plus a certificate for any remaining unexercised Warrants of the Registered Holder) unless prior to the date of issuance of such certificates the Company shall instruct the Warrant Agent to refrain from causing such issuance of certificates pending clearance of checks received in payment of the Purchase Price pursuant to such Warrants. Notwithstanding the foregoing, in the case of payment made in the form of a check drawn on an account of the Representatives or such other investment banks and brokerage houses as the Company shall approve in writing to the Warrant Agent, by the Representatives or such other investment bank or brokerage house, certificates shall immediately be issued without prior notice to the Company or any delay. Upon the exercise of any Warrant and clearance of the funds received, the Warrant Agent shall promptly remit the payment received for the Warrant (the "Warrant Proceeds") to the Company or as the Company may direct in writing. 5. Reservation of Shares; Listing; Payment of Taxes. (a) The Company covenants that it will at all times reserve and keep available out of its authorized Common Stock, solely for the purpose of issue upon exercise of Warrants, such number of shares of Common Stock as shall then be issuable upon the exercise of all outstanding Warrants. The Company covenants that all Warrant Shares shall, at the time of delivery in accordance with this Agreement, be duly and validly issued, fully paid, nonassessable and free from all taxes, liens and charges with respect to the issue thereof (other than those which the Company shall promptly pay or discharge), and that upon issuance such shares shall be listed on each national securities exchange or eligible for inclusion in each automated quotation system, if any, on which the other shares of outstanding Common Stock of the Company are then listed or eligible for inclusion. (b) The Company covenants that if any securities to be reserved for the purpose of exercise of Warrants hereunder require registration with, or approval of, any governmental authority under any Federal securities law before such securities may be validly issued or delivered upon such exercise, then the Company will in good faith and as expeditiously as reasonably possible, endeavor to secure such registration or approval. The Company will use reasonable efforts to obtain appropriate approvals or registrations under state "blue sky" securities - 5 - laws. With respect to any such securities, however, Warrants may not be exercised by, or shares of Common Stock issued to, any Registered Holder in any state in which such exercise would be unlawful. (c) The Company shall pay all documentary, stamp or similar taxes and other governmental charges that may be imposed with respect to the issuance of Warrants, or the issuance, or delivery of any shares upon exercise of the Warrants; provided, however, that if the shares of Common Stock are to be delivered in a name other than the name of the Registered Holder of the Warrant Certificate representing any Warrant being exercised, then no such delivery shall be made unless the person requesting the same has paid to the Warrant Agent the amount of transfer taxes or charges incident thereto, if any. (d) The Warrant Agent is hereby irrevocably authorized to requisition the Company's Transfer Agent from time to time for certificates representing shares of Common Stock issuable upon exercise of the Warrants, and the Company will authorize the Transfer Agent to comply with all such proper requisitions. The Company will file with the Warrant Agent a statement setting forth the name and address of the Transfer Agent of the Company for shares of Common Stock issuable upon exercise of the Warrants. 6. Exchange and Registration of Transfer. (a) Warrant Certificates may be exchanged for other Warrant Certificates representing an equal aggregate number of Warrants of the same class or may be transferred in whole or in part. Warrant Certificates to be exchanged shall be surrendered to the Warrant Agent at its Corporate Office, and upon satisfaction of the terms and provisions of this Agreement, the Company shall execute and the Warrant Agent shall countersign, issue and deliver in exchange therefor the Warrant Certificate or Certificates which the Registered Holder making the exchange shall be entitled to receive. (b) The Warrant Agent shall keep at its office books in which, subject to such reasonable regulations as it may prescribe, it shall register Warrant Certificates and the transfer thereof in accordance with its regular practice. Upon due presentment for registration of transfer of any Warrant Certificate at such office, the Company shall execute and the Warrant Agent shall issue and deliver to the transferee or transferees a new Warrant Certificate or Certificates representing an equal aggregate number of Warrants. (c) With respect to all Warrant Certificates presented for registration or transfer, or for exchange or exercise, the subscription form on the reverse thereof shall be duly endorsed, or be accompanied by a written instrument or instruments of transfer and subscription, in form satisfactory to the Company and the Warrant Agent, duly executed by the Registered Holder or his attorney-in-fact duly authorized in writing. - 6 - (d) A reasonable service charge may be imposed by the Warrant Agent for any exchange or registration of transfer of Warrant Certificates. In addition, the Company may require payment by such holder of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any exchanges, registration or transfer of Warrant Certificates. (e) All Warrant Certificates surrendered for exercise or for exchange in case of mutilated Warrant Certificates shall be promptly canceled by the Warrant Agent and thereafter retained by the Warrant Agent until termination of this Agreement or resignation as Warrant Agent, or, with the prior written consent of the Representatives, disposed of or destroyed, at the direction of the Company. (f) Prior to due presentment for registration of transfer thereof, the Company and the Warrant Agent may deem and treat the Registered Holder of any Warrant Certificate as the absolute owner thereof and of each Warrant represented thereby (notwithstanding any notations of ownership or writing thereon made by anyone other than a duly authorized officer of the Company or the Warrant Agent) for all purposes and shall not be affected by any notice to the contrary. (g) Notwithstanding any other provisions of this Agreement, no Warrants issued upon exercise of the Unit Purchase Option and no shares of Common Stock issuable upon exercise of such Warrants may be sold, transferred, assigned or hypothecated for a period of one year from the Effective Date except to the officers of the Representatives or to selling group members or officers or partners thereof, all of whom shall be bound by such restrictions. Until the expiration of such one-year period, Warrant Certificates and stock certificates shall be marked with a legend referring to such restriction. 7. Loss or Mutilation. Upon receipt by the Company and the Warrant Agent of evidence satisfactory to them of the ownership of and loss, theft, destruction or mutilation of any Warrant Certificate and (in case of loss, theft or destruction) of indemnity satisfactory to them, and (in the case of mutilation) upon surrender and cancellation thereof, the Company shall execute and the Warrant Agent shall (in the absence of notice to the Company and/or Warrant Agent that the Warrant Certificate has been acquired by a bona fide purchaser) countersign and deliver to the Registered Holder in lieu thereof a new Warrant Certificate of like tenor representing an equal aggregate number of Warrants. Applicants for a substitute Warrant Certificate shall comply with such other reasonable regulations and pay such other reasonable charges as the Warrant Agent may prescribe. - 7 - 8. Redemption. (a) Commencing twelve (12) months from the Effective Date or earlier with the consent of the Representatives, the Company shall have the right, on not less than thirty (30) nor more than sixty (60) days notice given prior to the Redemption Date, as hereinafter defined, at any time to redeem the then outstanding Warrants at the Redemption Price, provided that the Market Price of the Common Stock shall equal or exceed the "Target Price" with respect to the class of Warrants as to which the Company is exercising its right of redemption. The "Target Price" shall mean one hundred fifty percent (150%) of the Purchase Price with respect to the applicable class of Warrants. Market Price for the purpose of this Paragraph 8 shall mean, if the Common Stock is listed on the Nasdaq Stock Market or the New York or American Stock Exchange, the average last reported sales price (or, if no sale is reported on any such trading day, the average of the closing bid and asked prices) on the principal market for the Common Stock or, if the Common Stock is not so listed or traded, the average of the last reported bid prices of the Common Stock, during the twenty (20) day period ending within three (3) days of the date the Warrants are called for redemption. Notice of redemption shall be mailed by first class mail, postage prepaid, not later than five (5) business days (or such longer period to which the Representatives may consent) after the date the Warrants are called for redemption. All Warrants of any class of Warrants must be redeemed if any Warrants of such class are redeemed. (b) If the conditions set forth in Paragraph 8(a) of this Agreement are met, and the Company desires to exercise its right to redeem the Warrants, it shall request the Representatives or the Warrant Agent to mail the notice of redemption referred to in said Paragraph 8(a) to each of the Registered Holders of the Warrants to be redeemed, first class, postage prepaid, not earlier than the sixtieth (60th) day nor later than the thirtieth (30th) day before the date fixed for redemption, at their last addresses as shall appear on the records maintained pursuant to Paragraph 6(b) of this Agreement. Any notice mailed in the manner provided herein shall be conclusively presumed to have been duly given whether or not the Registered Holder receives such notice. The Warrant Agent agrees to mail such notice if requested by the Company or the Representatives. (c) The notice of redemption shall specify (i) the Redemption Price, (ii) the date fixed for redemption, (iii) the place where the Warrant Certificates shall be delivered and the redemption price to be paid, and (iv) that the right to exercise the Warrants shall terminate at 5:00 p.m. (New York City time) on the business day immediately preceding the date fixed for redemption. The date fixed for the redemption of the Warrants shall be the Redemption Date. No failure to mail such notice nor any defect therein or in the mailing thereof shall affect the validity of the proceedings for such redemption except as to a Registered Holder (A) to whom - 8 - notice was not mailed, or (B) whose notice was defective. An affidavit of the Warrant Agent or of the Secretary or an Assistant Secretary of either of the Representatives or the Company that notice of redemption has been mailed shall, in the absence of fraud, be prima facie evidence of the facts stated therein. (d) If either class of Warrant shall have been redeemed, any right to exercise a Warrant of such class shall terminate at 5:00 p.m. (New York City time) on the business day immediately preceding the Redemption Date. After such time, Holders of the Warrants shall have no further rights except to receive, upon surrender of the Warrant, the Redemption Price without interest, subject to the provisions of applicable laws relating to the treatment of abandoned property. In the event that the Warrants or the Warrant Shares shall not be subject to a current and effective registration statement under the Securities Act of 1933, as amended, at any time subsequent to the date the Warrants are called for redemption, the notice of redemption shall not be effective and shall be deemed for all purposes not to have been given. Nothing in the preceding sentence shall be construed to prohibit or restrict the Company from thereafter calling the Warrants for redemption in the manner provided for, and subject to the provisions of, this Paragraph 8. (e) From and after the Redemption Date with respect to the Warrants, the Company shall, at the place specified in the notice of redemption, upon presentation and surrender to the Company by or on behalf of the Registered Holder thereof of one or more Warrant Certificates evidencing Warrants to be redeemed, deliver or cause to be delivered to or upon the written order of such Holder a sum in cash equal to the Redemption Price of each such Warrant. From and after the Redemption Date and upon the deposit or setting aside by the Company of a sum sufficient to redeem all the Warrants called for redemption, such Warrants shall expire and become void and all rights hereunder and under the Warrant Certificates, except the right to receive payment of the Redemption Price, shall cease. (f) Notwithstanding any other provision of this Agreement, the Company shall not call the Warrants for redemption unless there is, at the time the Warrants are called for redemption, a current and effective registration statement or a post-effective amendment to the registration statement covering the issuance of the shares of Common Stock issuable upon exercise of the Warrants. (g) In the event that the Representatives' Option is exercised at a time subsequent to the redemption of the Warrants but prior to the Warrant Expiration Date, as defined in Paragraph 1(j) of this Agreement, then, notwithstanding any other provisions of this Agreement, the Warrants issued upon such exercise may be redeemed by the Company at any time after issuance. - 9 - 9. Adjustment of Exercise Price and Number of Securities Issuable upon Exercise of Warrants. (a) In case the Company shall, at any time or from time to time after the date of this Agreement, pay a dividend or make a distribution on its shares of Common Stock in shares of Common Stock, subdivide or reclassify its outstanding Common Stock into a greater number of shares, or combine or reclassify its outstanding Common Stock into a smaller number of shares or otherwise effect a combination of shares or reverse split, the Purchase Price in effect at the time of the record date for such dividend or distribution or of the effective date of such subdivision, combination or reclassification shall be proportionately adjusted so that the holder of any Warrant exercised after such date shall be entitled to receive the aggregate number and kind of shares which, if such Warrant had been exercised immediately prior to such time, he would have owned upon such exercise and been entitled to receive upon such dividend, subdivision, combination or reclassification. Such adjustment shall be made successively whenever any event listed in this Paragraph 9(a) shall occur. (b) In case the Company shall, at any time or from time to time after the date of this Agreement, issue rights or warrants to all holders of its Common Stock entitling them to subscribe for or purchase shares of Common Stock (or securities convertible into Common Stock) at a price (or having a conversion price per share) less than the current market price of the Common Stock (as defined in Paragraph 9(e) of this Agreement) on the record date mentioned below, the Purchase Price shall be adjusted so that the same shall equal the price determined by multiplying the Purchase Price in effect immediately prior to the date of such issuance by a fraction, of which the numerator shall be the number of shares of Common Stock outstanding on the record date mentioned below plus the number of additional shares of Common Stock which the aggregate offering price of the total number of shares of Common Stock so offered (or the aggregate conversion price of the convertible securities so offered) would purchase at such current market price per share of the Common Stock, and of which the denominator shall be the number of shares of Common Stock outstanding on such record date plus the number of additional shares of Common Stock offered for subscription or purchase (or into which the convertible securities so offered are convertible). Such adjustment shall be made successively whenever such rights or warrants are issued and shall become effective immediately after the record date for the determination of stockholders entitled to receive such rights or warrants; and to the extent that shares of Common Stock are not delivered (or securities convertible into Common Stock are not delivered) after the expiration of such rights or warrants, the Purchase Price shall be readjusted to the Purchase Price which would then be in effect had the adjustments made upon the issuance of such rights or warrants been made upon the basis of delivery of only - 10 - the number of shares of Common Stock (or securities convertible into Common Stock) actually delivered. (c) In case the Company shall, at any time or from time to time after the date hereof, distribute to all holders of Common Stock evidences of its indebtedness or assets (excluding cash dividends or distributions paid out of current earnings and dividends or distributions referred to in Paragraph 9(a) of this Agreement) or subscription rights or warrants (excluding those referred to in Paragraph 9(b) of this Agreement), then in each such case the Purchase Price in effect thereafter shall be determined by multiplying the Purchase Price in effect immediately prior thereto by a fraction, of which the numerator shall be the total number of shares of Common Stock outstanding multiplied by the current market price per share of Common Stock (as defined in Paragraph 9(e) of this Agreement), less the fair market value (as determined by the Company's Board of Directors) of said assets or evidences of indebtedness so distributed or of such rights or warrants, and of which the denominator shall be the total number of shares or Common Stock outstanding multiplied by such current market price per share of Common Stock. Such adjustment shall be made whenever any such distribution is made and shall become effective immediately after the record date for the determination of stockholders entitled to receive such distribution. (d) Whenever the Purchase Price payable upon exercise of each Warrant is adjusted pursuant to Paragraphs 9(a), (b) or (c) of this Agreement, the number of shares of Common Stock purchasable upon exercise of each Warrant shall simultaneously be adjusted by multiplying the number of shares issuable upon exercise of each Warrant in effect on the date thereof by the Purchase Price in effect on the date thereof and dividing the product so obtained by the Purchase Price, as adjusted. (e) For the purpose of any computation pursuant to Paragraphs 9(b) and (c) of this Agreement, the current market price per share of Common Stock at any date shall be deemed to be the average of the daily closing prices for thirty (30) consecutive business days commencing fifteen (15) business days before such date. The closing price for each day shall be the reported last sale price regular way or, in case no such reported sale takes place on such day, the average of the last reported high bid and low asked prices regular way, in either case on the principal national securities exchange on which the Common Stock is admitted to trading or listed, if the Common Stock is admitted to trading or listing on the New York or American Stock Exchange or on The Nasdaq Stock Market if included in such system or if not listed or admitted to trading on such exchange or system, the average of the highest bid and lowest asked prices as reported by Nasdaq, or the National Quotation Bureau, Inc. or another similar organization if Nasdaq is no - 11 - longer reporting such information, or if not so available, the fair market price as determined by the Board of Directors of the Company. (f) No adjustment in the Purchase Price shall be required unless such adjustment would require an increase or decrease of at least five cents ($0.05) in such price; provided, however, that any adjustments which by reason of this Paragraph 9(f) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Paragraph 9 shall be made to the nearest cent or to the nearest one-tenth of a share, as the case may be. Anything in this Paragraph 9 to the contrary notwithstanding, the Company may, upon notice to the record holders of the Warrants, in its sole discretion, reduce the Purchase Price of the Warrants, and, if such reduction is not otherwise required by this Paragraph 9, such reduction (i) will not, unless the Board of Directors otherwise determines, result in any change in the number or class of shares of Common Stock issuable upon exercise of such Warrants, and (ii) may be of limited duration, in which event the reduction in Purchase Price shall not apply to any Warrants exercised after the expiration of the time during which the reduced Purchase Price is in effect. (g) The Company may retain a firm of independent public accountants (who may be the regular accountants employed by the Company) of recognized standing selected by the Board of Directors of the Company to make any computation required by this Paragraph 9, and a certificate signed by such firm shall be conclusive evidence of the correctness of such adjustment. (h) In the event that at any time, as a result of an adjustment made pursuant to Paragraph 9(a) of this Agreement, the holder of any Warrant thereafter shall become entitled to receive any shares of the Company, other than Common Stock, thereafter the number of such other shares so receivable upon exercise of any Warrant shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Common Stock contained in Paragraphs 9(a) to (f), inclusive, of this Agreement. (i) The Company may elect, upon any adjustment of the Purchase Price hereunder, to adjust the number of Warrants outstanding, in lieu of the adjustment in the number of shares of Common Stock purchasable upon the exercise of each Warrant as hereinabove provided, so that each Warrant outstanding after such adjustment shall represent the right to purchase one share of Common Stock. Each Warrant held of record and each Warrant issuable upon exercise of the Representatives' Option prior to such adjustment of the number of Warrants shall become that number of Warrants or an Representatives' Option to purchase that number of Warrants (calculated to the nearest tenth) determined by multiplying the number one by a fraction, the numerator of which shall be the Purchase Price in effect immediately prior to such - 12 - adjustment and the denominator of which shall be the Purchase Price in effect immediately after such adjustment. Upon each adjustment of the number of Warrants pursuant to this Paragraph 9, the Company shall, as promptly as practicable, cause to be distributed to each Registered Holder of Warrant Certificates on the date of such adjustment Warrant Certificates evidencing, subject to Paragraph 10 of this Agreement, the number of additional Warrants to which such Holder shall be entitled as a result of such adjustment or, at the option of the Company, cause to be distributed to such Holder in substitution and replacement for the Warrant Certificates held by him prior to the date of adjustment (and upon surrender thereof, if required by the Company) new Warrant Certificates evidencing the number of Warrants to which such Holder shall be entitled after such adjustment. With respect to the Representative's Option, the Company shall give the registered holders of the Representative's Option notice as to the number of Warrants issuable in respect of such Representative's Option reflecting such adjustment. Any Warrants or notice to registered holders of Representative's Option may be mailed by the Warrant Agent or by first class mail, postage prepaid. (j) In case of any reclassification, capital reorganization or other change of outstanding shares of Common Stock, or in case of any consolidation or merger of the Company with or into another corporation (other than a consolidation or merger in which the Company is the continuing corporation and which does not result in any reclassification, capital reorganization or other change of outstanding shares of Common Stock), or in case of any sale or conveyance to another corporation of the property of the Company as, or substantially as, an entirety (other than a sale/leaseback, mortgage or other financing transaction), the Company shall cause effective provision to be made so that each holder of a Warrant then outstanding shall have the right thereafter, by exercising such Warrant, to purchase the kind and number of shares of stock or other securities or property (including cash) receivable upon such reclassification, capital reorganization or other change, consolidation, merger, sale or conveyance by a holder of the number of shares of Common Stock that might have been purchased upon exercise of such Warrant immediately prior to such reclassification, capital reorganization or other change, consolidation, merger, sale or conveyance. Any such provisions shall include provision for adjustments that shall be as nearly equivalent as may be practicable to the adjustments provided for in this Paragraph 9. The Company shall not effect any such consolidation, merger or sale unless, prior to or simultaneously with the consummation thereof, the successor (if other than the Company) resulting from such consolidation or merger or the corporation purchasing assets or other appropriate corporation or entity shall assume, by written instrument executed and delivered to the Warrant Agent, the obligation to deliver to the holder of each Warrant such shares of stock, securities or assets as, in accordance with the foregoing provisions, such holders may be entitled - 13 - to purchase and the other obligations under this Agreement. The foregoing provisions shall similarly apply to successive reclassifications, capital reorganizations and other changes of outstanding shares of Common Stock and to successive consolidations, mergers, sales or conveyances. In the event that, as a result of any merger, consolidation or similar transaction, all of the holders of Common Stock receive and are entitled to receive no consideration other than cash in respect of their shares of Common Stock, then, at the effective time of the transaction, the rights to purchase Common Stock pursuant to the Warrants shall terminate, and the holders of the Warrants shall, notwithstanding any other provisions of this Agreement or the Warrants, receive in respect of each Warrant to purchase one (1) share of Common Stock, upon presentation of the Warrant Certificate, the amount by which the consideration per share of Common Stock payable to the holders of Common Stock at such effective time exceeds the Purchase Price in effect on such effective date, without giving effect to the transaction. In the event that, subsequent to the effective time, additional cash or other consideration is payable to the holders of Common Stock of record as of the effective time, the same consideration shall be payable to the holders of the Warrants to the extent that the total cash then received by the holders of Common Stock exceeds the Purchase Price in effect at such effective date, without giving effect to the transaction, with the same effect as if the Warrants had been exercised on and as of such effective time. In the event of any merger, consolidation, sale or lease of substantially all of the Company's assets or reorganization whereby the Company is not the surviving corporation, in lieu of the foregoing provisions of this Paragraph 9(j), the Company may provide in the agreement relating to the transaction that each Warrant shall become, be converted into or be exchanged for, such securities of the surviving or acquiring corporation or other entity as has a value equal to the value of the Warrants (which shall not exceed the amount by which the consideration to be received per share of Common Stock (valued on such date as the Company's Board of Directors shall determine) exceeds the exercise price of the Warrant), the value of the Warrants and securities being issued in exchange therefor to be determined by the Company's Board of Directors, such determination to be final, binding and conclusive on the Company and the holders of the Warrants. In the event that, in such a transaction, the value of the consideration to be received per share of Common Stock is not greater than the exercise price of the Warrants, the Warrants shall terminate and no consideration will be paid with respect thereof. (k) Irrespective of any adjustments or changes in the Purchase Price or the number of shares of Common Stock purchasable upon exercise of the Warrants, the Warrant Certificates theretofore and thereafter issued shall, unless the Company shall exercise its option to issue new Warrant Certificates pursuant to Paragraphs 2(e) and 9(i) of this Agreement, continue to express the Purchase Price per share, the number of shares purchasable thereunder - 14 - and the Redemption Price therefor as to the Purchase Price per share, and the number of shares purchasable and the Redemption Price therefore were expressed in the Warrant Certificates when the same were originally issued. (l) After any adjustment of the Purchase Price pursuant to this Paragraph 9, the Company will promptly prepare a certificate signed by the Chairman, President, Vice President or Treasurer, of the Company setting forth: (i) the Purchase Price as so adjusted, (ii) the number of shares of Common Stock purchasable upon exercise of each Warrant after such adjustment, and, if the Company shall have elected to adjust the number of Warrants, the number of Warrants to which the registered holder of each Warrant shall then be entitled, and (iii) a brief statement of the facts accounting for such adjustment. The Company will promptly file such certificate with the Warrant Agent and cause a brief summary thereof to be sent by first class mail to the Representative and to each registered holder of Warrants at his last address as it shall appear on the registry books of the Warrant Agent. No failure to mail such notice nor any defect therein or in the mailing thereof shall affect the validity thereof. The affidavit of an officer of the Warrant Agent or the Secretary or an Assistant Secretary of the Company that such notice has been mailed shall, in the absence of fraud, constitute prima facie evidence of the facts stated therein. (m) As used in this Paragraph 9, the term "Common Stock" shall mean and include the Company's Common Stock authorized on the Effective Date and shall also include any capital stock of any class of the Company thereafter authorized which shall not be limited to a fixed sum or percentage in respect of the rights of the holders thereof to participate in dividends and in the distribution of assets upon the voluntary liquidation, dissolution or winding up of the Company; provided, however, that the shares issuable upon exercise of the Warrants shall include only shares of such class designated in the Company's Certificate of Incorporation as Common Stock on the Effective Date or, in the case of any reclassification, change, consolidation, merger, sale or conveyance of the character referred to in Paragraph 9(j) of this Agreement, the stock, securities or property provided for in such section or, in the case of any reclassification or change in the outstanding shares of Common Stock issuable upon exercise of the Warrants as a result of a subdivision or combination or consisting of a change in par value, or from par value to no par value, or from no par value to par value, such shares of Common Stock as so reclassified or changed. (n) Any determination as to whether an adjustment in the Purchase Price in effect hereunder is required pursuant to this Paragraph 9, or as to the amount of any such adjustment, if required, shall be binding upon the holders of the warrants and the Company if made in good faith by the Board of Directors of the Company. - 15 - (o) In lieu of an adjustment pursuant to Paragraph 9(b) of this Agreement, if the Company shall grant to the holders of Common Stock, as such, rights or warrants to subscribe for or to purchase Common Stock or securities convertible into or exchangeable for or carrying a right or warrant to purchase Common Stock, the Company may concurrently therewith grant to each Registered Holder as of the record date for such transaction of the Warrants then outstanding, the rights or warrants to which each Registered Holder would have been entitled if, on the record date used to determine the stockholders entitled to the rights or warrants being granted by the Company, the Registered Holder were the holder of record of the number of whole shares of Common Stock then issuable upon exercise of his Warrants. If the Company exercises such right no adjustment which otherwise might be called for pursuant to said Paragraph 9(b) shall be made. 10. Fractional Warrants and Fractional Shares. If the number of shares of Common Stock purchasable upon the exercise of each Warrant is adjusted pursuant to Paragraph 9 of this Agreement, the Company nevertheless shall not be required to issue fractions of shares, upon exercise of the Warrants or otherwise, or to distribute certificates that evidence fractional shares. With respect to any fraction of a share called for upon any exercise hereof, the Company, at its option, shall either issue a whole share in lieu of such fractional share or pay to the Holder an amount in cash equal to such fraction multiplied by the current market value of such fractional share, determined as follows: (a) If the Common Stock is listed on the New York or American Stock Exchange or admitted to unlisted trading privileges on such exchange or listed for trading on the Nasdaq Stock Market, the current value shall be the reported last sale price of the Common Stock on such exchange or system on the last business day prior to the date of exercise of this Warrant, or if no such sale is made on such day, the average closing bid and asked prices for such day on such exchange or system; or (b) If the Common Stock is not listed or admitted to unlisted trading privileges, the current value shall be the last reported bid price reported by the National Quotation Bureau, Inc. on the last business day prior to the date of the exercise of this Warrant; or (c) If the Common Stock is not so listed or admitted to unlisted trading privileges and bid prices are not so reported, the current value shall be an amount determined in such reasonable manner as may be prescribed by the Board of Directors of the Company. 11. Warrant Holders Not Deemed Stockholders. No holder of Warrants shall, as such, be entitled to vote or to receive dividends or be deemed the holder of Common Stock that may at any time be issuable upon exercise of such Warrants for any purpose whatsoever, nor shall anything contained in this Agreement be construed to confer upon the holder of Warrants, as - 16 - such, any of the rights of a stockholder of the Company or any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, or to give or withhold consent to any corporate action (whether upon any recapitalization, issue or reclassification of stock, change of par value or change of stock to no par value, consolidation, merger or conveyance or otherwise), or to receive notice of meetings, or to receive dividends or subscription rights, until such Holder shall have exercised such Warrants and been issued shares of Common Stock in accordance with the provisions hereof. 12. Rights of Action. All rights of action with respect to this Agreement are vested in the respective Registered Holders of the Warrants, and any Registered Holder of a Warrant, without consent of the Warrant Agent or of the holder of any other Warrant, may, in his own behalf and for his own benefit, enforce against the Company his right to exercise his Warrants for the purchase of shares of Common Stock in the manner provide in the Warrant Certificate and this Agreement. 13. Agreement of Warrant Holders. Every holder of a Warrant, by his acceptance of the Warrants, consents and agrees with the Company, the Warrant Agent and every other holder of a Warrant that: (a) The warrants are transferable only on the registry books of the Warrant Agent by the Registered Holder thereof in person or by his attorney duly authorized in writing and only if the Warrant Certificates representing such Warrants are surrendered at the office of the Warrant Agent, duly endorsed or accompanied by a proper instrument of transfer satisfactory to the Warrant Agent and the Company in their sole discretion, together with payment of any applicable transfer taxes; and (b) The Company and the Warrant Agent may deem and treat the person in whose name the Warrant Certificate is registered as the holder and as the absolute, true and lawful owner of the Warrants represented thereby for all purposes, and neither the Company nor the Warrant Agent shall be affected by any notice or knowledge to the contrary, except as otherwise expressly provided in Paragraph 6 of this Agreement. 14. Cancellation of Warrant Certificates. If the Company shall purchase or acquire any Warrant or Warrants, the Warrant Certificate or Warrant Certificates evidencing the same shall thereupon be delivered to the Warrant Agent and canceled by it and retired. 15. Concerning the Warrant Agent. (a) The Warrant Agent acts hereunder as agent and in a ministerial capacity for the Company, and its duties shall be determined solely by the provisions of this Agreement. The Warrant Agent shall not, by issuing and delivering Warrant Certificates or by any other act hereunder be deemed to make any representations as to the validity, value or authorization of the - 17 - Warrant Certificates or the Warrants represented thereby or of any securities or other property delivered upon exercise of any Warrant or whether any stock issued upon exercise of any Warrant is fully paid and nonassessable. (b) The Warrant Agent shall not at any time be under any duty or responsibility to any holder of Warrant Certificates to make or cause to be made any adjustment of the Purchase Price or the Redemption Price provided in this Agreement, or to determine whether any fact exists which may require any such adjustments, or with respect to the nature or extent of any such adjustment, when made, or with respect to the method employed in making the same. It shall not (i) be liable for any recital or statement of facts contained herein or for any action taken, suffered or omitted by it in reliance on any Warrant Certificate or other document or instrument believed by it in good faith to be genuine and to have been signed or presented by the proper party or parties, (ii) be responsible for any failure on the part of the Company to comply with any of its covenants and obligations contained in this Agreement or in any Warrant Certificate, or (iii) be liable for any act or omission in connection with this Agreement except for its own negligence or wilful misconduct. (c) The Warrant Agent may at any time consult with counsel satisfactory to it (who may be counsel for the Company) and shall incur no liability or responsibility for any action taken, suffered or omitted by it in good faith in accordance with the opinion or advice of such counsel. (d) Any notice, statement, instrument, request, direction, order or demand of the Company shall be sufficiently evidenced by an instrument signed by the Chairman of the Board, President, any Vice President, its Secretary, or Assistant Secretary, unless other evidence in respect thereof is specifically prescribed in this Agreement. The Warrant Agent shall not be liable for any action taken, suffered or omitted by it in accordance with such notice, statement, instruction, request, direction, order or demand believed by it to be genuine. (e) The Company agrees to pay the Warrant Agent reasonable compensation for its services hereunder and to reimburse it for its reasonable expenses hereunder; it further agrees to indemnify the Warrant Agent and hold it harmless against any and all costs and counsel fees, for anything done or omitted by the Warrant Agent in the execution of its duties and powers hereunder except losses, expenses and liabilities arising as a result of the Warrant Agent's negligence or wilful misconduct. (f) The Warrant Agent may resign its duties and be discharged from all further duties and liabilities hereunder (except liabilities arising as a result of the Warrant Agent's own negligence or wilful misconduct), after giving thirty (30) days' prior written notice to the Company. At least fifteen (15) days prior to the date such resignation is to become effective, the Warrant - 18 - Agent shall cause a copy of such notice of resignation to be mailed to the Registered Holder of each Warrant Certificate at the Company's expense. Upon such resignation, or any inability of the Warrant Agent to act as such under this Agreement, the Company shall appoint a new warrant agent in writing. If the Company shall fail to make such appointment within a period of fifteen (15) days after it has been notified in writing of such resignation by the resigning Warrant Agent, then the Registered Holder of any Warrant Certificate may apply to any court of competent jurisdiction for the appointment of a new warrant agent. Any new warrant agent, whether appointed by the Company or by such a court, shall be a bank or trust company having a capital and surplus, as shown by its last published report to its stockholders, of not less than $10,000,000 or a stock transfer company. After acceptance in writing of such appointment by the new warrant agent is received by the Company, such new warrant agent shall be vested with the same powers, rights, duties and responsibilities as if it had been originally named herein as the Warrant Agent, without any further assurance, conveyance, act or deed; but if for any reason, it shall be necessary or expedient to execute and deliver any further assurance, conveyance, act or deed, the same shall be done at the expense of the Company and shall be legally and validly executed and delivered by the resigning Warrant Agent. Not later than the effective date of any such appointment the Company shall file notice thereof with the resigning Warrant Agent and shall forthwith cause a copy of such notice to be mailed to the Registered Holder of each Warrant Certificate. (g) Any corporation into which the Warrant Agent or any new warrant agent may be converted or merged or any corporation resulting from any consolidation to which the Warrant Agent or any new warrant agent shall be a party or any corporation succeeding to the trust business of the Warrant Agent shall be a successor warrant agent under this Agreement without any further act, provided that such corporation is eligible for appointment as successor to the Warrant Agent under the provisions of the preceding paragraph. Any such successor warrant agent shall promptly cause notice of its succession as warrant agent to be mailed to the Company and to the Registered Holder of each Warrant Certificate. (h) The Warrant Agent, its subsidiaries and affiliates, and any of its or their officers or directors, may buy and hold or sell Warrants or other securities of the Company and otherwise deal with the Company in the same manner and to the same extent and with like effects as though it were not Warrant Agent. Nothing herein shall preclude the Warrant Agent from acting in any other capacity for the Company or for any other legal entity. 16. Modification of Agreement. The Warrant Agent and the Company may, by supplemental agreement, make any changes or corrections in this Agreement (i) that they shall deem appropriate to cure any ambiguity or to correct any defective or inconsistent provision or manifest mistake or error herein contained; or (ii) that they may deem necessary or desirable and - 19 - which shall not adversely affect the interests of the holders of Warrant Certificates; provided, however, that this Agreement shall not otherwise be modified, supplemented or altered in any respect except with the consent in writing of the Registered Holders of Warrant Certificates representing not less than fifty percent (50%) of the Warrants then outstanding; and provided, further, that no change in the number or nature of the securities purchasable upon the exercise of any Warrant, or the Purchase Price therefor, or the acceleration of the Warrant Expiration Date, shall be made without the consent in writing of the Registered Holder of the Warrant Certificate representing such Warrant, other than such changes as are specifically prescribed by this Agreement as originally executed or are made in compliance with applicable law; and provided, further, that Paragraphs 4(b) and 4(c) may not be modified or amended without the consent of the Representatives. 17. Notices. All notices provided for in this Agreement shall be in writing signed by the party giving such notice, and, unless otherwise expressly provided in this Agreement, delivered personally or sent by overnight courier or messenger against receipt thereof or sent by registered or certified mail (air mail if overseas), return receipt requested, or by facsimile transmission or similar means of communication. Notices sent by facsimile transmission or similar means of communication shall be confirmed by acknowledged receipt or by registered or certified mail, return receipt requested. Notices shall be deemed to have been received on the date of personal delivery or telecopy or, if sent by certified or registered mail, return receipt requested, shall be deemed to be delivered on the third business day after the date of mailing. Notices shall be sent to the Registered Holders at their respective addresses on the Warrant Agent's warrant register, to the Company at 95 Parker Street, Newburyport, MA 01950, telecopier (978) 499-0221, Attention: Richard F. Noll, President and Chief Executive Officer, and to the Warrant Agent at its Corporate Office, telecopier ( ) . Either party may, by like notice, change the address, person or telecopier number to which notice should be given. 18. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York applicable to agreements entered and to be performed wholly within such State, without regard to principles of conflicts of laws. The parties hereby (a) irrevocably consent and agree that any legal or equitable action or proceeding arising under or in connection with this Agreement shall be brought exclusively in any Federal or state court situated in New York County, New York, (b) irrevocably submit to and accept, with respect to their respective properties and assets, generally and unconditionally, the in personam jurisdiction of the aforesaid courts, and (c) agree that any process in any action commenced in such court under this Agreement may be served upon such party personally, by certified or registered mail, return receipt requested, or by overnight courier service which obtains evidence of delivery, with the - 20 - same full force and effect as if personally served upon such party in New York City, in addition to any other method of service permitted by law. 19. Binding Effect. This Agreement shall be binding upon and inure to the benefit of the Company and, the Warrant Agent and their respective successors and assigns, and the holders from time to time of Warrant Certificates. Nothing in this Agreement is intended or shall be construed to confer upon any other person any right, remedy or claim, in equity or at law, or to impose upon any other person any duty, liability or obligation. 20. Termination. This Agreement shall terminate at the close of business on the Expiration Date of all the Warrants or such earlier date upon which all Warrants have been exercised, except that the Warrant Agent shall account to the Company for cash held by it, and the provisions of Paragraph 15 of this Agreement shall survive any such termination. 21. Counterparts. This Agreement may be executed in several counterparts, which taken together shall constitute a single document. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first above written. ACTIVEWORLDS.COM, INC. By:______________________________________ Richard F. Noll, President and CEO __________________________________________ By:_______________________________________ , Authorized Officer - 21 - EXHIBIT A [FORM OF FACE OF WARRANT CERTIFICATE] No. A- Warrant to Purchase ----------- Shares of Common Stock Void after , 2004 (or earlier upon redemption). ACTIVEWORLDS.COM, INC SERIES B REDEEMABLE COMMON STOCK PURCHASE WARRANT This certifies that FOR VALUE RECEIVED ____________________ or registered assigns (the "Registered Holder") is the owner of the number of Series B Redeemable Common Stock Purchase Warrants ("Warrants") specified above. Each Warrant initially entitles the Registered Holder to purchase, subject to the terms and conditions set forth in this Certificate and the Warrant Agreement (as hereinafter defined), one (1) fully paid and nonassessable share of Common Stock, par value $.001 per share ("Common Stock"), of Activeworlds.com, Inc., a Delaware corporation (the "Company"), at any time during the period commencing with the issuance of this Warrant and ending on the Expiration Date, as hereinafter defined, by delivery of this Warrant, with the Subscription Form on the reverse hereof duly executed, at the corporate office of , as Warrant Agent, or its successor (the "Warrant Agent"), accompanied by payment of $ , subject to adjustment as provided in the Warrant Agreement (the "Purchase Price") in lawful money of the United States of America in cash or by official bank or certified check made payable to the order of the Company. This Warrant Certificate and each Warrant represented hereby are issued pursuant to and are subject in all respects to the terms and conditions set forth in the Warrant Agreement (the "Warrant Agreement"), dated as of , 1999, by and between the Company and the Warrant Agent. In the event of certain contingencies provided for in the Warrant Agreement, the Purchase Price or the number of shares of Common Stock subject to purchase upon the exercise of each Warrant represented hereby are subject to modification or adjustment. Each Warrant represented hereby is exercisable at the option of the Registered Holder, but no fractional shares of Common Stock will be issued. In the case of the exercise of less than all the Warrants represented hereby, the Company shall cancel this Warrant Certificate upon the surrender hereof and shall execute and deliver a new Warrant Certificates or Warrant Certificates of like tenor, which the Warrant Agent shall countersign, for the balance of such Warrants. The term "Expiration Date" shall mean 5:00 P.M. (New York City time) on , 2004 or earlier upon redemption as hereinafter provided. If such date shall in the State of New York be a holiday or a day on which the banks are authorized or required to close, then the Expiration Date shall mean 5:00 P.M. (New York City time) the next following day which in the State of New York is not a holiday or a day on which banks are authorized or required to close. Under certain circumstances as provided in the Warrant Agreement, the period during which the Warrant may be exercised may be extended. The Company shall not be obligated to deliver any securities pursuant to the exercise of this Warrant unless a registration statement under the Securities Act of 1933, as amended, with respect to such securities is effective. The Company has covenanted and agreed that it will file a registration statement and will use its commercially reasonably efforts to cause the same to become effective and to keep such registration statement current while any of the Warrants are outstanding. This Warrant shall not be exercisable by a Registered Holder in any state where such exercise would be unlawful. This Warrant Certificate is exchangeable, upon the surrender hereof by the Registered Holder at the corporate office of the Warrant Agent, for a new Warrant Certificate or Warrant Certificates of like tenor representing an equal aggregate number of Warrants, each of such new Warrant Certificates to represent such number of Warrants as shall A-1 be designated by such Registered Holder at the time of such surrender. Upon payment by the Registered Holder of any tax or other governmental charge imposed in connection therewith, for registration of transfer of this Warrant Certificate at such office, a new Warrant Certificate or Warrant Certificates representing an equal aggregate number of Warrants will be issued to the transferee in exchange therefor, subject to the limitations provided in the Warrant Agreement. Prior to the exercise of any Warrant represented hereby, the Registered Holder shall not be entitled to any rights of a stockholder of the Company, including, without limitation, the right to vote or to receive dividends or other distributions, and shall not be entitled to receive any notice of any proceedings of the Company, except as provided in the Warrant Agreement. Commencing , 2000, or earlier as provided in the Warrant Agreement, this Warrant may be redeemed at the option of the Company, at a redemption price of $.01 per Warrant at any time, provided the average closing price for the Common Stock issuable upon exercise of such Warrant shall equal or exceed $ per share, subject to adjustment, for the twenty day period prior to the date which is five days before the date the Warrants are called for redemption. Notice of redemption shall be given not earlier than the thirtieth (30th) day before the date fixed for redemption, all as provided in the Warrant Agreement. On and after 5:00 P.M. (New York City time) on the business day immediately preceding the date fixed for redemption, the Registered Holder shall have no rights with respect to this Warrant except to receive the $.01 per Warrant upon surrender of this Certificate. This Warrant may only be called for redemption if, on the date the Warrant is called for redemption, the issuance of the shares of Common Stock upon exercise of this Warrant is subject to a current and effective registration statement. Prior to due presentment for registration of transfer hereof, the Company and the Warrant Agent may deem and treat the Registered Holder as the absolute owner hereof and of each Warrant represented hereby (notwithstanding any notations of ownership or writing hereon made by anyone other than a duly authorized officer of the Company or the Warrant Agent) for all purposes and shall not be affected by any notice to the contrary. This Warrant Certificate shall be governed by and construed in accordance with the laws of the State of New York applicable to agreements executed and to be performed wholly within such State, without regard to principles of conflicts of laws. This Warrant Certificate is not valid unless countersigned by the Warrant Agent. IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be duly executed, manually or in facsimile by two of its officers thereunto duly authorized and a facsimile of its corporate seal to be imprinted hereon. ACTIVEWORLDS.COM, INC. Dated:________________ By:_______________________ By:_______________________ Countersigned: ____________________________ [Seal] as Warrant Agent By:_________________________ Authorized Officer A-2 ACTIVEWORLDS.COM, INC. SUBSCRIPTION FORM To Be Executed by the Registered Holder in Order to Exercise Warrants THE UNDERSIGNED REGISTERED HOLDER hereby irrevocably elects to exercise______________ Warrants represented by this Warrant Certificate to purchase the securities issuable upon the exercise of such Warrants, and requests that certificates for such securities shall be issued in the name of _______________________________________________________________________________ _______________________________________________________________________________ _______________________________________________________________________________ _______________________________________________________________________________ (please print or type name and address) Please insert Social Security or other identifying number _________________________________ and be delivered to _______________________________________________________________________________ _______________________________________________________________________________ _______________________________________________________________________________ _______________________________________________________________________________ (please print or type name and address) and if such number of Warrants shall not be all the Warrants evidenced by this Warrant Certificate, that a new Warrant Certificate for the balance of such Warrants be registered in the name of, and delivered to, the Registered Holder at the address stated below. Date:__________________________ X__________________________________________ ___________________________________________ ___________________________________________ ___________________________________________ Address ___________________________________________ Taxpayer Identification Number ___________________________________________ Signature Medallion Guaranteed A-3 ASSIGNMENT To Be Executed by the Registered Holder in Order to Assign Warrants FOR VALUE RECEIVED, ___________________________________________ hereby sells, assigns and transfers onto Please insert social security or other identifying number ______________________________ _______________________________________________________________________________ _______________________________________________________________________________ _______________________________________________________________________________ _______________________________________________________________________________ (please print or type name and address) ______________________________ of the Warrants represented by this Warrant Certificate, and hereby irrevocably constitutes and appoints _______________________________________________________________________Attorney to transfer this Warrant Certificate on the books of the Company, with full power of substitution in the premises. Date:__________________________ X___________________________________________ Signature Medallion Guaranteed ____________________________________________ THE SIGNATURE TO THE ASSIGNMENT OR THE SUBSCRIPTION FORM MUST CORRESPOND TO THE NAME AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER. AND MUST BE GUARANTEED BY AN ELIGIBLE INSTITUTION (AS DEFINED IN RULE 17Ad-15 UNDER THE SECURITIES AND EXCHANGE ACT OF 1934) WHICH MAY INCLUDE A COMMERCIAL BANK OR TRUST COMPANY, SAVINGS ASSOCIATION, CREDIT UNION OR A MEMBER FIRM OF THE AMERICAN STOCK EXCHANGE, NEW YORK STOCK EXCHANGE, PACIFIC STOCK EXCHANGE OR MIDWEST STOCK EXCHANGE A- 4 EX-10.5 5 EXHIBIT 10.5 ACTIVEWORLDS.COM, INC. INCENTIVE STOCK OPTION AGREEMENT THIS AGREEMENT, effective as of January 22, 1999 (the "Effective Date") is between Activeworlds.com, Inc., a Delaware corporation (the "Corporation"), and Richard F. Noll of ____________________________________ (the "Optionee"). RECITALS The Corporation and the Optionee desire to enter into an agreement providing for the grant by the Corporation to the Optionee of incentive stock options to purchase shares of the Corporation's common stock, $.001 par value (the "Common Stock"). All shares of Common Stock pursuant to this Agreement issued upon the exercise of all or any portion of the options granted hereunder and all shares of Common Stock hereafter acquired by the Optionee, hereinafter are referred to in this Agreement as "Employee Stock". The options granted hereunder are granted pursuant to the Activeworlds.com, Inc. 1999 Long-Term Incentive Plan, a copy of which is attached hereto as Exhibit A (the "Plan"), and are intended to be considered "incentive stock options" thereunder, and are subject in all respects to the provisions of the Plan and the Code (as defined below) concerning "incentive stock options." This Agreement is subject to the terms of the Plan and in the event of any inconsistencies between the Plan and this Agreement, the Plan will control. Capitalized terms used herein not otherwise defined herein shall have the same meaning as in the Plan. The parties agree as follows: 1. Award of Option. Subject to the terms and conditions set forth in this Agreement and the Plan, the Corporation hereby grants to Optionee options to purchase from the Corporation up to Fourteen Thousand (14,000) shares of the Corporation's Common Stock upon payment to the Corporation of an exercise price equal to Fifty-Five cents ($0.55) per share (with each such right to purchase a share of Common Stock hereunder being referred to as an "Option"). Each Option granted hereunder shall if otherwise vested or exercisable entitle the Optionee to purchase one (1) share of Common Stock. Each Option being granted hereunder is intended to qualify as an "incentive stock option" within the meaning of Section 422(b) of the Internal Revenue Code of 1986, as amended, and under the regulations promulgated thereunder or under any legislation which is passed as a successor thereto (collectively the "Code"). If any Option or shares of the Corporation's Common Stock acquired upon exercise of any Option are held for the holding periods specified for Incentive Stock Options under the Code and the Plan, they will be given favorable tax treatment. The Optionee should consult with his or her tax advisor concerning the tax aspects of this Option award, its exercise and the subsequent sale of the shares acquired. -1- 2. Term and Termination of the Option. 2.1 Term. Unless any Option issued hereunder terminates pursuant to subsection 2.2. or is subject to accelerated vesting pursuant to Section 3, such Option is or will become exercisable and will vest in accordance with Schedule 1 attached hereto and incorporated herein. 2.2 Termination of Option. In the event that the employment of the Optionee with the Corporation is terminated for any reason, the Optionee may exercise Options granted hereunder, with respect to the number of shares for which the Optionee is on that date vested, within three (3) months after the date of such termination; provided, however, that: (i) If such termination is because of the Optionee's death or disability, then such Options may only be exercised with respect to the number of shares for which the Optionee is vested at the date of termination and by the Optionee, the Optionee's legal representative or a person who acquired the right to exercise such Option by bequest or inheritance or by reason of the death of the Optionee, as the case may be (hereinafter such person is referred to as the "Optionee"), within one (1) year after the date of Optionee's termination on account of death or disability. In the event of an exercise under the terms of this subsection by someone other than the original Optionee, appropriate proof of such person's authority to act on behalf of the Optionee or his or her estate must be provided to the Corporation. (ii) If Optionee's employment is terminated for "cause" all Options issued hereunder shall terminate immediately. (iii) If Optionee's employment is terminated on or before the fifth anniversary of this Agreement other than for the reasons set forth in subsections (i) or (ii) of this Section 2.2, the Optionee shall be entitled to exercise all Options issued hereunder which remain unexercised to the extent such Options have vested at such time. (iv) In no event (including by death of the Optionee) may any Options granted hereunder be exercised after the fifth anniversary of this Agreement. For purposes of this Agreement, "cause" shall mean the occurrence of any of the following events: (i) the termination of the Optionee's Employment Agreement, if any, pursuant to its terms due to a breach of such agreement by the Optionee; (ii) Optionee's refusal or intentional failure to carry out the reasonable directives of the Board of Directors or Officers of the Corporation; (iii) Optionee's habitual gross neglect of a substantial portion of his duties with the Corporation; or (iv) the Optionee's criminal activity, including but not limited to action involving fraud, theft, or embezzlement. -2- 3. Acceleration. Notwithstanding the provisions of section 2.1 hereof, the Options granted hereunder shall immediately become fully vested and exercisable with regard to all Fourteen Thousand (14,000) shares upon the occurrence of one of the following events (such events are hereinafter collectively referred to as the "Transfer"): (i) the sale of all or substantially all of the assets of the Corporation; or (ii) the sale of in excess of ninety-percent (90%) of the issued and outstanding stock of the Corporation. The purpose and the intent of this subsection is to permit the Optionee to participate in such Transfer with respect to all shares obtainable pursuant to the Options. The Corporation will provide the Optionee with thirty (30) days advance written notice of any such Transfer so as to enable the Optionee to exercise the Options granted hereunder. Any exercise pursuant to this subsection shall be contingent and effective upon the closing or consummation of the transaction giving rise to acceleration hereunder. 4. Exercise Procedure. The Optionee, or the legal representative of the Optionee's estate upon the occurrence of any event contemplated by section 2.2, may exercise any Options granted hereunder by giving written notice of exercise of such Options to the Corporation at its principal office on the Notice of Exercise form annexed hereto as Exhibit B to this Agreement. Such notice shall state the number of Options being exercised and shall be accompanied by a payment in an amount equal to the product of the number of whole shares which are issuable upon the exercise of such Options multiplied by the exercise price per share (the "Exercise Price"). Such Exercise Price shall be payable either: (i) in cash or by certified or cashier's check, (ii) by transfer to the Corporation by the Optionee, or his or her Legal Representative, of such quantity of Common Stock of the Corporation owned by the Optionee as has an aggregate Fair Market Value, as of the date such Options are exercised, equal to such Exercise Price, or (iii) by a combination of (i) and (ii). 5. Lapse. Subject to the provisions of Section 2 and Section 3, all Options granted hereunder shall lapse and be of no further force or effect on or after the fifth anniversary of the Effective Date if they are not exercised before such anniversary. 6. Transfer of Option Prohibited. The Options granted hereunder may not be sold or otherwise transferred by the Optionee except by will or by the laws of descent and distribution and during the lifetime of the Optionee, may be exercised only by the Optionee. These Options are being granted on the condition that any Employee Stock issued hereunder shall be for investment purposes only, and not with a view to resale or distribution. At the time of the exercise of any Options, the Optionee shall execute such documents as the Corporation may require to implement the foregoing conditions and to acknowledge the Optionee's familiarity with restrictions on the resale of the shares under applicable securities laws. -3- 7. No Rights as Shareholder. Before the exercise of any Options granted hereunder and the subsequent issuance of shares of Common Stock certificates, the Optionee will have no rights as shareholder of the Corporation with respect to any shares subject to the Options. 8. Dilution Protection. If the Corporation shall at any time pay a stock dividend or distribution on its Common Stock or if the Corporation shall at any time split, subdivide or combine the outstanding shares of its Common stock, the number of shares for which the Options granted hereunder may be exercised and the exercise price per share shall be adjusted proportionately. Any such adjustments shall be effective as of the record date for the split, subdivision or combination. 9. Termination of Restrictions. The restrictions on the transfer of Employee Stock will continue until such time as the class of shares of the Corporation's capital stock of which comprise the Employee Stock is registered under the Securities Exchange Act of 1934, as amended. 10. Legend. The certificates representing the Employee Stock will bear a legend similar to the following: THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO RESTRICTIONS ON TRANSFER AND CERTAIN OTHER AGREEMENTS SET FORTH IN AN INCENTIVE STOCK OPTION AGREEMENT BETWEEN ACTIVEWORLDS.COM, INC. AND THE ORIGINAL HOLDER HEREOF, A COPY OF WHICH MAY BE OBTAINED AT ACTIVEWORLDS.COM, INC.'S PRINCIPAL PLACE OF BUSINESS. 11. Definition of Employee Stock. For the purposes of this Agreement, Employee Stock shall continue to be Employee Stock in the hands of any holder other than the Optionee (except for the Corporation and purchasers after the restrictions on transfer have terminated pursuant to Section 9), and each such other holder of Employee Stock will succeed to all rights and obligations attributable to the Optionee as holder of Employee Stock hereunder. Employee Stock will also include shares of the Corporation's capital stock issued with respect to shares of Employee Stock by ways of stock split, stock dividend or other recapitalization. 12. Right to Call the Employee Stock. Subject to the holding period requirements contained in the Code and the Plan, the Corporation, or following any sale referred to in subsection (iii) hereof, its successor corporation, shall have the right to repurchase all of the Employee Stock within sixty (60) days following the occurrence of one of the following events: (i) the sale of all or substantially all of its assets; (ii) the acquisition by an investor, other than those persons who were shareholders of the Corporation on the date of execution of this Agreement, of at least two thirds of the issued and outstanding shares of capital stock of the Corporation, or (iii) the merger of -4- the Corporation into another corporation such that the Corporation is not the surviving corporation. The Corporation shall provide notice to the Optionee of its intent to exercise this right in writing which notice shall include the per share purchase price for the Employee Stock which shall be equal to the price paid by the third party investor for each share of Common Stock in the transaction that triggers the right to call (which in the case of an acquisition of assets or merger shall be the aggregate purchase price divided all outstanding shares of Capital Stock of the Corporation). 13. Notices. Any notice provided for in this Agreement must be in writing, and shall be deemed given when delivered by hand delivery, or one day after deposit with a reputable overnight delivery service, or three days after deposit in the United State mail, certified, return receipt requested, postage prepaid, and addressed as follows: To the Corporation: 4 Middle Street Newburyport, Massachusetts 01950 To the Optionee: At the most recent address available in the Corporation's employment records. 14. Severability. Whenever possible, each provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable, such invalidity, illegality or unenforceability will not affect any other provision, and this Agreement shall be reformed and construed as if such invalid provision had never been contained herein. 15. Complete Agreement. This Agreement embodies the complete agreement and understanding of the parties and supersedes and pre-empts any prior understandings, agreements or representation, written or oral, between the parties, which may have related to the subject matter hereof in any way. 16. Successors and Assigns. This Agreement is intended to bind and inure to the benefit of the Optionee, the Corporation, and their respective successors and assigns. 17. Choice of Law; Venue. All questions concerning the construction, validity and interpretation of this Agreement, will be governed by the laws of the Commonwealth of Massachusetts, without regard to the conflict of law rules thereof. All disputes arising hereunder shall be resolved by a court of competent jurisdiction located in the Commonwealth of Massachusetts. IN WITNESS WHEREOF, the parties have executed this Agreement under seal on the date first written above. ACTIVEWORLDS.COM, INC. ----------------------------------------- Richard F. Noll, President OPTIONEE: ----------------------------------------- Richard F. Noll -6- SCHEDULE 1 ACTIVEWORLDS.COM, INC. TERM AND EXERCISE OF THE OPTION All Options being granted hereunder shall vest and become exercisable over a period of five (5) years from the Effective Date of this Agreement at the rate of one-fifth (1/5) of the total number of shares for which the Options may be exercised per year with such vesting to occur on the same day of each year as the Effective Date commencing on the Effective Date of this Agreement and continuing on each annual anniversary of the Effective Date up to the fourth annual anniversary of the Effective Date. -7- EXHIBIT A ACTIVEWORLDS.COM, INC. LONG-TERM INCENTIVE PLAN See Attached EXHIBIT B ACTIVEWORLDS.COM, INC. INCENTIVE STOCK OPTION AGREEMENT NOTICE OF EXERCISE The undersigned employee of Activeworlds.com, Inc. (the "Corporation"), pursuant to the Activeworlds.com, Inc. 1999 Long-Term Incentive Plan (the "Plan"), and pursuant to an Incentive Stock Option Agreement dated as of ________________________________, hereby agrees to purchase from the Corporation __________(1) shares of common stock, $.001 par value per share, of the Corporation ("Employee Stock") at an exercise price of $__________ per share. Optionee:____________________________________________________________________ First Middle Last (Print name exactly as it will appear on your stock certificate) Social Security Number: _________-________-__________ Address:_____________________________________________________________________ The undersigned Optionee has delivered the following consideration to the Corporation in exchange for the Employee Stock: (1) $________________ in cash or by certified or bank cashier's check; and/or (2) _________________ shares of the Corporation's common stock, $.01 par value per share, having a fair market value (as defined in the Plan) of $________________ as of _____________________________. ---------------------------------- (Optionee: Signature) Name: Date: __________________ - --------------------------- (1) No less than 100 shares may be purchased at one time unless the number purchased is the total number that may then be purchased under the Option. EX-10.6 6 EXHIBIT 10.6 ACTIVEWORLDS.COM, INC. INCENTIVE STOCK OPTION AGREEMENT THIS AGREEMENT, effective as of January 22, 1999 (the "Effective Date") is between Activeworlds.com, Inc., a Delaware corporation (the "Corporation"), and J.P. McCormick of _____________________________________ (the "Optionee"). RECITALS The Corporation and the Optionee desire to enter into an agreement providing for the grant by the Corporation to the Optionee of incentive stock options to purchase shares of the Corporation's common stock, $.001 par value (the "Common Stock"). All shares of Common Stock pursuant to this Agreement issued upon the exercise of all or any portion of the options granted hereunder and all shares of Common Stock hereafter acquired by the Optionee, hereinafter are referred to in this Agreement as "Employee Stock". The options granted hereunder are granted pursuant to the Activeworlds.com, Inc. 1999 Long-Term Incentive Plan, a copy of which is attached hereto as Exhibit A (the "Plan"), and are intended to be considered "incentive stock options" thereunder, and are subject in all respects to the provisions of the Plan and the Code (as defined below) concerning "incentive stock options." This Agreement is subject to the terms of the Plan and in the event of any inconsistencies between the Plan and this Agreement, the Plan will control. Capitalized terms used herein not otherwise defined herein shall have the same meaning as in the Plan. The parties agree as follows: 1. Award of Option. Subject to the terms and conditions set forth in this Agreement and the Plan, the Corporation hereby grants to Optionee options to purchase from the Corporation up to Fourteen Thousand (14,000) shares of the Corporation's Common Stock upon payment to the Corporation of an exercise price equal to Fifty-Five cents ($0.55) per share (with each such right to purchase a share of Common Stock hereunder being referred to as an "Option"). Each Option granted hereunder shall if otherwise vested or exercisable entitle the Optionee to purchase one (1) share of Common Stock. Each Option being granted hereunder is intended to qualify as an "incentive stock option" within the meaning of Section 422(b) of the Internal Revenue Code of 1986, as amended, and under the regulations promulgated thereunder or under any legislation which is passed as a successor thereto (collectively the "Code"). If any Option or shares of the Corporation's Common Stock acquired upon exercise of any Option are held for the holding periods specified for Incentive Stock Options under the Code and the Plan, they will be given favorable tax treatment. The Optionee should consult with his or her tax advisor concerning the tax aspects of this Option award, its exercise and the subsequent sale of the shares acquired. -1- 2. Term and Termination of the Option. 2.1 Term. Unless any Option issued hereunder terminates pursuant to subsection 2.2. or is subject to accelerated vesting pursuant to Section 3, such Option is or will become exercisable and will vest in accordance with Schedule 1 attached hereto and incorporated herein. 2.2 Termination of Option. In the event that the employment of the Optionee with the Corporation is terminated for any reason, the Optionee may exercise Options granted hereunder, with respect to the number of shares for which the Optionee is on that date vested, within three (3) months after the date of such termination; provided, however, that: (i) If such termination is because of the Optionee's death or disability, then such Options may only be exercised with respect to the number of shares for which the Optionee is vested at the date of termination and by the Optionee, the Optionee's legal representative or a person who acquired the right to exercise such Option by bequest or inheritance or by reason of the death of the Optionee, as the case may be (hereinafter such person is referred to as the "Optionee"), within one (1) year after the date of Optionee's termination on account of death or disability. In the event of an exercise under the terms of this subsection by someone other than the original Optionee, appropriate proof of such person's authority to act on behalf of the Optionee or his or her estate must be provided to the Corporation. (ii) If Optionee's employment is terminated for "cause" all Options issued hereunder shall terminate immediately. (iii) If Optionee's employment is terminated on or before the fifth anniversary of this Agreement other than for the reasons set forth in subsections (i) or (ii) of this Section 2.2, the Optionee shall be entitled to exercise all Options issued hereunder which remain unexercised to the extent such Options have vested at such time. (iv) In no event (including by death of the Optionee) may any Options granted hereunder be exercised after the fifth anniversary of this Agreement. For purposes of this Agreement, "cause" shall mean the occurrence of any of the following events: (i) the termination of the Optionee's Employment Agreement, if any, pursuant to its terms due to a breach of such agreement by the Optionee; (ii) Optionee's refusal or intentional failure to carry out the reasonable directives of the Board of Directors or Officers of the Corporation; (iii) Optionee's habitual gross neglect of a substantial portion of his duties with the Corporation; or (iv) the Optionee's criminal activity, including but not limited to action involving fraud, theft, or embezzlement. 3. Acceleration. Notwithstanding the provisions of section 2.1 hereof, the Options granted hereunder shall immediately become fully vested and -2- exercisable with regard to all Fourteen Thousand (14,000) shares upon the occurrence of one of the following events (such events are hereinafter collectively referred to as the "Transfer"): (i) the sale of all or substantially all of the assets of the Corporation; or (ii) the sale of in excess of ninety-percent (90%) of the issued and outstanding stock of the Corporation. The purpose and the intent of this subsection is to permit the Optionee to participate in such Transfer with respect to all shares obtainable pursuant to the Options. The Corporation will provide the Optionee with thirty (30) days advance written notice of any such Transfer so as to enable the Optionee to exercise the Options granted hereunder. Any exercise pursuant to this subsection shall be contingent and effective upon the closing or consummation of the transaction giving rise to acceleration hereunder. 4. Exercise Procedure. The Optionee, or the legal representative of the Optionee's estate upon the occurrence of any event contemplated by section 2.2, may exercise any Options granted hereunder by giving written notice of exercise of such Options to the Corporation at its principal office on the Notice of Exercise form annexed hereto as Exhibit B to this Agreement. Such notice shall state the number of Options being exercised and shall be accompanied by a payment in an amount equal to the product of the number of whole shares which are issuable upon the exercise of such Options multiplied by the exercise price per share (the "Exercise Price"). Such Exercise Price shall be payable either: (i) in cash or by certified or cashier's check, (ii) by transfer to the Corporation by the Optionee, or his or her Legal Representative, of such quantity of Common Stock of the Corporation owned by the Optionee as has an aggregate Fair Market Value, as of the date such Options are exercised, equal to such Exercise Price, or (iii) by a combination of (i) and (ii). 5. Lapse. Subject to the provisions of Section 2 and Section 3, all Options granted hereunder shall lapse and be of no further force or effect on or after the fifth anniversary of the Effective Date if they are not exercised before such anniversary. 6. Transfer of Option Prohibited. The Options granted hereunder may not be sold or otherwise transferred by the Optionee except by will or by the laws of descent and distribution and during the lifetime of the Optionee, may be exercised only by the Optionee. These Options are being granted on the condition that any Employee Stock issued hereunder shall be for investment purposes only, and not with a view to resale or distribution. At the time of the exercise of any Options, the Optionee shall execute such documents as the Corporation may require to implement the foregoing conditions and to acknowledge the Optionee's familiarity with restrictions on the resale of the shares under applicable securities laws. 7. No Rights as Shareholder. Before the exercise of any Options granted hereunder and the subsequent issuance of shares of Common Stock certificates, the Optionee will have no rights as shareholder of the Corporation with respect to any shares subject to the Options. 8. Dilution Protection. If the Corporation shall at any time pay a stock dividend or distribution on its Common Stock or if the Corporation shall at any time split, subdivide or combine the outstanding shares of its Common -3- stock, the number of shares for which the Options granted hereunder may be exercised and the exercise price per share shall be adjusted proportionately. Any such adjustments shall be effective as of the record date for the split, subdivision or combination. 9. Termination of Restrictions. The restrictions on the transfer of Employee Stock will continue until such time as the class of shares of the Corporation's capital stock of which comprise the Employee Stock is registered under the Securities Exchange Act of 1934, as amended. 10. Legend. The certificates representing the Employee Stock will bear a legend similar to the following: THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO RESTRICTIONS ON TRANSFER AND CERTAIN OTHER AGREEMENTS SET FORTH IN AN INCENTIVE STOCK OPTION AGREEMENT BETWEEN ACTIVEWORLDS.COM, INC. AND THE ORIGINAL HOLDER HEREOF, A COPY OF WHICH MAY BE OBTAINED AT ACTIVEWORLDS.COM, INC.'S PRINCIPAL PLACE OF BUSINESS. 11. Definition of Employee Stock. For the purposes of this Agreement, Employee Stock shall continue to be Employee Stock in the hands of any holder other than the Optionee (except for the Corporation and purchasers after the restrictions on transfer have terminated pursuant to Section 9), and each such other holder of Employee Stock will succeed to all rights and obligations attributable to the Optionee as holder of Employee Stock hereunder. Employee Stock will also include shares of the Corporation's capital stock issued with respect to shares of Employee Stock by ways of stock split, stock dividend or other recapitalization. 12. Right to Call the Employee Stock. Subject to the holding period requirements contained in the Code and the Plan, the Corporation, or following any sale referred to in subsection (iii) hereof, its successor corporation, shall have the right to repurchase all of the Employee Stock within sixty (60) days following the occurrence of one of the following events: (i) the sale of all or substantially all of its assets; (ii) the acquisition by an investor, other than those persons who were shareholders of the Corporation on the date of execution of this Agreement, of at least two thirds of the issued and outstanding shares of capital stock of the Corporation, or (iii) the merger of the Corporation into another corporation such that the Corporation is not the surviving corporation. The Corporation shall provide notice to the Optionee of its intent to exercise this right in writing which notice shall include the per share purchase price for the Employee Stock which shall be equal to the price paid by the third party investor for each share of Common Stock in the transaction that triggers the right to call (which in the case of an acquisition of assets or merger shall be the aggregate purchase price divided all outstanding shares of Capital Stock of the Corporation). -4- 13. Notices. Any notice provided for in this Agreement must be in writing, and shall be deemed given when delivered by hand delivery, or one day after deposit with a reputable overnight delivery service, or three days after deposit in the United State mail, certified, return receipt requested, postage prepaid, and addressed as follows: To the Corporation: 4 Middle Street Newburyport, Massachusetts 01950 To the Optionee: At the most recent address available in the Corporation's employment records. 14. Severability. Whenever possible, each provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable, such invalidity, illegality or unenforceability will not affect any other provision, and this Agreement shall be reformed and construed as if such invalid provision had never been contained herein. 15. Complete Agreement. This Agreement embodies the complete agreement and understanding of the parties and supersedes and pre-empts any prior understandings, agreements or representation, written or oral, between the parties, which may have related to the subject matter hereof in any way. 16. Successors and Assigns. This Agreement is intended to bind and inure to the benefit of the Optionee, the Corporation, and their respective successors and assigns. 17. Choice of Law; Venue. All questions concerning the construction, validity and interpretation of this Agreement, will be governed by the laws of the Commonwealth of Massachusetts, without regard to the conflict of law rules thereof. All disputes arising hereunder shall be resolved by a court of competent jurisdiction located in the Commonwealth of Massachusetts. IN WITNESS WHEREOF, the parties have executed this Agreement under seal on the date first written above. ACTIVEWORLDS.COM, INC. ------------------------------------ Richard F. Noll, President OPTIONEE: ------------------------------------ J.P. McCormick -5- SCHEDULE 1 ACTIVEWORLDS.COM, INC. TERM AND EXERCISE OF THE OPTION All Options being granted hereunder shall vest and become exercisable over a period of five (5) years from the Effective Date of this Agreement at the rate of one-fifth (1/5) of the total number of shares for which the Options may be exercised per year with such vesting to occur on the same day of each year as the Effective Date commencing on the Effective Date and continuing on each annual anniversary of the Effective Date up to the fourth annual anniversary of the Effective Date. -7- EXHIBIT A ACTIVEWORLDS.COM, INC. LONG-TERM INCENTIVE PLAN See Attached EXHIBIT B ACTIVEWORLDS.COM, INC. INCENTIVE STOCK OPTION AGREEMENT NOTICE OF EXERCISE The undersigned employee of Activeworlds.com, Inc. (the "Corporation"), pursuant to the Activeworlds.com, Inc. 1999 Long-Term Incentive Plan (the "Plan"), and pursuant to an Incentive Stock Option Agreement dated as of ________________________________, hereby agrees to purchase from the Corporation __________(1) shares of common stock, $.001 par value per share, of the Corporation ("Employee Stock") at an exercise price of $__________ per share. Optionee:____________________________________________________________________ First Middle Last (Print name exactly as it will appear on your stock certificate) Social Security Number: _________-________-__________ Address:_____________________________________________________________________ The undersigned Optionee has delivered the following consideration to the Corporation in exchange for the Employee Stock: (1) $________________ in cash or by certified or bank cashier's check; and/or (2) _________________ shares of the Corporation's common stock, $.01 par value per share, having a fair market value (as defined in the Plan) of $________________ as of _____________________________. ------------------------------- (Optionee: Signature) Name: - ----------------- (1) No less than 100 shares may be purchased at one time unless the number purchased is the total number that may then be purchased under the Option. -----END PRIVACY-ENHANCED MESSAGE-----