<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 4, 1998
REGISTRATION NO. 333-59863
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
UNITY FIRST ACQUISITION CORP.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 6770 13-3899021
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
245 FIFTH AVENUE, SUITE 1500
NEW YORK, NEW YORK 10016
(212) 696-4282
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
------------------------
LAWRENCE BURSTEIN, PRESIDENT
UNITY FIRST ACQUISITION CORP.
245 FIFTH AVENUE, SUITE 1500
NEW YORK, NEW YORK 10016
(212) 696-4282
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
------------------------
COPIES TO:
<TABLE>
<S> <C>
IRA I. ROXLAND, ESQ. RICHARD F. HOROWITZ, ESQ.
JOSEPH H. SCHMITT, ESQ. IRVING ROTHSTEIN, ESQ.
COOPERMAN LEVITT WINIKOFF HELLER, HOROWITZ & FEIT, P.C.
LESTER & NEWMAN, P.C. 292 MADISON AVENUE
800 THIRD AVENUE NEW YORK, NEW YORK 10017
NEW YORK, NEW YORK 10022 (212) 685-7600
(212) 688-7000 FAX: (212) 696-9459
FAX: (212) 755-2839
</TABLE>
----------------------------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement and the
effective time of the merger of Worlds Inc. ("Worlds") with and into Registrant
as described in the Agreement and Plan of Merger and Reorganization, dated as of
June 25, 1998 (the "Merger").
If any of the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / / ____________________
If this Form is a post-effective amendment filed pursuant to Rule 462(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. / / ____________________
----------------------------------
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 SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
PURSUANT TO RULE 429, PROMULGATED UNDER THE SECURITIES ACT OF 1933, THE
PROSPECTUS FORMING A PART OF THIS REGISTRATION STATEMENT ALSO RELATES TO (I)(A)
1,250,000 SHARES OF COMMON STOCK ISSUABLE UPON THE EXERCISE OF 1,250,000 CLASS A
REDEEMABLE COMMOM STOCK PURCHASE WARRANTS AND (B) 1,250,000 SHARES OF COMMON
STOCK ISSUABLE UPON THE EXERCISE OF 1,250,000 CLASS B REDEEMABLE COMMON STOCK
PURCHASE WARRANTS (COLLECTIVELY THE "IPO SECURITIES"), (II)(A) 125,000 SHARES OF
COMMON STOCK, (B) 125,000 SHARES OF COMMON STOCK ISSUABLE UPON THE EXERCISE OF
125,000 CLASS A COMMON STOCK PURCHASE WARRANTS AND (C) 125,000 SHARES OF COMMON
STOCK ISSUABLE UPON THE EXERCISE OF 125,000 CLASS B COMMON STOCK PURCHASE
WARRANTS ALL ISSUABLE TO THE MANAGING UNDERWRITERS OF THE IPO SECURITIES UPON
THE EXERCISE OF THE UNDERWRITERS' UNIT PURCHASE OPTION, AND (III)(A) 200,000
SHARES OF COMMON STOCK ISSUABLE UPON THE EXERCISE OF 200,000 CLASS A COMMON
STOCK PURCHASE WARRANTS AND (B) 200,000 SHARES OF COMMON STOCK ISSUABLE UPON THE
EXERCISE OF 200,000 CLASS B COMMON STOCK PURCHASE WARRANTS ISSUED TO CERTAIN
OFFICERS AND DIRECTORS OF REGISTRANT, ALL INITIALLY INCLUDED IN REGISTRANT'S
REGISTRATION STATEMENT ON FORM S-1 (FILE NO. 333-11165), DECLARED EFFECTIVE ON
NOVEMBER 12, 1996.
- --------------------------------------------------------------------------------
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<PAGE>
UNITY FIRST ACQUISITION CORP.
245 FIFTH AVENUE
NEW YORK, NEW YORK 10016
(212) 696-4282
September , 1998
Dear Shareholder:
The Board of Directors cordially invites you to attend a special meeting of
shareholders of Unity First Acquisition Corp. to be held at 10:00 A.M., local
time, on , October , 1998, at 800 Third Avenue, 30th Floor, New
York, New York.
At the meeting, you will be asked to consider a proposal to approve a merger
between Unity and Worlds Inc.
Upon completion of the merger, Unity's name will be changed to "Worlds
Inc.", Worlds' shareholders as a group will acquire approximately 77.3% of the
then outstanding Unity shares and Unity's post-merger Board of Directors will
consist of three persons, all of whom are presently directors of Worlds.
In determining whether or not you should approve the merger, you should be
aware that for approximately 18 months prior to May 6, 1998, the date upon which
Unity and Worlds entered into a letter of intent to effect the merger, Unity had
unsuccessfully attempted to effect a merger with several other business
concerns, the last of these attempts having been terminated by Unity on April
30, 1998. If Unity had not entered into the Worlds letter of intent, it would
have been liquidated on May 12, 1998, in which event you would have received a
cash distribution of approximately $5.09 per share. The Unity Board of Directors
agreed to the Worlds merger, in which Worlds' shareholders, as noted above, will
acquire a controlling interest in Unity, based upon its belief that Worlds'
significant growth potential, although by no means assured, outweighed the
liquidation alternative.
THE UNITY BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT
AND THE TRANSACTIONS CONTEMPLATED BY SUCH AGREEMENT AND RECOMMENDS THAT UNITY
SHAREHOLDERS VOTE "FOR" APPROVAL OF THE MERGER.
Your participation at the special meeting, in person or by proxy, is
especially important. Whether or not you plan to attend the special meeting, I
urge you to complete, date, sign and promptly return your proxy card in the
enclosed pre-paid envelope to ensure that your shares will be represented in the
special meeting.
/s/ LAWRENCE BURSTEIN
Lawrence Burstein
PRESIDENT
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE NOT
APPROVED THE MERGER DESCRIBED IN THIS JOINT PROXY STATEMENT/PROSPECTUS OR THE
SHARES OF UNITY COMMON STOCK TO BE ISSUED IN THE MERGER, AND THEY HAVE NOT
DETERMINED IF THIS JOINT PROXY STATEMENT/PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
SEE "RISK FACTORS" BEGINNING ON PAGE XIII FOR CERTAIN MATTERS YOU SHOULD
CONSIDER.
This Joint Proxy Statement/Prospectus is dated September , 1998 and is
first being mailed to Unity shareholders on or about September , 1998.
<PAGE>
UNITY FIRST ACQUISITION CORP.
245 FIFTH AVENUE
NEW YORK, NEW YORK 10016
------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON OCTOBER , 1998
------------------------
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders (the "Special
Meeting") of Unity First Acquisition Corp., a Delaware corporation ("Unity"),
will be held on , October , 1998, commencing at 10:00 A.M., local
time, at 800 Third Avenue, 30th Floor, New York, New York, for the following
purposes:
1. To consider and vote upon a proposal to approve and adopt a certain
Agreement and Plan of Merger and Reorganization, dated as of June 25, 1998
(the "merger agreement"), between Unity and Worlds Inc., a New Jersey
corporation ("Worlds"), providing for, among other things, the merger of
Worlds with and into Unity (the "Merger"), and the issuance by Unity of
approximately 6,379,065 shares of its common stock (the "Unity Common
Stock") to Worlds' shareholders, all upon the terms and conditions described
therein.
2. To approve an adjournment or postponement of the Special Meeting, if
necessary, to permit further solicitation of proxies in the event there are
not sufficient votes at the Special Meeting to approve Proposal 1, above.
3. To transact any other business incidental to the Special Meeting that
may properly come before such meeting or any adjournment or postponement
thereof.
A copy of the merger agreement is attached as Exhibit A to the accompanying
Joint Proxy Statement/ Prospectus and is incorporated herein by reference.
SHAREHOLDER APPROVAL AND ADOPTION OF THE MERGER AGREEMENT WILL RESULT IN A
CHANGE OF THE MAJORITY EQUITY OWNERSHIP, THE BUSINESS AND THE MANAGEMENT OF
UNITY.
The Board of Directors of Unity has fixed September , 1998 as the record
date for the determination of shareholders entitled to notice of and to vote at
the Special Meeting. The affirmative vote of the holders of a majority of all
outstanding shares of Unity Common Stock entitled to vote at the Special Meeting
is necessary to approve and adopt the merger agreement.
HOLDERS OF UNITY COMMON STOCK ARE ENTITLED TO APPRAISAL RIGHTS UNDER
DELAWARE LAW IN CONNECTION WITH THE MERGER. HOLDERS OF UNITY COMMON STOCK ARE
ALSO ENTITLED TO CERTAIN CASH CONVERSION RIGHTS PURSUANT TO UNITY'S CERTIFICATE
OF INCORPORATION. If 20% or more of the shares of Unity Common Stock are offered
to Unity for conversion into cash and the holders of such shares vote against
the approval and adoption of the merger agreement, the Merger will not be
consummated. See "The Merger--Appraisal Rights" and "-- Conversion Rights."
If the Merger is not consummated by November 12, 1998, Unity's Certificate
of Incorporation requires that Unity be liquidated. In such event, Unity's then
remaining assets, after payment of, or reservation for liabilities, will be
distributed to Unity's public stockholders. Such distribution will approximate
$5.09 per share.
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE, DATE
AND SIGN THE ACCOMPANYING PROXY CARD AND MAIL IT PROMPTLY IN THE ENCLOSED
PRE-ADDRESSED ENVELOPE, WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED
STATES. THE PROXY CARD MAY BE REVOKED AT ANY TIME PRIOR TO THE VOTE AT THE
SPECIAL MEETING BY FOLLOWING THE PROCEDURES SET FORTH IN THIS JOINT PROXY
STATEMENT/PROSPECTUS.
Norman Leben
SECRETARY
September , 1998
<PAGE>
WORLDS INC.
15 UNION WHARF
BOSTON, MASSACHUSETTS 02109
(617) 725-8900
September , 1998
Dear Shareholder:
The Board of Directors cordially invites you to attend a special meeting of
shareholders of Worlds Inc. to be held at 10:00 A.M., local time, on ,
October , 1998, at 15 Union, Wharf, Boston, Massachusetts.
At the meeting, you will vote on a proposal to approve a merger between
Unity First Acquisition Corp. and Worlds. If the merger is completed, you and
your fellow Worlds shareholders will own approximately 77.3% of the combined
company, which will retain the "Worlds" name. I will be Chairman of this company
and the other officers and directors of Worlds will become the officers and
directors of this company.
THE WORLDS BOARD OF DIRECTORS HAS UNANIMOUSLY DETERMINED THAT THE MERGER IS
IN THE BEST INTERESTS OF WORLDS AND ITS SHAREHOLDERS. THE WORLDS BOARD HAS
APPROVED THE MERGER AND RECOMMENDS THAT YOU VOTE "FOR" THE MERGER AT THE
MEETING.
Whether or not you plan to attend the meeting, I urge you to complete, date,
sign and promptly return your proxy card in the enclosed pre-paid envelope to
ensure that your shares will be represented in the special meeting.
/s/ MICHAEL J. SCHARF
Michael J. Scharf
CHAIRMAN OF THE BOARD OF DIRECTORS
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE
NOT APPROVED THE MERGER DESCRIBED IN THIS JOINT PROXY STATEMENT/PROSPECTUS OR
THE SHARES OF UNITY COMMON STOCK TO BE ISSUED IN THE MERGER, AND THEY HAVE NOT
DETERMINED IF THIS JOINT PROXY STATEMENT/PROSPECTUS IS TRUTHFUL OR COMPLETE.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
SEE "RISK FACTORS" BEGINNING ON PAGE XIII FOR CERTAIN MATTERS YOU SHOULD
CONSIDER.
This Joint Proxy Statement/Prospectus is dated September , 1998 and is
first being mailed to Worlds shareholders on or about September , 1998.
<PAGE>
WORLDS INC.
15 UNION WHARF
BOSTON, MASSACHUSETTS 02109
------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON OCTOBER , 1998
------------------------
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders (the "Special
Meeting") of Worlds Inc., a New Jersey corporation ("Worlds"), will be held on
, October , 1998, commencing at 10:00 A.M., local time, at 15 Union
Wharf, Boston, Massachusetts, for the following purposes:
1. To consider and vote upon a proposal to approve and adopt a certain
Agreement and Plan of Merger and Reorganization, dated as of June 25, 1998
(the "merger agreement"), between Unity First Acquisition Corp., a Delaware
corporation ("Unity"), and Worlds, providing for, among other things, the
merger of Worlds with and into Unity (the "Merger"), and the issuance by
Unity of approximately 6,379,065 shares of its common stock to Worlds'
shareholders, all upon the terms and conditions described therein.
2. To approve an adjournment or postponement of the Special Meeting, if
necessary, to permit further solicitation of proxies in the event there are
not sufficient votes at the Special Meeting to approve Proposal 1, above.
3. To transact any other business incidental to the Special Meeting that
may properly come before such meeting or any adjournment or postponement
thereof.
A copy of the merger agreement is attached as Exhibit A to the accompanying
Joint Proxy Statement/ Prospectus and is incorporated herein by reference.
SHAREHOLDER APPROVAL AND ADOPTION OF THE MERGER AGREEMENT MEANS THAT WORLDS WILL
CEASE TO EXIST AND ALL OF ITS SHAREHOLDERS WILL BECOME SHAREHOLDERS OF UNITY,
ALTHOUGH UNITY WILL CHANGE ITS NAME TO "WORLDS INC." AND ITS BUSINESS,
MANAGEMENT AND BOARD OF DIRECTORS WILL BE IDENTICAL TO THOSE OF WORLDS PRIOR TO
THE MERGER.
The Board of Directors of Worlds has fixed September , 1998 as the record
date for the determination of shareholders entitled to notice of and to vote at
the Special Meeting. The affirmative vote of 66 2/3% of all votes cast at the
Special Meeting is necessary to approve and adopt the merger agreement.
HOLDERS OF WORLDS COMMON STOCK ARE ENTITLED TO APPRAISAL RIGHTS UNDER NEW
JERSEY LAW IN CONNECTION WITH THE MERGER. See "The Merger--Appraisal Rights."
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE, DATE
AND SIGN THE ACCOMPANYING PROXY CARD AND MAIL IT PROMPTLY IN THE ENCLOSED
PRE-ADDRESSED ENVELOPE, WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED
STATES. THE PROXY CARD MAY BE REVOKED AT ANY TIME PRIOR TO THE VOTE AT THE
SPECIAL MEETING BY FOLLOWING THE PROCEDURES SET FORTH IN THIS JOINT PROXY
STATEMENT/PROSPECTUS.
Thomas Kidrin
SECRETARY
September , 1998
<PAGE>
UNITY FIRST ACQUISITION CORP.
AND
WORLDS INC.
JOINT PROXY STATEMENT
------------------------
UNITY FIRST ACQUISITION CORP.
PROSPECTUS
------------------------
This Joint Proxy Statement/Prospectus is being furnished by Unity First
Acquisition Corp., a Delaware corporation ("Unity"), to holders of common stock
of Unity (the "Unity Common Stock") and by Worlds Inc., a New Jersey corporation
("Worlds"), to the holders of common stock of Worlds (the "Worlds Common Stock")
in connection with the respective solicitation of proxies by the Boards of
Directors of Unity and Worlds for use at the Special Meeting of Shareholders of
Unity and the Special Meeting of Shareholders of Worlds each to be held on
October , 1998. At each of the meetings, the shareholders of Unity and Worlds
will consider and vote upon a proposal to approve and adopt that certain
Agreement and Plan of Merger and Reorganization, dated as of June 25, 1998,
between Unity and Worlds ("the "Merger Agreement") providing for, among other
things, the merger of Worlds with and into Unity. A copy of the Merger Agreement
is attached to this Joint Proxy Statement/Prospectus as Exhibit A and is
incorporated herein by reference.
THE UNITY BOARD AND WORLDS BOARD RECOMMENDS THAT THE RESPECTIVE SHAREHOLDERS
OF UNITY AND WORLDS VOTE TO APPROVE THE MERGER AGREEMENT AND THE TRANSACTIONS
CONTEMPLATED THEREUNDER.
This Joint Proxy Statement/Prospectus also constitutes a prospectus of Unity
with respect to a maximum of 6,379,065 shares of Unity Common Stock to be issued
in exchange for the Worlds Common Stock and with respect to a maximum of 461,310
shares of Unity Common Stock issuable upon the exercise of options and warrants
and the conversion of promissory notes that will be issued in exchange for
Worlds' options, warrants and convertible promissory notes on the basis of 0.357
shares of Unity Common Stock for each share of Worlds Common Stock.
This Joint Proxy Statement/Prospectus and the enclosed proxy card are first
being mailed to the respective shareholders of Unity and Worlds on or about
September , 1998.
Unity Common Stock is quoted on the OTC Bulletin Board under the symbol
UFAC. The closing bid price of Unity Common Stock on the OTC Bulletin Board on
September , 1998 was $ .
------------------------
THE SECURITIES TO BE ISSUED PURSUANT TO THIS JOINT PROXY STATEMENT/
PROSPECTUS HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS JOINT PROXY
STATEMENT/PROSPECTUS. ANY
REPRESENTATION TO THE
CONTRARY IS A CRIMINAL
OFFENSE.
------------------------
The date of this Joint Proxy Statement/Prospectus is September , 1998.
<PAGE>
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
JOINT PROXY STATEMENT/PROSPECTUS SUMMARY................................................................... i
The Companies............................................................................................ i
The Special Meetings..................................................................................... i
Record Dates for Voting.................................................................................. i
Voting................................................................................................... ii
What You Will Receive in the Merger...................................................................... ii
Board Recommendations.................................................................................... ii
Fairness Opinion......................................................................................... iii
Interests of Certain Persons in the Merger............................................................... iii
Forward-Looking Statements May Prove Inaccurate.......................................................... iii
Certain Possible Disadvantages of the Merger............................................................. iii
Directors and Management of Unity following the Merger................................................... iv
Conditions to the Merger................................................................................. iv
Termination of the Merger Agreement...................................................................... iv
Absence of Regulatory Approvals.......................................................................... iv
Appraisal Rights......................................................................................... iv
Tax Consequences of the Merger........................................................................... v
Accounting Treatment..................................................................................... v
Anticipated Completion Date of the Merger................................................................ v
Exchange of Stock Certificates........................................................................... v
SUMMARY HISTORICAL FINANCIAL INFORMATION................................................................... vi
SUMMARY PRO FORMA FINANCIAL INFORMATION.................................................................... ix
COMPARATIVE PER SHARE INFORMATION.......................................................................... x
WHERE YOU CAN FIND MORE INFORMATION........................................................................ xi
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS.................................................. xii
RISK FACTORS............................................................................................... xiii
Risks Relating to Worlds................................................................................. xiii
Risks Relating to Unity Subsequent to the Merger......................................................... xxii
DILUTION................................................................................................... xxvi
INTRODUCTION............................................................................................... 1
SOLICITATION OF PROXIES.................................................................................... 1
THE UNITY SPECIAL MEETING.................................................................................. 2
Purposes of Meeting...................................................................................... 2
Date, Time and Place; Record Date........................................................................ 2
Voting Rights............................................................................................ 2
THE WORLDS SPECIAL MEETING................................................................................. 3
Purposes of Meeting...................................................................................... 3
Date, Time and Place; Record Date........................................................................ 3
Voting Rights............................................................................................ 3
THE MERGER................................................................................................. 5
General.................................................................................................. 5
Exchange Ratio........................................................................................... 5
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Unity Exchange Options................................................................................... 5
Unity Merger Warrants.................................................................................... 5
Unity Convertible Notes.................................................................................. 6
Closing; Effective Time.................................................................................. 6
Exchange of Stock Certificates........................................................................... 6
No Fractional Shares..................................................................................... 6
Background of the Merger................................................................................. 7
Recommendations of the Boards of Directors and Reasons for the Merger.................................... 14
Opinion of Unity Financial Advisor....................................................................... 16
Interests of Certain Persons in the Merger............................................................... 19
Certain Tax Consequences of the Merger................................................................... 19
The Merger Agreement..................................................................................... 20
Absence of Regulatory Filings and Approvals.............................................................. 22
Restrictions on Sales by Affiliates...................................................................... 23
Accounting Treatment..................................................................................... 23
Expenses................................................................................................. 23
Conversion Rights........................................................................................ 23
Appraisal Rights......................................................................................... 24
Operations After the Merger.............................................................................. 28
PRICE RANGES OF SECURITIES................................................................................. 29
Unity.................................................................................................... 29
Worlds................................................................................................... 29
SELECTED HISTORICAL FINANCIAL DATA OF WORLDS............................................................... 30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF WORLDS............ 32
Background............................................................................................... 32
Plan of Operation........................................................................................ 32
Results of Operations of Worlds.......................................................................... 33
Liquidity and Capital Resources of Worlds................................................................ 35
Results of Operations of Predecessor..................................................................... 36
SELECTED HISTORICAL FINANCIAL DATA OF UNITY................................................................ 38
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF UNITY............. 39
WORLDS AND UNITY PRO FORMA FINANCIAL STATEMENTS (UNAUDITED)................................................ 40
Introduction to Pro Forma Financial Statements (Unaudited)............................................... 40
Pro Forma Balance Sheet--Assets As of June 30, 1998 (Worlds) and April 30, 1998 (Unity) (Unaudited)...... 41
Pro Forma Balance Sheet--Liabilities and Shareholders' Equity As of June 30, 1998 (Worlds) and April 30,
1998 (Unity) (Unaudited)............................................................................... 42
Pro Forma Statement of Operations For the Nine Month Period Ended June 30, 1998 (Worlds) and April 30,
1998 (Unity) (Unaudited)............................................................................... 43
Pro Forma Statement of Operations For the Years Ended September 30, 1997 (Worlds) and July 31, 1997
(Unity) (Unaudited).................................................................................... 44
Notes to Pro Forma Financial Statements (Unaudited)...................................................... 45
BUSINESS OF WORLDS......................................................................................... 47
Overview................................................................................................. 47
Predecessor's History.................................................................................... 47
The Market............................................................................................... 48
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Market Entry Strategy.................................................................................... 48
3D Internet Environments; Virtual Reality Modeling Language ("VRML")..................................... 49
Worlds' Technology....................................................................................... 50
Customers................................................................................................ 51
Competition.............................................................................................. 52
Employees................................................................................................ 53
Facilities............................................................................................... 53
Legal Proceedings........................................................................................ 53
MANAGEMENT OF WORLDS....................................................................................... 54
Directors, Executive Officers and Consultant............................................................. 54
Indemnification of Directors and Officers................................................................ 55
Compensation of Directors................................................................................ 55
Compensation of Executive Officers....................................................................... 55
1997 Stock Option Plan................................................................................... 55
Certain Transactions..................................................................................... 56
PRINCIPAL SHAREHOLDERS OF WORLDS........................................................................... 57
DESCRIPTION OF WORLDS' SECURITIES.......................................................................... 58
General.................................................................................................. 58
Shares Available for Future Sale......................................................................... 58
BUSINESS OF UNITY.......................................................................................... 60
MANAGEMENT OF UNITY........................................................................................ 60
Prior to the Merger...................................................................................... 60
After the Merger......................................................................................... 62
PRINCIPAL SHAREHOLDERS OF UNITY............................................................................ 63
DESCRIPTION OF UNITY'S SECURITIES.......................................................................... 65
General.................................................................................................. 65
Common Stock............................................................................................. 65
Preferred Stock.......................................................................................... 65
Dividends................................................................................................ 65
Transfer Agent........................................................................................... 66
IPO Warrants............................................................................................. 66
Underwriters' IPO Securities............................................................................. 67
Directors' Warrants...................................................................................... 67
Limitations Upon Transactions with "Interested Shareholders"............................................. 67
COMPARISON OF RIGHTS OF HOLDERS OF UNITY COMMON STOCK AND WORLDS COMMON STOCK.............................. 68
Comparison of DGCL and NJBCA............................................................................. 68
Comparison of Certificates of Incorporation and By-Laws of Unity and Worlds.............................. 72
LEGAL MATTERS.............................................................................................. 73
EXPERTS.................................................................................................... 73
</TABLE>
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<TABLE>
<CAPTION>
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<S> <C>
INDEX TO FINANCIAL STATEMENTS.............................................................................. F-1
</TABLE>
<TABLE>
<S> <C>
EXHIBIT A - Agreement And Plan of Merger and Reorganization, dated as of June 25, 1998,
Between Unity First Acquisition Corp. and Worlds Inc.
EXHIBIT B - Fairness Opinion of Gilford Securities Incorporated
EXHIBIT C - Section 262 of the General Corporation Law of the State of Delaware
EXHIBIT D - Section 14A:11 of the New Jersey Business Corporation Act
</TABLE>
<PAGE>
JOINT PROXY STATEMENT/PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS DOCUMENT AND MAY NOT
CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO YOU. TO UNDERSTAND THE
MERGER FULLY AND FOR A MORE COMPLETE DESCRIPTION OF THE LEGAL TERMS OF THE
MERGER, YOU SHOULD CAREFULLY READ THIS ENTIRE DOCUMENT AND THE DOCUMENTS WE HAVE
REFERRED YOU TO. SEE "WHERE YOU CAN FIND MORE INFORMATION"(PAGE XI). THE MERGER
AGREEMENT IS ATTACHED AS EXHIBIT A TO THIS JOINT PROXY STATEMENT/PROSPECTUS. WE
ENCOURAGE YOU TO READ THE MERGER AGREEMENT. IT IS THE LEGAL DOCUMENT THAT
GOVERNS THE MERGER.
THE COMPANIES (PAGES 47 AND 60)
UNITY FIRST ACQUISITION CORP.
245 Fifth Avenue
New York, New York 10016
(212) 696-4282
Unity was formed in May 1996 to serve as a vehicle to merge with an
operating business which Unity believes has significant growth potential.
In November 1996, Unity successfully completed a public offering of units,
each consisting of one share of common stock and two common stock purchase
warrants, substantially identical to each other but for their respective
exercise prices, at a price of $6.00 per unit, from which it received net cash
of $6,402,112. Approximately 90% of such funds (including interest) is presently
held in a trust account awaiting completion of the merger and will be released
to Unity once the merger is completed. The balance of such funds comprise
Unity's day to day working capital.
One of the conditions to the completion of Unity's public offering was
Unity's agreement with the underwriters of such offering that if Unity was
unable to enter into a letter of intent to effect a merger with a business
concern by May 12, 1998, Unity would be liquidated. Unity entered into such a
letter of intent with Worlds on May 6, 1998. A further condition to the
completion of this public offering was Unity's agreement that if it were able to
enter into a merger letter of intent by May 12, 1998, it would have to complete
such merger by November 12, 1998 or be liquidated. If the merger with Worlds
cannot be completed by this date and Unity is liquidated, Unity shareholders
will receive a cash distribution of approximately $5.09 per share.
WORLDS INC.
15 Union Wharf
Boston, Massachusetts 02109
(617) 725-8900
Worlds develops applications for its three-dimensional ("3D") Internet
technology for different markets. At present Worlds is targeting three different
markets for its 3D Internet technology. First, Worlds is in the process of
marketing its 3D Internet technology with record companies to produce
music-oriented websites; second, Worlds is in the process of marketing its
WORLDS CHAT technology to businesses for corporate Intranet applications; and
third, Worlds intends to market an updated version of WORLDS CHAT, a 3D chat
site on the Internet, to consumers on the Internet.
THE SPECIAL MEETINGS (PAGES 2 AND 3)
UNITY SHAREHOLDERS
There will be a special meeting of Unity shareholders at 800 Third Avenue,
30th Floor, New York, New York on October , 1998, at 10:00 A.M., local time.
At this meeting, Unity shareholders will be asked to approve the merger.
WORLDS SHAREHOLDERS
There will be a special meeting of Worlds shareholders at 15 Union Wharf,
Boston, Massachusetts on October , 1998, at 10:00 A.M., local time. At this
meeting, Worlds shareholders will be asked to approve the merger.
RECORD DATES FOR VOTING (PAGES 2 AND 3)
UNITY SHAREHOLDERS
The close of business on September , 1998 was the record date for
determining which holders of Unity common stock are entitled to vote at the
Unity special meeting. At the record date, there were 1,875,000 shares of Unity
common stock entitled to vote at the Unity special meeting.
i
<PAGE>
WORLDS SHAREHOLDERS
The close of business on September , 1998 was the record date for
determining which holders of Worlds common stock are entitled to vote at the
Worlds special meeting. At the record date, there were 17,868,531 shares of
Worlds common stock entitled to vote at the Worlds special meeting.
VOTING (PAGES 2 AND 3)
UNITY SHAREHOLDERS
You will have one vote for each share of Unity common stock that you owned
on the record date.
An affirmative vote of a majority of the outstanding shares of Unity common
stock is required to approve the merger.
Unity shareholders who acquired Unity common stock prior to Unity's initial
public offering in November 1996 have agreed to vote such common stock
(approximately 33.3% of the outstanding Unity common stock) in the same manner
as the majority of those Unity shareholders who acquired their Unity shares
either in such initial public offering or at any time thereafter.
If you do not approve the merger, Unity's Certificate of Incorporation
requires that Unity be liquidated. In such event, you will each receive a cash
distribution of approximately $5.09 per share.
WORLDS SHAREHOLDERS
You will have one vote for each share of Worlds common stock that you owned
on the record date.
An affirmative vote of 66 2/3% of all votes cast at the Worlds special
meeting is required to approve the merger.
WHAT YOU WILL RECEIVE IN THE MERGER (PAGE 5)
UNITY SHAREHOLDERS
Upon completion of the merger, each share of Unity common stock that you own
will remain outstanding and will represent one share of the combined company,
which will be called "Worlds Inc."
Unity's Certificate of Incorporation provides that should you object to the
merger, you may request Unity to convert your shares of Unity common stock into
cash. The amount of cash you would be entitled to receive, approximately $5.13
per share, will be payable to you only if you vote against the merger and the
merger is completed. The steps that you must take to receive such payment are
set out in full on page 24 of this Joint Proxy Statement/Prospectus.
WORLDS SHAREHOLDERS
Upon completion of the merger, each share of Worlds common stock that you
own will be cancelled. In exchange, you will receive for each such share 0.357
of a share of Unity common stock. You will not receive fractional shares of
Unity common stock. Instead, you will be paid cash equal to the market value on
the merger date of any fractional shares of Unity common stock you would have
otherwise received.
The total number of shares of Unity common stock to be issued in the merger
will be approximately 6,379,065, which would represent approximately 77.3% of
the outstanding shares of Unity common stock immediately after the completion of
the merger.
BOARD RECOMMENDATIONS (PAGES 14 AND 15)
UNITY
The Unity Board believes that Worlds is a better alternative than the four
other companies seriously evaluated by Unity as prospective merger candidates.
In making its selection of a merger partner, the Unity Board took note of the
fact that Worlds satisfied, or could be expected to satisfy prior to or upon
completion of the merger, all but two of Unity's acquisition criteria, discussed
elsewhere in this Joint Proxy Statement/Prospectus. The Unity Board also gave
considerable weight to the rapidly growing market for new and enhanced Internet
applications and products and to the prior contacts and relationships of Worlds'
largest shareholder in the pre-recorded music and entertainment industries.
In selecting Worlds as a merger partner for Unity on May 6, 1998, the Unity
Board was aware that absent such selection, it was a virtual certainty
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<PAGE>
that Unity would have been liquidated on May 12, 1998, there being no other
suitable merger partners then available to Unity. The Unity Board, however,
believed that the significant growth potential of Worlds, although by no means
assured, outweighed the liquidation alternative and the resulting cash
distribution of approximately $5.09 per share of Unity common stock.
The Unity Board has unanimously determined that the Merger is in the best
interests of Unity and its shareholders and has approved the merger agreement.
The Unity Board unanimously recommends that Unity shareholders vote "for" the
merger.
WORLDS
The Worlds Board believes that the merger will enable Worlds to access
approximately $6,000,000 of Unity's pre-merger cash assets (assuming minimal
conversions of Unity common stock into cash) without the costs and market
uncertainties that would be inherent in any attempt by Worlds to conduct a
public offering of like magnitude of its own securities.
The Worlds Board has unanimously determined that the merger is in the best
interests of Worlds and its shareholders and recommends that the Worlds
shareholders vote "for" the merger.
FAIRNESS OPINION (PAGE 16)
The Unity Board has obtained an opinion from Gilford Securities Incorporated
("Gilford"), an independent investment banking firm, as to the fairness of the
exchange ratio to the Unity shareholders from a financial point of view. A copy
of such opinion is attached as Exhibit B to this Joint Proxy
Statement/Prospectus. You are urged to read the entire Gilford opinion
carefully.
Unity has agreed to pay Gilford a fee of $75,000, of which $50,000 has
already been paid and $25,000 is payable upon approval of the merger by the
Unity shareholders.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
(PAGE 19)
UNITY SHAREHOLDERS
In considering the recommendation of the Unity Board to approve the merger,
you should be aware that Unity's officers and directors and their affiliates are
currently shareholders of Worlds, collectively owning approximately 2.0% of
Worlds' outstanding shares of common stock (including shares issuable upon
exercise of Worlds' warrants).
WORLDS SHAREHOLDERS
In considering the recommendation of the Worlds Board to approve the merger,
you should be aware that Worlds' officers and directors will become the
post-merger officers and directors of Unity.
FORWARD-LOOKING STATEMENTS MAY PROVE
INACCURATE (PAGE XII)
Unity and Worlds have made forward-looking statements in this Joint Proxy
Statement/Prospectus that are subject to certain risks and uncertainties.
Forward-looking statements include the information concerning possible or
assumed future results of operations of Unity and Worlds as well as statements
preceded by, followed by or that include the words "believes," "expects,"
"anticipates," "plans," "intends" or similar expressions. You should understand
that certain important factors, in addition to those discussed elsewhere in this
Joint Proxy Statement/ Prospectus, could affect Worlds' post-merger operating
results and could cause those results to differ materially from those expressed
in our forward-looking statements.
CERTAIN POSSIBLE DISADVANTAGES OF THE MERGER (PAGE XIII)
In determining whether to vote for the merger, you should understand that
there are numerous risks and uncertainties relating to the present and proposed
operations of Worlds which may directly impact its prospects following
completion of the merger, including:
- Worlds has never earned a profit; its operating losses are substantial and
may be
iii
<PAGE>
expected to continue for an extended period of time.
- Worlds has only a few customers generating nominal revenues.
- Worlds will have to enter into contracts with a significant number of
record companies, record labels and artists, as well as attract and retain
advertisers and subscribers, to establish a stable source of revenue.
- Worlds' 3D Internet products are still under development and are not as
yet available for sale; their market receptivity is untested.
- Significant future infusions of additional capital will be required.
- Worlds has numerous competitors, many of which have significantly greater
resources.
DIRECTORS AND MANAGEMENT OF UNITY FOLLOWING THE MERGER (PAGES 28 AND 54)
We have agreed that the post-merger Unity Board will initially have three
members being, respectively, Michael J. Scharf, Thomas Kidrin and Kenneth A.
Locker, all of whom are presently directors of Worlds.
Messrs. Scharf and Kidrin, who are presently Chairman and President,
respectively, of Worlds, will be Chairman and President, respectively, of Unity
after the merger is completed.
CONDITIONS TO THE MERGER (PAGE 21)
We will not complete the merger unless a number of conditions are satisfied
or waived. These include:
- approval of the merger by the shareholders of Worlds;
- approval of the merger by the shareholders of Unity;
- the absence of any injunction prohibiting the merger;
- the absence of any material adverse change with respect to Worlds; and
- the absence of any material adverse change with respect to Unity.
TERMINATION OF THE MERGER AGREEMENT (PAGE 22)
We can mutually agree to terminate the merger agreement at any time.
Either of us can terminate the merger agreement if:
- the merger is not completed by September 30, 1998; or
- a governmental authority, such as a court, permanently prohibits the
merger or refuses to grant an approval that is required.
Unity can terminate the merger agreement if:
- there is a material breach by Worlds of its representations or warranties
in the merger agreement or Worlds fails to comply with or satisfy any
material condition.
Worlds can terminate the merger agreement if:
- there is a material breach by Unity of its representations or warranties
in the merger agreement or Unity fails to comply with or satisfy any
material condition.
Unity is required to terminate the merger prior to the Unity special meeting
if:
- Unity shareholders, owning 20% or more of Unity's outstanding common stock
prior to the merger, request conversion of their shares into cash.
ABSENCE OF REGULATORY APPROVALS (PAGE 22)
No submissions to the Antitrust Division of the Department of Justice and
the Federal Trade Commission are required of either of us.
APPRAISAL RIGHTS (PAGES 24)
UNITY SHAREHOLDERS
You have the right to demand appraisal of your shares and to receive an
amount that the Delaware Court of Chancery decides is the "fair value" of your
Unity shares. This amount may be more or less than the cash conversion value of
your shares. This right is known as an "appraisal right".
If you wish to exercise your appraisal right, you must not vote in favor of
the merger and must
iv
<PAGE>
take certain steps, which are set out in full in Exhibit C to this Joint Proxy
Statement/Prospectus. If you exercise your appraisal right, you will be obliged
to bear your own expenses, including attorney's fees.
WORLDS SHAREHOLDERS
You have the right to demand appraisal of your shares and to receive,
instead of that number of shares of Unity common stock that you would otherwise
receive in the merger, an amount that the New Jersey Superior Court decides is
the "fair value" of your Worlds shares. This amount may be more or less than the
value of the Unity shares you would otherwise receive in the merger.
If you wish to exercise your appraisal right, you must not vote in favor of
the merger and must take certain steps, which are set out in full in Exhibit D
to this Joint Proxy Statement/Prospectus. If you exercise your appraisal right,
you will be obliged to bear your own expenses, including attorney's fees.
TAX CONSEQUENCES OF THE MERGER (PAGE 19)
We have structured the merger so that neither Unity nor Worlds nor our
shareholders will recognize any gain or loss for Federal income tax purposes in
the merger (except for tax payable because of cash received instead of
fractional shares by Worlds' shareholders). We have conditioned the merger on
our receipt of legal opinions that such is the case.
ACCOUNTING TREATMENT (PAGE 23)
We expect that the merger will be accounted for as a capital transaction
equivalent to the issuance of stock by Worlds for Unity's net monetary assets of
approximately $6,000,000, accompanied by a recapitalization of Worlds.
ANTICIPATED COMPLETION DATE OF THE MERGER
(PAGE 6)
We expect that the merger will be completed by October , 1998.
EXCHANGE OF STOCK CERTIFICATES (PAGE 6)
UNITY SHAREHOLDERS
After the merger is completed, you may but will not be required to exchange
your current Unity stock certificates for new Unity stock certificates.
WORLDS SHAREHOLDERS
After the merger is completed, we will send you written instructions for
exchanging your Worlds stock certificates for new Unity stock certificates.
v
<PAGE>
SUMMARY HISTORICAL FINANCIAL INFORMATION
The following tables show financial results actually achieved by each of
Worlds and Unity (the "historical" figures).
Worlds' year end historical figures are taken from financial statements
audited by BDO Seidman, LLP and Unity's historical figures for July 31, 1997 and
July 31, 1996 are taken from financial statements audited by Arthur Andersen
LLP.
Worlds' six months' figures for 1998 and Unity's nine months' figures for
1998 and 1997 are unaudited, but Worlds and Unity each believes that its own
figures reflect all normal recurring adjustments necessary for a fair
presentation of the financial position and results of operations for those
periods. You should not assume that results for portions of 1998 will be
repeated in later periods.
WORLDS
Worlds is the result of the contemporaneous mergers on December 3, 1997
("Worlds Consolidations") of Worlds Inc., a Delaware corporation formed on April
26, 1994 ("Predecessor"), with and into Worlds Acquisition Corp., a Delaware
corporation formed on April 8, 1997 ("WAC"), and of WAC with and into Academic
Computer Systems, Inc., a New Jersey corporation formed on May 20, 1968
("Academic"), which changed its name to Worlds Inc. after the Worlds
Consolidations. Thus, Worlds is really Academic Computer Systems, Inc. with a
new name carrying on the business previously conducted by Predecessor in
conjunction with the new business focus provided by WAC. In a transaction
related to the Worlds Consolidations, an aggregate of $4,415,000 in gross
proceeds was raised in a private offering. The consolidation was accounted for
as the acquisition of Predecessor by WAC and a simultaneous consolidation into
Worlds with WAC deemed the "Accounting Acquiror" in both transactions.
vi
<PAGE>
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
WORLDS INC.
(FORMERLY WORLDS
ACQUISITION CORP.)
(A DEVELOPMENT STAGE
WORLDS INC.--PREDECESSOR (A DEVELOPMENT STAGE ENTERPRISE)
--------------------------------------------------------------------
ENTERPRISE) CUMULATIVE
--------------------------- FOR THE FROM APRIL
APRIL 8, PERIOD APRIL 26, 26,
1997 FROM JANUARY 1994 1994
FOR THE (INCEPTION) 1, FOR THE YEAR ENDED (INCEPTION) (INCEPTION)
SIX MONTHS THROUGH THROUGH DECEMBER 31, THROUGH THROUGH
ENDED JUNE DECEMBER 31, DECEMBER 3, ----------------------- DECEMBER 31, DECEMBER 3,
30, 1998 1997 1997 1996 1995 1994 1997
------------- ------------ ------------- ----------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Revenues....... $ 16,132 $ 1,420 $ 80,720 $ 3,784,019 $1,882,232 $ 279,720 $ 6,026,691
Total Costs &
Expenses......... 1,867,054 6,810,568(a) 2,885,088 13,871,984 9,561,265 1,461,300 27,779,637
Operating Loss..... (1,850,922) (6,809,148) (2,804,368) (10,087,965) (7,679,033) (1,181,580) (21,752,946)
Other Income and
(Expenses)....... 4,880 (3,099) 134,863 16,011 96,201 447 247,522
Net Loss Before
Taxes and
Extraordinary
Item............. (1,846,042) (6,812,247) (2,669,505) (10,071,954) (7,582,832) (1,181,133) (21,505,424)
Income Taxes....... -- -- (5,000) (115,000) -- -- (120,000)
Net Loss Before
Extraordinary
Item............. (1,846,042) (6,812,247) (2,674,505) (10,186,954) (7,582,832) (1,181,133) (21,625,424)
Extraordinary Item-
Gain On Debt
Settlement....... 151,654 125,776 389,285 -- -- -- 389,285
Net Loss........... $(1,694,388) $(6,686,471) $(2,285,220) $(10,186,954) $(7,582,832) $(1,181,133) $(21,236,139)
Loss per share--
before
extraordinary
item (basic and
diluted)......... $ (0.11) $ (0.73) $ (0.48) $ (1.84) $ (1.44) $ (0.39)
Loss per share
(basic and
diluted)......... $ (0.10) $ (0.72) $ (0.41) $ (1.84) $ (1.44) $ (0.39)
</TABLE>
- ------------------------
(a) Includes $6,135,538 of acquired research and development costs resulting
from the merger with Predecessor.
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
JUNE 30, 1998 DECEMBER 31, 1997
------------- -----------------
<S> <C> <C>
Working Capital................................................................. $ 1,765,197 $ 1,750,112
Total Assets.................................................................... $ 3,569,674 $ 3,825,994
Total Liabilities............................................................... $ 3,595,274 $ 3,834,763
Stockholders' Deficit........................................................... $ (25,600) $ (8,769)
</TABLE>
vii
<PAGE>
UNITY
STATEMENTS OF OPERATIONS DATA:
<TABLE>
<CAPTION>
PERIOD FROM
PERIOD FROM MAY 30, 1996
NINE MONTHS ENDED MAY 30, 1996 (INCEPTION)
APRIL 30, YEAR ENDED (INCEPTION) TO
---------------------- JULY 31, TO APRIL 30,
1998 1997(1) 1997(1) JULY 31, 1996 1998
---------- ---------- --------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues............................... -- -- -- -- --
Net income (loss)...................... $ (35,290) $ 9,033 $ 6,637 $ (15,000) $ (43,653)
Income (loss) per common share (basic
and diluted)......................... $ (0.02) $ 0.01 $ 0.01 $ (0.02)
Weighted average common shares......... 1,875,000 1,375,000 1,515,000 625,000
</TABLE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
APRIL 30, JULY 31, JULY 31,
1998 1997 1996
------------- ------------ ------------
<S> <C> <C> <C>
Total assets.......................................................... $ 6,455,188 $6,465,021 $ 250,563
Total liabilities..................................................... $ 96,666 $ 71,209 $ 265,500
Working capital....................................................... $ 6,358,522 $6,393,812 $ (14,937)
Shareholders' equity(2)............................................... $ 5,075,914 $5,154,432 $ (14,937)
</TABLE>
- ------------------------
(1) Unity was inactive during the period May 30, 1996 (inception) through
November 19, 1996.
(2) Does not include shares subject to possible conversion at conversion value
at April 30, 1998 and July 31, 1997.
viii
<PAGE>
SUMMARY PRO FORMA FINANCIAL INFORMATION
The following tables show results as if the companies had been combined for
the periods shown (the "pro forma combined" figures) under the following
circumstances: (1) that no Public Unity Shareholders exercised their right to
have their shares converted upon consummation of the merger and (2) that 19.99%
of interest in Unity Common Stock held by Public Unity Shareholders elected to
have their shares converted upon consummation of the merger at the conversion
value of $5.13 per share, based on the amount held in the Unity trust account,
inclusive of interest income to date thereon, at April 30, 1998. You should not
assume that Worlds and Unity would have achieved the combined pro forma results
if they had actually been combined during the periods shown.
PRO FORMA STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
(ASSUMING NO CONVERSION) (ASSUMING 19.99% CONVERSION)
--------------------------------- ---------------------------------
NINE MONTHS NINE MONTHS
ENDED ENDED
YEARS ENDED JUNE 30, 1998 YEARS ENDED JUNE 30, 1998
SEPTEMBER 30, 1997 (WORLDS) AND SEPTEMBER 30, 1997 (WORLDS)
(WORLDS) AND APRIL 30, (WORLDS) AND APRIL 30,
JULY 31, 1997 1998 JULY 31, 1997 1998
(UNITY) (UNITY) (UNITY) (UNITY)
------------------ ------------- ------------------ -------------
<S> <C> <C> <C> <C>
Total revenues.............................. $ 1,162,853 $ 29,174 $ 1,162,853 $ 29,174
Operating expenses.......................... $ 6,295,868 $ 9,072,087 $ 6,295,868 $ 9,072,087
Operating loss.............................. $ (5,133,015) $ (9,042,913) $ (5,133,015) $ (9,042,913)
Net loss before extraordinary item.......... $ (5,022,285) $ (8,887,177) $ (5,062,046) $ (8,930,786)
Net loss.................................... $ (4,648,952) $ (8,593,795) $ (4,688,713) $ (8,637,404)
Net loss per weighted average common share
before extraordinary item (basic and
diluted).................................. $ (0.64) $ (1.08) $ (0.66) $ (1.12)
Net loss per weighted average common share
(basic and diluted)....................... $ (0.59) $ (1.04) $ (0.61) $ (1.08)
Weighted average common shares
outstanding(1)............................ 7,894,065 8,254,065 7,644,190 8,004,190
</TABLE>
PRO FORMA BALANCE SHEET DATA:
<TABLE>
<CAPTION>
(ASSUMING NO (ASSUMING 19.99%
CONVERSION) CONVERSION)
------------------ -----------------------
<S> <C> <C>
AS OF JUNE 30,
1998 AS OF JUNE 30, 1998
(WORLDS) AND (WORLDS) AND
APRIL 30, 1998 APRIL 30, 1998
(UNITY) (UNITY)
------------------ -----------------------
Working capital...................................................... $ 7,327,119 $ 6,044,511
Current Assets....................................................... $ 9,108,993 $ 7,826,385
Total Assets......................................................... $ 9,224,862 $ 7,942,254
Current Liabilities.................................................. $ 1,781,874 $ 1,781,874
Total Liabilities.................................................... $ 3,688,540 $ 3,688,540
Shareholders' equity................................................. $ 5,536,322 $ 4,253,714
</TABLE>
- ------------------------
(1) Gives effect to the issuance of approximately 6,379,065 shares of Unity
Common Stock to the Worlds Shareholders in connection with the merger.
ix
<PAGE>
COMPARATIVE PER SHARE INFORMATION
The following table sets forth unaudited data concerning the net loss,
dividends and book value per share for Worlds and Unity on a pro forma basis
after giving effect to the merger.
<TABLE>
<CAPTION>
(ASSUMING NO CONVERSION) (ASSUMING 19.99% CONVERSION)
---------------------------------- ----------------------------------
<S> <C> <C> <C> <C>
NINE MONTHS NINE MONTHS
ENDED ENDED
YEARS ENDED JUNE 30, 1998 YEARS ENDED JUNE 30, 1998
SEPTEMBER 30, 1997 (WORLDS) AND SEPTEMBER 30, 1997 (WORLDS) AND
(WORLDS) AND APRIL 30, (WORLDS) AND APRIL 30,
JULY 31, 1997 1998 JULY 31, 1997 1998
(UNITY) (UNITY) (UNITY) (UNITY)
------------------- ------------- ------------------- -------------
Net loss per share--before extraordinary item
(basic and diluted).......................... $ (0.64) $ (1.08) $ (0.66) $ (1.12)
Net loss per share (basic and diluted)......... $ (0.59) $ (1.04) $ (0.61) $ (1.00)
Dividends declared per share................... -- -- -- --
Book value per share at end of period (1)...... $ 0.67 $ 0.53
</TABLE>
- ------------------------
(1) The information is not presented for the years ended September 30, 1997
(Worlds) and July 31, 1997 (Unity) as pro forma balance sheets were not
prepared as of these dates.
The following tables set forth data concerning the historical net income
(loss), dividends and book value per share for Worlds and Unity:
WORLDS:
HISTORICAL PER SHARE DATA:
<TABLE>
<CAPTION>
WORLDS (FORMERLY WORLDS
ACQUISITION CORP.)
(A DEVELOPMENT STAGE WORLDS--PREDECESSOR (A
ENTERPRISE) DEVELOPMENT STAGE ENTERPRISE)
------------------------ --------------------------------------------
FOR THE
FOR THE APRIL 8, PERIOD
SIX 1997 FROM FOR THE YEAR APRIL 26, 1994
MONTHS (INCEPTION) JANUARY 1, ENDED (INCEPTION)
ENDED THROUGH THROUGH DECEMBER 31, THROUGH
JUNE 30, DECEMBER 31, DECEMBER 3, -------------- DECEMBER 31,
1998 1997 1997(1) 1996(1) 1995(1) 1994(1)
--------- ------------ ----------- ------ ------ --------------
<S> <C> <C> <C> <C> <C> <C>
Net loss per share-- before extraordinary
item (basic and diluted)........................... $(0.11) $(0.73) $(0.48) $(1.84) $(1.44) $(0.39)
Net loss per share (basic and diluted)............... $(0.10) $(0.72) $(0.41) $(1.84) $(1.44) $(0.39)
Dividends declared per share......................... -- -- -- -- -- --
Book value per share at end of period (2)............ $(0.00) $0.00 $(3.76) $(3.35) $(1.53) $(0.16)
</TABLE>
- ------------------------
(1) Per share information is based upon the respective shares outstanding at the
end of the period, which have been obtained from historical data previously
presented.
(2) Book value per share for Worlds-Predecessor considers the liquidation value
of preferred stock for Worlds-Predecessor.
x
<PAGE>
EQUIVALENT PER SHARE DATA: (1)
<TABLE>
<CAPTION>
WORLDS (FORMERLY WORLDS
ACQUISITION CORP.)
(A DEVELOPMENT STAGE WORLDS--PREDECESSOR (A
ENTERPRISE) DEVELOPMENT STAGE ENTERPRISE)
-------------------------- ----------------------------------------------
FOR THE APRIL 26,
FOR THE PERIOD 1994
SIX APRIL 8, 1997 FROM (INCEPTION)
MONTHS (INCEPTION) JANUARY 1, FOR THE YEAR ENDED THROUGH
ENDED THROUGH THROUGH DECEMBER 31, DECEMBER
JUNE 30, DECEMBER 31, DECEMBER 3, -------------------- 31,
1998 1997 1997 1996 1995 1994
----------- ------------- ----------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net loss per share--before
extraordinary item (basic
and diluted)............. $ (0.31) $ (2.04) $ (1.35) $ (5.15) $ (4.03) $ (1.10)
Net loss per share (basic
and diluted)............. $ (0.29) $ (2.01) $ (1.16) $ (5.15) $ (4.03) $ (1.10)
Dividends declared per
share.................... -- -- -- -- -- --
Book value per share at end
of period (2)............ $ (0.00) $ (0.00) $ (10.52) $ (9.37) $ (4.29) $ (0.45)
</TABLE>
- ------------------------
(1) Per share information is based upon the application of the Exchange Ratio to
the number of shares actually outstanding for each period.
(2) Book value per share for Worlds--Predecessor considers the liquidation value
of preferred stock.
UNITY:
HISTORICAL PER SHARE DATA:
<TABLE>
<CAPTION>
PERIOD FROM
NINE MONTHS ENDED MAY 30, 1996
(INCEPTION)
APRIL 30, TO
---------------------- YEAR ENDED JULY 31,
1998 1997(1) JULY 31, 1997(1) 1996(1)
--------- ----------- ----------------- -------------
<S> <C> <C> <C> <C>
Net income (loss) per share........................................... $ (0.02) $ 0.01 $ 0.01 $ (0.02)
Dividends declared per share.......................................... -- -- -- --
Book value per share at end of period................................. $ 3.39 $ 3.41 $ 3.41 $ (0.02)
</TABLE>
- ------------------------
(1) Unity was inactive during the period May 30, 1996 (inception) through
November 19, 1996.
WHERE YOU CAN FIND MORE INFORMATION
We each file annual, quarterly and current reports, proxy statements and
other information with the Securities and Exchange Commission ("SEC"). You may
read and copy any reports, statements or other information on file at the SEC's
public reference rooms in Washington, D.C., New York, New York and Chicago,
Illinois. Please call the SEC at (800) SEC-0330 for further information on the
public reference rooms. Our public filings are also available to the public from
commercial document retrieval services and at the Internet World Wide Web site
maintained by the SEC at "http//www.sec.gov." Reports, proxy statements and
other information concerning Unity also may be inspected at the offices of The
Nasdaq Stock Market, 9801 Washingtonian Boulevard, Rockville, Maryland 20878.
Unity has filed a Registration Statement to register with the SEC the shares
of Unity common stock to be issued to Worlds' shareholders in the merger. This
Joint Proxy Statement/Prospectus is a part of that Registration Statement and
constitutes a prospectus of Unity as well as a proxy statement of Unity and
Worlds for the meetings.
As allowed by SEC rules, this Joint Proxy Statement/Prospectus does not
contain all the information that you can find in the Registration Statement or
the exhibits to the Registration Statement.
Worlds has supplied all information contained in the Joint Proxy
Statement/Prospectus relating to Worlds, and Unity has supplied all such
information relating to Unity.
You should rely only on the information contained in this Joint Proxy
Statement/Prospectus to vote your shares at your meeting. We have not authorized
anyone to provide you with information that is different from what is contained
in this Joint Proxy Statement/Prospectus. This Joint Proxy Statement/ Prospectus
is dated September , 1998. You should not assume that the information
contained in this Joint Proxy Statement/Prospectus is accurate as of any date
other than such date, and neither our mailing of this Joint Proxy
Statement/Prospectus to you nor the issuance of Unity common stock in the merger
shall create any implication to the contrary.
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The following statements are or may constitute forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995 (the
"PSLRA"):
(1) Certain statements, including possible or assumed future results of
operations of Unity First Acquisition Corp. ("Unity"), Worlds Inc.
("Worlds") and the combined company, which will be called "Worlds Inc."
("Surviving Company"), contained in "Risk Factors," "The Merger,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of Worlds," "Management's Discussion and Analysis of Financial
Condition and Results of Operations of Unity," "Business of Worlds" and
"Business of Unity," including any forecasts, projections and descriptions
of post-merger synergies referred to therein and any statements contained
herein regarding the development of possible or assumed future results of
operations of Surviving Company's business, Surviving Company's competitive
position or the scope and enforceability of Surviving Company's intellectual
property rights;
(2) Any statements preceded by, followed by or that include the words
"believes," "expects," "anticipates," "plans," "intends," or similar
expressions; and
(3) Other statements contained or incorporated by reference herein
regarding matters that are not historical facts.
Because such statements are subject to risks and uncertainties, actual
results may differ materially from those expressed or implied by such
forward-looking statements; factors that could cause actual results to differ
materially include, but are not limited to, those discussed under "Risk
Factors." Unity and Worlds shareholders are cautioned not to place undue
reliance on such statements, which speak only as of the date thereof.
The independent public accountants for Unity and Worlds have not examined or
compiled the accompanying forward-looking statements or any forecasts or other
projections referred to herein and, accordingly, do not provide any assurance
with respect to such statements.
The cautionary statements contained or referred to in this section should be
considered in connection with any subsequent written or oral forward-looking
statements that may be issued by Unity or Worlds or persons acting on its or
their behalf. Neither Unity nor Worlds undertakes any obligation to release
publicly any revisions to any forward-looking statements to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
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RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS JOINT PROXY
STATEMENT/PROSPECTUS, SHAREHOLDERS OF EACH OF UNITY AND WORLDS SHOULD CAREFULLY
REVIEW THE FOLLOWING FACTORS IN DECIDING WHETHER TO VOTE IN FAVOR OF APPROVAL OF
THE MERGER AND THE TRANSACTIONS CONTEMPLATED THEREBY, AND WHETHER TO EXECUTE AND
RETURN A PROXY CARD.
RISKS RELATING TO WORLDS
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DEVELOPMENT STAGE COMPANY WITH ONLY LIMITED OPERATIONS
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Worlds is still a development stage company. Worlds has
limited experience in developing and commercializing new
products based on innovative technologies, and there is
limited information available concerning the potential
performance of its software or market acceptance of its
proposed products. Worlds will be subject to all of the
risks, uncertainties, expenses, delays, problems and
INHERENT RISKS OF A difficulties typically encountered in the establishment
DEVELOPMENT STAGE COMPANY of a new business and the development and
commercialization of new products. There can be no
assurance that unanticipated expenses, problems or
technical difficulties will not occur which would result
in material delays in product commercialization or that
Worlds' efforts will result in successful product
commercialization.
SIGNIFICANT AND CONTINUING LOSSES; GOING CONCERN ACCOUNTING OPINION
Following the Worlds Consolidations, the business of
Worlds was substantially premised upon the
pre-consolidation business of Predecessor. Since its
inception, Predecessor has generated limited revenues.
Predecessor incurred losses of $1,181,133, $7,582,832
and $10,186,954 for the fiscal years ended December 31,
1994, 1995 and 1996, respectively, and $2,285,220 for
WORLDS' OPERATIONS HAVE NEVER the period January 1, 1997 through December 3, 1997.
BEEN BEEN PROFITABLE Predecessor had an accumulated deficit since inception
in April 1994 through December 3, 1997 of $21,236,139.
Worlds incurred losses of $6,686,471 (which included
$6,135,538 of acquired research and development) for the
period April 8, 1997 (inception of WAC) through December
31, 1997, and $1,694,388 for the six months ended June
30, 1998.
Worlds anticipates that it will continue to incur
significant losses until, at the earliest, Worlds
generates sufficient revenues to offset the substantial
expenditures and operating costs associated with
SIGNIFICANT LOSSES ARE developing and commercializing its proposed products
EXPECTED TO CONTINUE estimated to be approximately $250,000-$300,000 per
month, including approximately $75,000-$100,000 in
continuing research and development costs. There can be
no assurance that Worlds can be operated profitably in
the future.
Worlds' independent auditors have included an
INDEPENDENT AUDITORS HAVE explanatory paragraph in their report dated March 25,
EXPRESSED CONCERN AS TO 1998 stating that recurring losses during the
WORLD'S ABILITY TO CONTINUE IN development stage raise substantial doubt about its
BUSINESS ability to continue as a going concern.
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FEW CUSTOMERS; LIMITED REVENUES
While Worlds has entered into two agreements to
integrate its three-dimensional ("3D") Internet
technology onto enhanced musical CDs, neither product
has as yet been released or has generated any revenues.
Worlds does not believe that such products will generate
significant revenues in the immediate future. Although
Worlds anticipates releasing an updated version of its
WORLDS CHAT 3D Internet chat service during the fourth
WORLDS' TWO AGREEMENTS WILL quarter of 1998, such product will be sold, as well as
NOT GENERATE ANY SIGNIFICANT offered, for a nominal monthly fee; it is not currently
REVENUES FOR THE IMMEDIATE anticipated to generate significant revenues. While the
FUTURE original WORLDS CHAT product is currently licensed for
use in Asia, no significant license revenues have been
generated to date and none are anticipated. Worlds has
also developed a prototype corporate Intranet
application, which is derived from its WORLDS CHAT 3D
product, for a single customer. However, resultant
revenues have been minimal and Worlds currently has no
other customers for this application.
Worlds will not generate any meaningful revenues, if
ever, until after it successfully completes development
and market testing of its 3D Internet music web site(s),
obtains contracts with a significant number of record
companies, record labels and artists and attracts and
FUTURE REVENUES ARE DEPENDENT retains a significant number of advertisers and
ON SECURING RECORDING INDUSTRY subscribers. There can be no assurance that Worlds will
CONTRACTS, ADVERTISERS AND be able to obtain contracts with a significant number of
SUBSCRIBERS record companies, record labels and artists, and attract
and retain a sufficient number of advertisers and
subscribers to generate meaningful revenues or achieve
profitable operations or that its 3D Internet music
site(s) will prove to be commercially viable.
NEED FOR SUBSTANTIAL ADDITIONAL FINANCING
Worlds' capital requirement relating to the further
development and commercialization of WORLDS PLATINUM,
Worlds' related Internet software technology and its
other activities have been and will continue to be
significant and is currently estimated at approximately
$3.0 to $5.0 million. Worlds is dependent on the
proceeds of the merger and future financings in order to
continue in business and develop and commercialize its
proposed products. Worlds anticipates, based on
currently proposed business plans and assumptions
relating to its operations (including the timetable of,
and costs associated with, product development and
ADDITIONAL MONEY WILL BE commercialization), that it currently has only a portion
NEEDED of the funds necessary to permit Worlds to complete
product development and commercialization. There can be
no assurance that Worlds will be able to obtain the
substantial additional capital resources necessary to
permit Worlds to pursue its business plan or that any
assumptions relating to its business plan will prove to
be accurate. Worlds has no current arrangements with
respect to, or sources of, additional financing and
there can be no assurance that any such financing will
be available to Worlds on commercially reasonable terms,
or at all. Any inability to obtain additional financing
will
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have a material adverse effect on Worlds including
possibly requiring Worlds to significantly curtail
operations.
DEPARTURE OF PREDECESSOR MANAGEMENT; PREVIOUS CESSATION OF OPERATIONS
In March 1997, in light of its poor and rapidly
deteriorating financial condition resulting from its
inability to raise additional capital, Predecessor's
Board of Directors decided to retain an outside crisis
management organization to assess possibilities for
reorganization, liquidation or other disposition. At
such time Predecessor's senior management, including its
president, senior vice president for business
development, and general legal counsel, resigned. As a
result of their departure, much of the institutional
FORMER MANAGEMENT AND Predecessor's operations, financial affairs, technical
EMPLOYEES HAVE DEPARTED; projects, and other related items and matter prior to
DISRUPTION OF RELATIONSHIPS the consolidation was lost. The lack of institutional
WITH FORMER CUSTOMERS AND knowledge could have a materially adverse effect on
SUPPLIERS Worlds' business. In addition, contemporaneous with the
departure of Predecessor's management, substantially all
of Predecessor's personnel were discharged and until
recently, Worlds has not had the financial resources to
hire new personnel. Consequently, Predecessor's
relations with customers, vendors and shareholders have
been disrupted and Worlds may be required to expend its
limited funds and management resources in dealing with
Predecessor's former customers, vendors and
shareholders.
UNCERTAINTY OF PRODUCT DEVELOPMENT
Although considerable time and financial resources were
expended in the development of WORLDS PLATINUM, its
application for music oriented web sites has yet to be
completed. There can be absolutely no assurance that
problems will not develop or that this product will ever
be completed, which would have a material adverse effect
on Worlds. Worlds has only recently undertaken
third-party testing of the basic platform and the
development or testing of any system enhancements.
Worlds will be required to commit considerable time,
effort and resources to finalize such development and
adapt its software to satisfy specific requirements of
potential customers. Continued system refinement,
enhancement and development efforts are subject to all
of the risks inherent in the development of new products
and technologies, including unanticipated delays,
WORLDS CURRENTLY HAS NO expenses, technical problems or difficulties to
MARKET-READY PRODUCTS satisfactorily complete development, which could result
in abandonment or substantial change in product
commercialization. There can be no assurance that
product development efforts will be successfully
completed on a timely basis, or at all, that Worlds will
be able to successfully adapt its software to satisfy
specific requirements of potential customers, or that
unanticipated events will not occur which would result
in increased costs or material delays in product
development or commercialization. Worlds has conducted
only limited tests of such software. Consequently, there
can be no assurance that such software will perform all
of the functions for which it has been designed or prove
to be sufficiently reliable in widespread commercial
use. In addition, technologies as complex as those
planned to be incorporated
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into Worlds' product may contain errors which only
become apparent subsequent to commercial use. Remedying
such errors could delay Worlds' plans and cause it to
incur substantial additional costs.
NEED TO INTEGRATE OTHER TECHNOLOGIES THAT MAY NOT BE AVAILABLE
Worlds' 3D Internet related music sites require the
integration of other technologies into its WORLDS
PLATINUM technology platform. In this regard, there can
be absolutely no assurance that any and/or all of these
other technologies that are needed to supplement Worlds'
core technology will be available; and even if
RELIANCE ON OTHER TECHNOLOGIES available, there can be absolutely no assurance these
other technologies can be acquired on favorable economic
terms. Furthermore, there can be absolutely no assurance
that these other technologies can successfully be
integrated with and/or into Worlds' WORLDS PLATINUM
technology.
NEW CONCEPT; UNCERTAINTY OF MARKET ACCEPTANCE AND COMMERCIALIZATION STRATEGY
Worlds' planned 3D music site(s) represent a new
business concept. As is typical in the case of a new
business concept, demand and market acceptance for a
newly introduced product is subject to a high level of
uncertainty. Achieving market acceptance for this new
concept will require significant efforts and
expenditures by Worlds to create awareness and demand by
record companies, record labels, recording artists,
music buyers, and Internet consumers. Worlds' prospects
will be significantly affected by its ability to
successfully develop and maintain relationships with
recording artists and record companies, which will
promote their services using Worlds' 3D music site(s)
and, at the same time, attract significant numbers of
advertisers and subscribers. Any lack or lessening of
demand by record buyers or Internet consumers would have
an adverse effect on market acceptance for Worlds'
product. Worlds has not yet commenced significant
marketing activities and has limited experience and
WORLDS' PRODUCTS MAY NOT BE limited financial, technical, personnel and other
ACCEPTABLE TO CUSTOMERS resources to independently undertake extensive marketing
activities. Worlds' marketing strategy and preliminary
and future marketing plans may be unsuccessful and are
subject to change as a result of a number of factors,
including progress or delays in Worlds' marketing
efforts, changes in market conditions (including the
emergence of potentially significant related market
segments for applications of Worlds' technology), and
the nature of possible license and distribution
arrangements which may or may not become available to it
in the future and economic, regulatory and competitive
factors. To the extent that Worlds is able to enter into
satisfactory marketing and distribution arrangements in
the future, it will be largely dependent on the efforts
of the recording artists and record labels and on the
marketability and sales of their products. There can be
no assurance that Worlds' strategy will result in
successful product commercialization or that Worlds'
efforts will result in initial or continued market
acceptance for Worlds' proposed products.
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COMPETITIVE MARKETPLACE WITH SHORT TECHNOLOGICAL LIFE CYCLES
The markets that Worlds intends to enter are
characterized by intense competition and an increasing
number of new market entrants who have developed or are
developing potentially competitive products. Worlds will
face competition from numerous sources, including
prospective record labels which may develop and market
their own competitive products and services, on-line and
Internet service providers, and others with the
technical capabilities and expertise which would
MANY COMPETITORS WILL BE encourage them to develop and commercialize competitive
LARGE, WELL FINANCED COMPANIES products or services. There are over 50 companies
collaborating to establish standardization of the
Virtual Reality Modeling Language ("VRML") for 3D usage
on the Internet. Certain of such competitors have
substantially greater financial, technical, marketing,
distribution, personnel and other resources than Worlds,
permitting such companies to implement extensive
marketing campaigns, both generally and in response to
efforts by additional competitors to enter into new
markets and market new products and services.
In addition, the markets for Worlds' proposed products
are characterized by rapidly changing technology and
evolving industry standards which could result in
product obsolescence or short product life cycles.
Accordingly, the ability of Worlds to compete will be
dependent upon Worlds' ability to complete development
PRODUCTS MAY BE and introduce WORLDS PLATINUM into the marketplace in a
TECHNOLOGICALLY OBSOLESCENT timely manner, to continually enhance and improve its
PRIOR TO MARKET INTRODUCTION software and to successfully develop and market new
products. There can be no assurance that Worlds will be
able to compete successfully, that competitors will not
develop technologies or products that render Worlds'
products obsolete or less marketable or that Worlds will
be able to successfully enhance its products or develop
new products.
CAPACITY CONSTRAINTS COULD CAUSE SYSTEM FAILURE
Worlds' operations will depend upon the capacity and
reliability of its system infrastructure. Worlds
currently has limited system capacity consisting of only
seven servers, of which three are currently being used
for internal development purposes, leaving four which
Worlds believes can accommodate only 300-500 users
simultaneously. Accordingly, Worlds will be required to
continually expand its system infrastructure to
SYSTEM LIMITATIONS accommodate significant numbers of users and music sites
they may wish to access. Development and/or expansion of
Worlds' system infrastructure will require substantial
financial, operational and managerial resources,
including the need for additional servers, which could
cost, if purchased, in the range of $200,000-$400,000.
Worlds intends to continue improving its servers'
performance and will determine whether to purchase or
lease computer equipment to develop and/or expand system
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capacity. There can be no assurance that Worlds will be
able to expand its system infrastructure to meet
potential demand on a timely basis, at a commercially
reasonable cost, or at all. Failure by Worlds to develop
and/or expand its system infrastructure on a timely
basis would have a material adverse effect on Worlds.
SECURITY RISKS OF BEING ON-LINE
Worlds will be highly dependent upon on-line service
providers for access to Worlds' services. Worlds' system
infrastructure will also be vulnerable to computer
viruses, break-ins and similar disruptions from
LACK OF SECURITY unauthorized tampering with Worlds' computer systems.
Computer viruses or problems caused by third parties
could lead to material interruptions, delays or
cessation in service to its customers.
DIFFICULTIES WITH ENTERING THE MUSIC INDUSTRY
The following are certain specific risks related to
doing business in the music industry:
FLUCTUATION IN OPERATING RESULTS--Each recording is an
individual artistic work, and its commercial success is
primarily determined by consumer taste, which is
unpredictable and constantly changing. Accordingly,
there can be no assurance as to the financial success of
CONSUMER TASTES VARY AND any particular release, the timing of such success or
CONSTANTLY CHANGE the popularity of any particular artist. Thus, there can
be no assurance that any of the prerecorded music
products in which Worlds inserts its technology will
produce revenue for Worlds or, if they do, that such
revenue will be sufficient to recoup any costs incurred
by Worlds.
LENGTHY SALES CYCLES--A record label's decision to
purchase new products and technology is often lengthy
and requires the approval of a significant number of
parties which Worlds believes can take 2-6 months. The
LONG LEAD TIMES FOR PRODUCT period in which a record company distributes Worlds'
ACCEPTANCE software to its customers may also be lengthy, depending
upon the level of acceptance and usage by its recording
artists and the timing and release schedule of the
artist's next album which could delay Worlds' plans in
particular markets.
UNCERTAIN FUTURE OF INTERNET--BASED BUSINESSES
Worlds plans to market its products on the Internet.
Following are certain specific risks related to
conducting business on the Internet:
UNCERTAIN MARKET ACCEPTANCE--Use of the Internet by
consumers is in a relatively early stage, and market
acceptance of the Internet as a medium for commerce and
advertising is subject to uncertainty. The rapid growth
of global commerce and the exchange of information on
the Internet and other on-line networks is relatively
new and still evolving, making it difficult to
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predict whether the Internet will prove to be a viable
commercial marketplace. Consumer concern over Internet
security has been, and could continue to be, a barrier
to commercial activities requiring consumers to send
WIDESPREAD INTERNET USE MAY their credit card information over the Internet. Worlds
NOT BE ACCEPTED BY CONSUMERS believes that its future success will depend on its
ability to significantly increase revenues which, in
turn, may be materially dependent upon the development
and widespread acceptance of the Internet and on-line
services as a medium for commerce and advertising.
NEED TO DEVELOP LARGER INFRASTRUCTURE--The Internet may
not prove to be a viable commercial marketplace because
of inadequate development of the necessary
infrastructure, such as reliable network backbones, or
complimentary services, such as high speed modems and
security procedures for financial transactions. The
Internet has experienced, and is expected to continue to
experience, significant growth in the number of users
and amount of traffic. There can be no assurance that
the Internet infrastructure will continue to be able to
INTERNET MAY NOT BECOME A support the demands placed on it by sustained growth. In
COMMERCIAL MARKETPLACE addition, the viability of the Internet may prove
uncertain due to delays in the development and adoption
of new standards and protocols, the inability to handle
increased levels of Internet activity or due to
increased government regulation. If use of the Internet
does not continue to grow, or if the necessary Internet
infrastructure or complementary services are not
developed to effectively support growth that may occur,
Worlds' business, results of operations and financial
condition would be materially adversely affected.
NEED TO ATTRACT ADVERTISERS--In order for Worlds to
generate advertising revenues, advertisers and
advertising agencies must direct a portion of their
budgets to the Internet and, specifically, to Worlds'
Internet websites. To date, sales of Internet
advertising represent only a small percentage of total
ADVERTISERS MAY NOT UTILIZE advertising sales. There can be no assurance that
WORLDS' WEBSITES advertisers and advertising agencies will accept the
Internet as a medium. If Internet advertising is not
widely accepted by, or if Worlds is not successful in
generating significant advertising revenues from,
advertisers and advertising agencies, Worlds' business,
results of operations and financial condition could be
materially adversely affected.
POTENTIAL LIABILITY AND INSURANCE
While Worlds intends to acquire all licenses and other
rights of which it is aware are necessary to conduct its
business without violating any copyrights, due to the
nature of its business, Worlds could become involved in
POTENTIAL FOR LITIGATION litigation regarding the musical content transmitted
over its system which could create adverse publicity,
significant defense costs and substantial damage awards
against Worlds. In addition, because music content
materials may be downloaded and may be subsequently
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distributed to others, there is a potential that claims
will be made against Worlds for defamation, negligence,
copyright or trademark infringement or other theories
based on the nature and content of such materials.
Worlds also could be exposed to liability in connection
with the selection of materials that may be accessible
over its system. Claims could be made against Worlds if
material deemed inappropriate for viewing by children
could be accessed.
Worlds carries only certain limited insurance policies
which may not cover potential claims of this type or may
not be adequate to cover liability that may be imposed
or related defense costs. There can be no assurance that
INSURANCE COVERAGE MAY NOT BE Worlds will not face claims resulting in substantial
ADEQUATE liability for which Worlds is partially or completely
uninsured. Any partially or completely uninsured claim
against Worlds, if successful and of sufficient
magnitude, would have a material adverse effect on
Worlds.
LACK OF PROTECTION FOR PROPRIETARY INFORMATION
Worlds regards certain computer software developed by
Predecessor prior to the Worlds Consolidations as
proprietary and will continue to attempt to protect it
with copyrights, trade secret laws, proprietary rights
agreements and internal nondisclosure agreements and
safeguards. However, such methods may not afford
complete protection and there can be no assurance that
others will not independently develop know-how or obtain
access to Worlds' know-how or software codes, concepts,
ideas and documentation. Furthermore, there can be no
assurance that nondisclosure agreements with Worlds'
employees will adequately protect Worlds' trade secrets.
While employees of Predecessor (and of Worlds) executed
non-disclosure and non-compete agreements, it is
questionable how effective such agreements will be in
preventing disclosures as courts often drastically limit
the restrictions. Although Worlds believes that its
WORLDS MAY NOT BE ABLE TO proposed products do not and will not infringe patents
ADEQUATELY PROTECT ITS or violate proprietary rights of others, it is possible
PROPRIETARY INFORMATION that infringement of existing or future patents or
proprietary rights of others have occurred or may occur.
In the event Worlds' proposed products infringe patents
or proprietary rights of others, Worlds may be required
to modify the design of its proposed products or obtain
a license. There can be no assurance that Worlds will be
able to do so in a timely manner, upon acceptable terms
and conditions or at all. The failure to do any of the
foregoing could have a material adverse effect upon
Worlds. In addition, there can be no assurance that
Worlds will have the financial or other resources
necessary to enforce or defend a patent infringement
action and Worlds could, under certain circumstances,
become liable for damages, which also could have a
material adverse effect on Worlds. Also, while Worlds
has a patent application pending on its server
technology, no assurance can be give that the patent
will issue to
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Worlds, or even if it does issue to Worlds, that Worlds
will necessarily derive any revenues from it or that
competitors will not be able to develop other technology
around Worlds' patent.
DEPENDENCE ON KEY PERSONNEL; NEED FOR QUALIFIED MANAGEMENT PERSONNEL; MANAGEMENT LACK OF
INTERNET EXPERIENCE
The success of Worlds will be dependent on the personal
efforts of Thomas Kidrin, its President. Although Worlds
intends to enter into an employment agreement with Mr.
Kidrin which will expire in December 2000 and Worlds has
"key-man" insurance on his life in the amount of
$1,000,000, the loss of his services could have a
material adverse effect on Worlds' proposed business
plan and prospects. The success of Worlds will also be
dependent on the personal efforts of Steven Greenberg, a
FEW KEY MANAGERS consultant to and major shareholder of Worlds. Mr.
Greenberg's relationships with certain executives and
others in the music industry have been and will continue
to be important in introducing Worlds' technology and
content for possible inclusion on CDs, in structuring
and negotiating certain potential relationships, and in
interfacing with various Worlds' employees and
independent contractors. The loss of Mr. Greenberg's
services could, therefore, have a material adverse
effect on Worlds' proposed business plan and prospects.
At present Worlds is understaffed and the success of
Worlds is dependent upon its ability to hire and retain
additional qualified management, marketing, technical,
financial, and other personnel. Competition for
qualified personnel is intense and there can be no
assurance that Worlds will be able to hire or retain
additional qualified personnel. Any inability to attract
and retain qualified management and other personnel
COMPETITION FOR QUALIFIED would have a material adverse effect on Worlds. While
PERSONNEL IS INTENSE senior managers and/ or independent contractors retained
by Worlds and the Board members have substantial
business, financial and technical experience, the senior
managers and the Board members have only limited direct
experience with Internet marketing or sales. This lack
of Internet experience could lead Worlds to make flawed
strategic judgments or decisions that could adversely
affect Worlds.
CONSENT DECREE OF FOUNDER
In June 1994, Steven Greenberg, a founder of and
consultant to WAC and Worlds' largest single shareholder
with approximately 25.2% of the outstanding shares
(approximately 19.5% following the merger), settled a
civil proceeding instituted against him by the SEC. Mr.
SEC PROCEEDING INVOLVING Greenberg, without admitting or denying the allegations
LARGEST SHAREHOLDER of the SEC complaint, consented to an injunction against
future violations of the insider trading provisions of
the federal securities laws and paid $1.5 million in
civil penalties. The action had absolutely no
relationship to Mr. Greenberg's
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affiliation with Worlds and Worlds does not anticipate
incurring any costs or liability in connection with the
matter, which was settled almost four years ago.
RISKS RELATING TO UNITY SUBSEQUENT TO THE MERGER
DILUTION
Current shareholders of Unity will incur an immediate
dilution in the net tangible book value of $2.72 per
NET TANGIBLE BOOK VALUE OF share of Unity common stock ($2.86 per share of Unity
UNITY SHARES HELD BY PRESENT common stock assuming the conversion into cash of 19.99%
HOLDERS WILL DECREASE in interest of the Unity common stock held by Unity
shareholders).
IMPACT ON MARKET PRICE RESULTING FROM SUBSTANTIAL NUMBER OF SHARES ELIGIBLE FOR FUTURE
SALE
Sales of substantial amounts of shares of Unity common
stock in the public market following the merger could
adversely affect the market price of Unity common stock.
As of the date of this Joint Proxy Statement/Prospectus,
1,250,000 shares of Unity common stock were unrestricted
and freely tradable.
There are 625,000 shares of Unity common stock
outstanding but not currently available for sale by
certain Unity shareholders, including shares held by the
current officers and directors of Unity and their
affiliates (the "Affiliated Unity Shareholders"). These
shares may not be sold or otherwise transferred until
the Effective Time (as hereinafter defined). Such
625,000 shares will be registered under the Securities
Act of 1933 (the "Securities Act") at the Effective Time
so as to permit such shares to be offered for sale by
their respective holders at any time and from time to
time subsequent to the merger. However, 311,500 of these
POTENTIAL PUBLIC SALES OF A shares are held by the Affiliated Unity Shareholders who
SIGNIFICANT NUMBER OF UNITY have agreed not to sell, pledge, transfer or otherwise
SHARES OF UNITY COMMON STOCK dispose of any of such shares for a period of 12 months
COULD REDUCE THE MARKET PRICE following the Effective Time. Upon consummation of the
OF UNITY COMMON STOCK merger, approximately an additional 6,379,065 shares of
Unity common stock will be outstanding. All of such
shares will be registered under the Securities Act at
the Effective Time so as to permit such shares to be
offered for sale by their respective holders at any time
and from time to time subsequent to the merger. However,
the holders of 2,856,000 of such shares, namely all of
Worlds' officers and directors as well as its largest
shareholder, have agreed with Unity that each will not
sell, pledge, transfer or otherwise dispose of any
shares of Unity common stock ("Unity Merger Shares")
received in connection with the Merger for a period of
12 months from the Effective Time.
Upon consummation of the Merger, there also will be
outstanding options and warrants to purchase, and
promissory notes convertible into, a maximum of
approximately 3,736,310 shares of Unity common stock
(including (i) approximately
</TABLE>
xxii
<PAGE>
<TABLE>
<S> <C>
461,310 shares issuable upon exercise or conversion of
Worlds' options, warrants and convertible promissory
notes, (ii) 2,500,000 shares issuable upon exercise of
Unity's Class A Redeemable Warrants and Unity's Class B
Redeemable Warrants (collectively, the "IPO Warrants")
issued in Unity's initial public offering of securities
(the "IPO"), (iii) 400,000 shares issuable upon exercise
of Unity's Class A Redeemable Warrants and Unity's Class
B Redeemable Warrants (collectively, the "Directors'
Warrants") issued to Unity's current officers and
directors, and (iv) 375,000 shares issuable upon
exercise of all of the components of the unit purchase
warrants originally issued to the underwriters and
affiliates of the underwriters in connection with the
IPO (such units and their common stock and warrant
components being hereinafter referred to as the
"Underwriters' IPO Securities")). The shares of Unity
common stock issuable upon exercises of such options and
warrants and conversion of such promissory notes are
being registered for sale under the Securities Act as of
the date of this Joint Proxy Statement/Prospectus.
The sale of any of these shares could have an adverse
effect on the future market price of Unity common stock.
CONTROL BY CERTAIN SHAREHOLDERS
Following the consummation of the merger, the executive
officers, directors and principal shareholders of Worlds
(the "Affiliated Worlds Shareholders") will beneficially
AFTER THE MERGER, UNITY WILL own approximately 34.6% of the then outstanding shares
BE CONTROLLED BY A FEW PEOPLE of Unity common stock. Accordingly, the Affiliated
Worlds Shareholders will be able to influence the
election of the Unity Board and thereby influence or
direct the policies of Unity.
NO DIVIDENDS
Neither Worlds nor Unity has ever paid cash dividends on
its common stock. Following the merger, Unity does not
anticipate paying cash dividends for the foreseeable
NO DIVIDENDS WILL BE PAID IN future. Unity intends to reinvest any funds that might
THE FORESEEABLE FUTURE otherwise be available for the payment of dividends in
further development of its business following the
merger.
POSSIBLE VOLATILITY OF STOCK PRICE
Stock prices for many technology companies fluctuate
widely for reasons which may be unrelated to operating
performance or new product or service announcements.
Broad market fluctuations, earnings announcements and
other announcements of other companies, general economic
THE PRICE OF UNITY'S conditions or other matters unrelated to Unity or
SECURITIES MAY FLUCTUATE outside its control also could affect the market price
of Unity common stock. In addition, the market for
Internet products is intensely competitive.
Announcements by Internet companies or other companies
of
</TABLE>
xxiii
<PAGE>
<TABLE>
<S> <C>
their plans with respect to advancements in Internet
technology could cause the market price of Unity common
stock to fluctuate substantially.
OTC BULLETIN BOARD
It is anticipated that Unity's securities will be quoted
on the OTC Bulletin Board, an NASD sponsored and
operated inter-dealer automated quotation system for
equity securities not included in The Nasdaq Stock
Market, as well as in the NQB Pink Sheets published by
National Quotation Bureau Incorporated. The OTC Bulletin
UNITY'S SECURITIES WILL NOT BE Board was introduced as an alternative to "pink sheet"
QUOTED IN THE NASDAQ STOCK trading of over-the-counter securities. Although Unity
MARKET believers that the OTC Bulletin Board has been
recognized by the brokerage community as an acceptable
alternative to the NQB Pink Sheets, there can be no
assurance that the liquidity and prices of Unity's
securities in the secondary market will not be adversely
affected.
BLUE SKY RESTRICTIONS
Although certain exemptions under the securities (Blue
Sky) laws of certain states may permit the IPO Warrants
to be transferred to purchasers in states other than the
state in which the IPO Warrants were initially
qualified, Unity will be prevented from issuing Unity
common stock in such states upon exercise of the IPO
Warrants unless an exemption from qualification is
available or unless the issuance of Unity common stock
upon exercise of the IPO Warrants is qualified.
LIMITATIONS UPON IPO WARRANT Following the merger, Unity intends to seek, but may not
EXERCISES be able to obtain, qualification of the issuance of such
common stock in all states in which the current holders
of the IPO Warrants reside and where an exemption from
qualification is not available. If such qualification is
not obtained, the IPO Warrants will expire and holders
thereof may be unable to realize any value upon their
investment therein if such IPO Warrants cannot be sold.
Accordingly, the market for the IPO Warrants may be
limited because of these restrictions.
POTENTIAL ANTI-TAKEOVER EFFECTS OF DELAWARE LAW; POSSIBLE ISSUANCES OF PREFERRED STOCK
Certain provisions of Delaware law could delay or impede
the removal of incumbent directors and could make more
difficult a merger, tender offer or proxy contest
involving Unity, even if such events could be beneficial
to the interests of shareholders. Such provisions may
have a depressive effect on the market price of the
DELAWARE LAW PROVISIONS AND Unity common stock subsequent to the merger and could
UNITY'S PREFERRED STOCK MAY also limit the price that certain investors might be
ENTRENCH MANAGEMENT willing to pay in the future for shares of Unity common
stock. Moreover, shares of Unity preferred stock may be
issued by the Unity Board without shareholder approval
on such terms as the Unity Board may determine. The
rights of the holders of Unity common stock will be
subject to, and may be adversely affected
</TABLE>
xxiv
<PAGE>
<TABLE>
<S> <C>
by, the rights of the holders of any Unity preferred
stock that may be issued in the future. Although the
ability to issue Unity preferred stock may provide
flexibility in connection with possible acquisitions and
other corporate purposes, such issuance may make it more
difficult for a third party to acquire, or may
discourage a third party from acquiring, a majority of
the voting stock of Unity. Unity has no current plans to
issue any shares of Unity preferred stock.
CONFLICTS OF INTEREST
See "The Merger--Background of the Merger" and "--
Interests of Certain Persons in the Merger."
</TABLE>
xxv
<PAGE>
DILUTION
The net tangible book value of Unity at April 30, 1998 was $6,358,522, or
$3.39 for each of the 1,875,000 outstanding shares of Unity common stock. Net
tangible book value per share represents the amount of total tangible assets of
Unity less total liabilities, divided by the number of shares of Unity common
stock outstanding. After giving effect to the merger, the pro forma net tangible
book value of Unity at April 30, 1998 would have been $5,536,322, or $0.67 per
share of Unity common stock ($4,253,714, or $0.53 per share of Unity common
stock, assuming the conversion into cash of 19.99% in interest of the Unity
common stock held by Public Shareholders (as hereinafter defined)). This
represents an immediate dilution in net tangible book value of $2.72 per share
of Unity common stock ($2.86 per share assuming 19.99% conversion) to the Unity
shareholders prior to the merger. The following table illustrates the dilution
in net tangible book value per share of Unity common stock to the Unity
shareholders prior to the merger.
<TABLE>
<CAPTION>
TANGIBLE BOOK
TANGIBLE BOOK SHARES OF VALUE PER
VALUE OF UNITY SHARE OF UNITY
UNITY COMMON STOCK COMMON STOCK
------------- -------------- ---------------
<S> <C> <C> <C>
BEFORE MERGER..................................................... $ 6,358,522 1,875,000 $ 3.39
AFTER MERGER TRANSACTION:
ASSUMING NO CONVERSION
Pro forma as of April 30, 1998 giving effect to the Merger
(l)......................................................... $ 5,536,322 8,254,065 $ 0.67
ASSUMING 19.99% CONVERSION
Pro forma as of April 30, 1998 giving effect to the Merger
(l)......................................................... $ 4,253,714 8,004,190 $ 0.53
</TABLE>
- ------------------------
(1) Does not give effect to the possible exercise subsequent to the Effective
Time of options and warrants to purchase, and the possible conversion
subsequent to the Effective Time of convertible promissory notes into, a
maximum of approximately 3,736,310 shares of Unity common stock. See "The
Merger-- Unity Exchange Options," "--Unity Merger Warrants, --Unity
Convertible Notes," "Description of Worlds' Securities" and "Description of
Unity's Securities."
xxvi
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UNITY FIRST ACQUISITION CORP.
WORLDS INC.
------------------------
JOINT PROXY STATEMENT/PROSPECTUS
------------------------
INTRODUCTION
This Joint Proxy Statement/Prospectus is being furnished by Unity First
Acquisition Corp., a Delaware corporation ("Unity"), to holders of shares of
common stock, $.0001 par value, of Unity (the "Unity Shareholders") and by
Worlds Inc., a New Jersey corporation ("Worlds"), to holders of shares of common
stock, $.001 par value, of Worlds (the "Worlds Shareholders") in connection with
the solicitation of proxies by the respective Boards of Directors of Unity and
Worlds for use at the Special Meeting of Unity Shareholders (the "Unity
Shareholders Meeting") and at the Special Meeting of Worlds Shareholders (the
"Worlds Shareholders Meeting") to be held at the times and places and for the
purposes set forth in the accompanying Notices of Special Meeting of Unity
Shareholders and Worlds Shareholders, respectively, or any adjustments or
postponements thereof (collectively, the "Meetings").
At the Meetings, the Unity Shareholders and the Worlds Shareholders,
respectively, will consider and vote upon a proposal to approve and adopt an
Agreement and Plan of Merger and Reorganization, dated as of June 25, 1998 (the
"Merger Agreement"), between Unity and Worlds, pursuant to which, among other
matters, Worlds will merge with and into Unity (the "Merger").
Unity was formed in May 1996 to serve as a vehicle to effect a merger,
exchange of capital stock, asset acquisition or other similar business
combination (a "Business Combination") with an operating business (an "Acquired
Business"). Unity's business objective is to seek a Business Combination with an
Acquired Business which Unity believes has significant growth potential.
Worlds develops applications for its three-dimensional ("3D") Internet
technology for different markets. At present Worlds is targeting three different
markets for its 3D Internet technology. First, Worlds is in the process of
marketing its 3D Internet technology with record companies to produce music-
oriented websites; second, Worlds is in the process of marketing its WORLDS CHAT
technology to businesses for corporate Intranet applications; and third, Worlds
intends to market an updated version of WORLDS CHAT, a 3D chat site on the
Internet, to consumers on the Internet.
At the effective time of the Merger ("Effective Time"), Unity will issue
approximately 6,379,065 shares of its common stock (the "Unity Common Stock") to
the Worlds Shareholders in exchange for all of the then issued and outstanding
shares of common stock of Worlds (the "Worlds Common Stock"). As a result of the
Merger and the transactions contemplated thereby (collectively the "Merger
Transaction"), as more fully set forth in the Merger Agreement, Worlds will be
merged with and into Unity, Unity's name will be changed to "Worlds Inc.", the
Worlds Shareholders will collectively acquire approximately 77.3% of the then
outstanding Unity Common Stock and the three present directors of Worlds will
constitute all of the initial members of Unity's post-Merger Board of Directors.
The current Unity Shareholders, collectively, will continue to own approximately
22.7% of the outstanding Unity Common Stock following the Merger. See "The
Merger--Exchange Ratio" and "Principal Shareholders of Worlds."
SOLICITATION OF PROXIES
The costs of solicitation of Unity Shareholder proxies and Worlds
Shareholder proxies will be borne by Unity and Worlds, respectively. Unity and
Worlds will reimburse the respective brokers, fiduciaries, custodians and other
nominees for reasonable out-of-pocket expenses incurred in sending this Joint
Proxy Statement/Prospectus and other proxy materials to, and obtaining
instructions relating to such materials
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from, the respective beneficial owners of Unity Common Stock and Worlds Common
Stock. Unity and Worlds Shareholder proxies may be solicited by directors,
executive officers or regular employees of, respectively, Unity and Worlds, in
person, by letter or by telephone or telegram.
THE UNITY SPECIAL MEETING
PURPOSES OF MEETING
At the Unity Special Meeting, Unity Shareholders eligible to vote thereat
will be asked to consider and vote upon a proposal to approve the Merger
Transaction, including the Merger Agreement. A copy of the Merger Agreement is
attached as Exhibit A to this Joint Proxy Statement/Prospectus.
THE UNITY BOARD, WITHOUT DISSENT, HAS APPROVED THE MERGER TRANSACTION AND
RECOMMENDS THAT THE UNITY SHAREHOLDERS VOTE "FOR" THE PROPOSAL TO APPROVE AND
ADOPT THE MERGER TRANSACTION, INCLUDING THE MERGER. See "The
Merger--Recommendations of the Boards of Directors and Reasons for the Merger--
Unity."
DATE, TIME AND PLACE; RECORD DATE
The Unity Special Meeting is scheduled to be held at 10:00 A.M., local time,
on , October , 1998, at 800 Third Avenue, 30th Floor, New York, New
York. The Unity Board has fixed the close of business on September , 1998 as
the record date (the "Unity Record Date") for the determination of holders of
Unity Common Stock entitled to notice of and to vote at the Unity Special
Meeting. On September , 1998, there were 1,875,000 shares of Unity Common
Stock (held by 34 persons of record) outstanding and entitled to vote. Each
share of Unity Common Stock is entitled to one vote.
VOTING RIGHTS
Holders of record of Unity Common Stock on the Unity Record Date are
entitled to vote on the proposals to be presented to the Unity Shareholders at
the Unity Special Meeting. The presence, either in person or by proxy, of the
holders of a majority of the outstanding shares of Unity Common Stock entitled
to vote at the Unity Special Meeting is necessary to constitute a quorum at the
Unity Special Meeting. Abstentions and broker non-votes are counted for purposes
of determining the presence or absence of a quorum for the transaction of
business. However, pursuant to Delaware law, the affirmative vote of the holders
of at least a majority of Unity Common Stock entitled to vote thereon is
required to approve and adopt the Merger Transaction, including the Merger. A
condition precedent to the Merger requires that no more than 20% of the
outstanding Unity Common Stock held by shareholders who acquired such Common
Stock in Unity's initial public offering (the "IPO") or thereafter (the "Public
Unity Shareholders") vote against approval of the Merger Transaction and
thereafter offered to Unity for conversion into cash. See "The Merger--The
Merger Agreement--Conditions to the Merger." Shareholders of Unity Common Stock
who acquired such Common Stock prior to the IPO (the "Non-Public Unity
Shareholders") have agreed to vote such Unity Common Stock (collectively an
aggregate of approximately 33.3% of the currently outstanding shares of Unity
Common Stock) with respect to the proposal to approve the Merger Transaction, in
accordance with the vote of the majority of all Public Unity Shareholders.
Consequently, if a majority of outstanding Unity Common Stock held and voted by
Public Unity Shareholders is voted in favor of the Merger Transaction, the
Non-Public Unity Shareholders will vote their shares of Unity Common Stock in
favor of the Merger Transaction.
If a Unity Shareholder attends the Unity Special Meeting, he or she may vote
by ballot. However, many of the Unity Shareholders may be unable to attend the
Unity Special Meeting. Therefore, the Unity Board is soliciting proxies so that
each holder of Unity Common Stock on the Unity Record Date has the opportunity
to vote on the proposals to be considered at the Unity Special Meeting. When a
proxy card is returned properly signed and dated, the shares represented thereby
will be voted in accordance with the instructions on the proxy card. If a Unity
Shareholder does not return a signed proxy card, his or her shares
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<PAGE>
will not be voted. Unity Shareholders are urged to mark the box on the proxy
card to indicate how their shares are to be voted. If a Unity Shareholder (other
than a broker which holds shares in street name for its customers) returns a
signed proxy card, but does not indicate how his or her shares are to be voted,
the shares represented by the proxy card will be voted FOR approval and adoption
of the Merger Transaction. If a signed proxy card is returned by a Unity
Shareholder and expressly reflects an abstention upon any proposal or if a
signed proxy card is returned by a broker with no indication of how shares are
to be voted, the shares evidenced thereby will be counted towards the quorum
necessary to convene the Unity Special Meeting, noted in the immediately
preceding paragraph, but will not be counted towards the requisite affirmative
vote upon such proposal as mandated by applicable Delaware law. The proxy card
also confers discretionary authority on the individuals appointed by the Unity
Board and named on the proxy card to vote the shares represented thereby on any
other matter incidental to the Unity Special Meeting that is properly presented
for action at such meeting.
Any Unity Shareholder who executes and returns a proxy card may revoke such
proxy at any time before it is voted by (i) notifying in writing the Secretary
of Unity, at 245 Fifth Avenue, New York, New York 10016, (ii) granting a
subsequent proxy or (iii) appearing in person and voting at the Unity Special
Meeting. Attendance at the Unity Special Meeting will not in and of itself
constitute revocation of a proxy.
IF THE MERGER TRANSACTION IS NOT APPROVED BY THE REQUISITE VOTE IMPOSED BY
APPLICABLE DELAWARE LAW OR, EVEN IF SO APPROVED BUT 20% OR MORE IN INTEREST OF
ALL PUBLIC UNITY SHAREHOLDERS ACTUALLY VOTE AGAINST APPROVAL OF THE MERGER
TRANSACTION AND AFFIRMATIVELY REQUEST CONVERSION OF THEIR SHARES OF UNITY COMMON
STOCK INTO CASH, THE MERGER AGREEMENT WILL BE TERMINATED AND THE MERGER
ABANDONED. SEE "THE MERGER-- CONVERSION RIGHTS."
THE WORLDS SPECIAL MEETING
PURPOSES OF MEETING
At the Worlds Special Meeting, Worlds Shareholders eligible to vote thereat
will be asked to consider and vote upon a proposal to approve and adopt the
Merger Transaction, including the Merger Agreement.
THE WORLDS BOARD, WITHOUT DISSENT, HAS APPROVED THE MERGER TRANSACTION AND
RECOMMENDS THAT THE WORLDS SHAREHOLDERS VOTE "FOR" THE PROPOSAL TO APPROVE AND
ADOPT THE MERGER TRANSACTION, INCLUDING THE MERGER. See "The
Merger--Recommendations of the Boards of Directors and Reasons for the Merger
Transaction--Worlds."
DATE, TIME AND PLACE; RECORD DATE
The Worlds Special Meeting is scheduled to be held at 10:00 A.M., local
time, on October , 1998, at 15 Union Wharf, Boston, Massachusetts. The
Worlds Board has fixed the close of business on September , 1998 as the record
date (the "Worlds Record Date") for the determination of holders of Worlds
Common Stock entitled to notice of and to vote at the Worlds Special Meeting. On
September , 1998, there were 17,868,531 shares of Worlds Common Stock (held
by 600 persons of record) outstanding and entitled to vote. Each share of Worlds
Common Stock is entitled to one vote.
VOTING RIGHTS
Holders of record of Worlds Common Stock on the Worlds Record Date are
entitled to vote on the proposals to be presented to the Worlds Shareholders at
the Worlds Special Meeting. The presence, either in person or by proxy, of the
holders of a majority of the outstanding shares of Worlds Common Stock entitled
to vote at the Worlds Special Meeting is necessary to constitute a quorum at the
Worlds Special Meeting. Abstentions and broker non-votes are counted for
purposes of determining the presence or absence of a quorum for the transaction
of business. However, pursuant to New Jersey law, the affirmative
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<PAGE>
vote of at least 66 2/3% of the votes cast by the Worlds Common Stock is
required to approve and adopt the Merger Transaction, including the Merger.
If a Worlds Shareholder attends the Worlds Special Meeting, he or she may
vote by ballot. However, many of the Worlds Shareholders may be unable to attend
the Worlds Special Meeting. Therefore, the Worlds Board is soliciting proxies so
that each holder of Worlds Common Stock on the Worlds Record Date has the
opportunity to vote on the proposals to be considered at the Worlds Special
Meeting. When a proxy card is returned properly signed and dated, the shares
represented thereby will be voted in accordance with the instructions on the
proxy card. If a Worlds Shareholder does not return a signed proxy card, his or
her shares will not be voted. Worlds Shareholders are urged to mark the box on
the proxy card to indicate how their shares are to be voted. If a Worlds
Shareholder (other than a broker which holds shares in street name for its
customers) returns a signed proxy card, but does not indicate how his or her
shares are to be voted, the shares represented by the proxy card will be voted
FOR approval and adoption of the Merger Transaction. If a signed proxy card is
returned by a Worlds Shareholder and expressly reflects an abstention upon any
proposal, the shares evidenced thereby will be counted towards the quorum
necessary to convene the Worlds Special Meeting, noted in the immediately
preceding paragraph, but will not be counted towards the requisite affirmative
vote upon such proposal as mandated by applicable New Jersey law. The proxy card
also confers discretionary authority on the individuals appointed by the Worlds
Board and named on the proxy card to vote the shares represented thereby on any
other matter incidental to the Worlds Special Meeting that is properly presented
for action at such meeting.
Any Worlds Shareholder who executes and returns a proxy card may revoke such
proxy at any time before it is voted by (i) notifying in writing the Secretary
of Worlds, at 15 Union Wharf, Boston, Massachusetts, (ii) granting a subsequent
proxy or (iii) appearing in person and voting at the Worlds Special Meeting.
Attendance at the Worlds Special Meeting will not in and of itself constitute
revocation of a proxy.
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<PAGE>
THE MERGER
GENERAL
The following is a brief summary of the material features of the Merger
Transaction. This summary does not purport to be complete and is qualified in
its entirety by reference to the Merger Agreement, which is attached to this
Joint Proxy Statement/Prospectus as Exhibit A.
At the Effective Time, Worlds will be merged with and into Unity, and the
Certificate of Incorporation of Unity will be amended to change Unity's name to
"Worlds Inc."
The following table identifies those persons or groups of persons who will
derive significant equity interests in Unity following consummation of the
Merger:
<TABLE>
<CAPTION>
EQUITY INTEREST IN UNITY UPON BASIS FOR ACQUISITION
NAME OF GROUP CONSUMMATION OF MERGER OF EQUITY INTEREST
- ------------------------------------ ------------------------------------ ------------------------------------
<S> <C> <C>
Executive Officers and Directors of 1,249,500 shares of Unity Common In exchange for 3,500,000 shares of
Worlds Stock Worlds Common Stock held prior to
the Merger
Principal Shareholder of Worlds 1,606,500 shares of Unity Common In exchange for 4,500,000 shares of
Stock Worlds Common Stock held prior to
the Merger
Investors in Worlds' private equity 1,576,155 shares of Unity Common In exchange for shares of 4,415,000
financings between November 24, Stock Worlds Common Stock held prior to
1997 and January 2, 1998 the Merger
</TABLE>
EXCHANGE RATIO
At the Effective Time, each then outstanding share of Worlds Common Stock
will be converted into the right to receive approximately 0.357 of a share of
Unity Common Stock (the "Exchange Ratio"), or an approximate aggregate of
6,379,065 shares of Unity Common Stock (the "Unity Merger Stock"). No fractional
shares of Unity Common Stock will be issued in the Merger, and Worlds
Shareholders whose shares are converted in the Merger will be entitled to a cash
payment in lieu of such fractional shares. See "--No Fractional Shares". The
Exchange Ratio was established through arms-length negotiations between Unity
and Worlds. See "Description of Unity's Securities--Common Stock."
UNITY EXCHANGE OPTIONS
At the Effective Time, options to purchase 470,000 shares of Worlds Common
Stock at exercise prices ranging from $0.50 to $1.00 per share will be converted
at the Exchange Ratio into options to purchase 167,790 shares of Unity Common
Stock at exercise prices ranging from $1.40 to $2.80 per share (the "Unity
Exchange Options"). See "Management of Worlds--1997 Stock Option Plan."
The shares of Unity Common Stock issuable upon exercise of the Unity
Exchange Options are being registered under the Securities Act contemporaneously
with the date of this Joint Proxy Statement/ Prospectus. Unity will use its best
efforts subsequent to the Effective Time to have such shares of Unity Common
Stock so registered or qualified at all times up to and through the expiration
date of the Unity Exchange Options and to maintain a current prospectus relating
thereto.
UNITY MERGER WARRANTS
At the Effective Time, warrants to purchase 410,375 shares of Worlds Common
Stock at exercise prices ranging from $0.67 to $5.00 per share will be converted
at the Exchange Ratio into Warrants to
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<PAGE>
purchase 146,503 shares of Unity Common Stock at an exercise price of ranging
from $1.88 to $14.01 per share (the "Unity Merger Warrants").
The shares of Unity Common Stock issuable upon exercise of the Unity Merger
Warrants are being registered under the Securities Act contemporaneously with
the date of this Joint Proxy Statement/ Prospectus. Unity will use its best
efforts subsequent to the Effective Time to have such shares of Unity Common
Stock so registered or qualified at all times up to and through the expiration
date of the Unity Merger Warrants and to maintain a current prospectus relating
thereto.
UNITY CONVERTIBLE NOTES
At the Effective Time, promissory notes in the aggregate principal amount of
$1,635,000 and convertible (including accrued interest) into 404,373 shares of
Worlds Common Stock at a conversion price of $4.375 per share will be converted
at the Exchange Ratio into promissory notes convertible into 144,361 shares of
Unity Common Stock at a conversion price of $12.255 per share (the "Unity
Convertible Notes"). The conversion price of the Unity Convertible Notes will
increase to $14.01 between December 3, 1998 and December 2, 1999 and thereafter
to $15.76. The Unity Convertible Notes (including accrued interest) are
convertible into a maximum of 147,017 shares of Unity Common Stock.
The shares of Unity Common Stock issuable upon conversion of the Unity
Convertible Notes are being registered under the Securities Act
contemporaneously with the date of this Joint Proxy Statement/ Prospectus. Unity
will use its best efforts subsequent to the Effective Time to have such shares
of Unity Common Stock so registered or qualified at all times up to and through
the expiration date of the Unity Convertible Notes and to maintain a current
prospectus relating thereto.
CLOSING; EFFECTIVE TIME
The closing of the transactions contemplated by the Merger Agreement (the
"Closing") will take place as soon as practicable immediately following the date
on which the last of the conditions set forth in the Merger Agreement is
satisfied or waived, or at such other time as Unity and Worlds agree. The Merger
will become effective at such time as a certificate of merger and articles of
merger together with a plan of merger reflecting the Merger shall be accepted
for filing by the Secretary of State of the State of Delaware, and by the
Secretary of State of the State of New Jersey, respectively. Such filings will
be made simultaneously with or as soon as practicable after the Closing.
EXCHANGE OF STOCK CERTIFICATES
At the Effective Time, the Worlds Shareholders will exchange certificates
representing all of the Worlds Common Stock (the "Worlds Certificates") for the
Unity Merger Stock. No fractional shares of Unity Common Stock will be issued.
See "--No Fractional Shares".
UNITY SHAREHOLDERS MAY BUT WILL NOT BE REQUIRED TO SURRENDER CERTIFICATES
EVIDENCING SHARES OF UNITY COMMON STOCK FOLLOWING THE APPROVAL AND ADOPTION OF
THE MERGER AGREEMENT AND THE SUBSEQUENT IMPLEMENTATION OF THE MERGER.
NO FRACTIONAL SHARES
No certificates or scrip for fractional shares of Unity Common Stock will be
issued upon the surrender for exchange of Worlds Certificates in the Merger. No
dividend, stock split or interest will be paid with respect to any fractional
share of Unity Common Stock, and such fractional interests will not entitle the
owner thereof to vote or to any of the other rights of a holder of Unity Common
Stock. Instead, each Worlds Shareholder who would otherwise have been entitled
to a fraction of a share of Unity Common Stock upon surrender of Worlds
Certificates for exchange will be entitled to receive a cash payment in lieu
6
<PAGE>
thereof. The cash payment will be equal to such fraction multiplied by the
closing price per share of Unity Common Stock as reported by the OTC Bulletin
Board on the day preceding the Effective Time.
BACKGROUND OF THE MERGER
IN ADDITION TO A CHRONOLOGICAL PRESENTATION OF THE BACKGROUND OF THE
PROPOSED MERGER TRANSACTION, THERE IS ALSO SET FORTH HEREUNDER CERTAIN
BACKGROUND INFORMATION AS TO THOSE TRANSACTIONS IN WHICH THE NON-PUBLIC UNITY
SHAREHOLDERS, INCLUDING EACH OF UNITY'S PRESENT EXECUTIVE OFFICERS AND
DIRECTORS, ACQUIRED THEIR OWNERSHIP INTERESTS IN ACADEMIC AND, SUBSEQUENTLY, IN
WORLDS.
UNITY/ACADEMIC
In late March 1996, Stanley Wirtheim, a member of Lipner, Gordon & Co., the
then auditors for Academic Computer Systems, Inc. ("Academic"), telephoned
Lawrence Burstein in his capacity as President of Unity Venture Capital
Associates Ltd. ("Unity VCA"), a private investment banking firm, to ascertain
whether Unity VCA had any interest in acquiring a controlling equity interest in
Academic. At the time Mr. Burstein was contacted by Mr. Wirtheim, Academic, in
essence, was a "shell" corporation, having discontinued its original data
processing business in August 1975 and, thereafter, having engaged in no
activity other than investing and reinvesting its cash resources in debt and
equity securities of public companies. Although Academic had completed a public
offering of its common stock in August 1969, at the time of Mr. Wirtheim's
inquiry there was no active trading market for Academic's shares nor had there
been any such market for at least the previous ten years.
Approximately two weeks thereafter, in early May 1996, Mr. Burstein,
together with Unity VCA's counsel, met with Milton Fisher, Academic's President
and principal shareholder, to explore the possibility of Unity VCA's acquisition
of a controlling equity interest in Academic inasmuch as Unity VCA would
favorably entertain such a transaction in order to acquire a vehicle to
effectuate a merger or similar business combination with an operating company.
At such meeting, Mr. Fisher indicated a willingness to sell a controlling
interest in Academic to Unity VCA at such interest's book value, which price was
acceptable to Unity VCA. Mr. Burstein thereupon requested Mr. Fisher to furnish
Unity VCA's counsel with all material documentation relating to Academic's past
and current business activities, including copies of all filings made by
Academic with the SEC since August 1969.
Upon reviewing Academic's several SEC filings, Unity VCA's counsel became
aware of the fact that Academic, having engaged in no operating activities other
than investing and reinvesting in securities since August 1975, appeared to be
an "investment company", as such term is defined in the Investment Company Act
of 1940, as amended (the "Investment Company Act"). Such counsel concluded that
as an investment company, Academic should have been registered as such under the
Investment Company Act. Such counsel further noted that the several purchases
and sales of securities made by Academic subsequent to the expiration of one
year from cessation of its data processing business would appear to have been
violative of the Investment Company Act as well.
Upon learning of these apparent violations, Mr. Burstein informed Mr. Fisher
of Unity VCA's position that it would not proceed with its proposed acquisition
unless and until a quantitative assessment could be made of the liability, if
any, that could be incurred by Academic as a consequence of such violations.
Thereafter, with Academic's concurrence, Unity VCA's counsel contacted the Staff
of the SEC in late June 1996 in an effort to seek an administrative resolution
pursuant to which the extent of Academic's liability could be quantified.
Following a series of telephone conversations and written exchanges between
Unity VCA's counsel and members of the SEC's Staff, and the submission to the
Staff of Academic's brokerage statements for a five year period, the SEC Staff
requested Mr. Fisher to give voluntary testimony under oath in furtherance
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<PAGE>
of an informal inquiry of Academic initiated by the SEC's Northeast Regional
Office. Such testimony was given on September 4, 1996, at which time Mr. Fisher
was asked and responded to various questions pertaining to his personal
background, his involvement in Academic's management and the several purchases
and sales of securities by Academic subsequent to August 1975.
Subsequent to Mr. Fisher's testimony and on various dates up to and through
early April 1997, additional historical documentation with respect to Academic's
purchases and sales of securities were requested by and furnished to the Staff.
During this period, Academic sold all of its portfolio securities at then
prevailing market prices, resulting in net cash proceeds to Academic of
approximately $600,000. Alternative settlement proposals were discussed among
Mr. Fisher, Unity VCA's counsel acting on behalf of Academic and the SEC Staff,
resulting in the issuance of a letter dated April 23, 1997 wherein the Staff
advised of the termination of its informal inquiry of Academic and of the fact
that no enforcement action had been recommended to the SEC.
Subsequent to Academic's receipt of the Staff's April 23, 1997 letter, Unity
VCA's Board of Directors determined to proceed with the acquisition of Mr.
Fisher's controlling equity interest in Academic, Unity VCA's counsel was
directed to prepare a proposed stock purchase agreement which was furnished to
Mr. Fisher on or about April 29, 1997. Mr. Fisher requested certain non-material
changes to such agreement and a revised agreement, incorporating such changes,
was furnished to Mr. Fisher on May 2, 1997, just prior to his departure for a
brief vacation.
Following Mr. Fisher's return, both he and Unity VCA entered into the stock
purchase agreement on May 21, 1997, pursuant to which Unity VCA acquired 454,000
Academic shares representing approximately 50% of Academic's then outstanding
common stock, from Mr. Fisher and A.D. Gilhart and Co., Inc. Profit Sharing
Pension Plan, an affiliate of Mr. Fisher, for approximately $318,000, or $.70
per share, the then book value of such shares. In a contemporaneous transaction,
Mr. Burstein, together with John Cattier and Steve Millner, were elected as
Academic's new directors. Messrs. Burstein and Millner also assumed the
respective offices of President and Secretary--Treasurer of Academic. Mr.
Burstein is President, a director and shareholder of Unity and Unity VCA. Mr.
Cattier is a director and shareholder of Unity and Unity VCA. Mr. Millner is a
shareholder of Unity and Unity VCA and is also a partner of Dalessio Millner &
Leben ("DML"), an accounting firm of which Norman Leben, a director and
shareholder of Unity and Unity VCA, is a partner.
Unity VCA did not offer Unity the opportunity, either before or after the
completion of Unity's public offering of securities in November 1996, to acquire
a controlling equity interest in Academic as negotiations towards this end were
initiated by Unity VCA with Mr. Fisher prior to Unity's inception on May 30,
1996.
ACADEMIC/PREDECESSOR
In late July 1997, Ronald Koenig, the Chairman of International Capital
Growth Ltd. ("ICG"), an investment banking firm, telephoned Mr. Burstein and
suggested that he consider the possibility of a business combination between
Academic and Worlds Acquisition Corp. ("WAC"), in which WAC would acquire a
controlling equity interest in Academic. As noted above, Unity VCA had acquired
approximately a 50% equity interest in Academic in May 1997, for approximately
$318,000, or $.70 per share. Mr. Koenig, who is also a shareholder of Unity VCA,
informed Mr. Burstein that WAC had entered into an agreement in June 1997 to
acquire Worlds Inc. ("Predecessor"), a company engaged in the development of 3D
Internet technology. Mr. Koenig explained that Predecessor, which previously had
obtained nearly $17,000,000 in venture capital financing, had exhausted its
operating funds, resulting in a suspension of its business operations in March
1997. Mr. Koenig also informed Mr. Burstein that WAC's agreement to acquire
Predecessor, in addition to containing usual and customary closing conditions,
contained a requirement that WAC secure no less than $2,000,000 in financing to
provide funds to satisfy certain liabilities of Predecessor. Mr. Koenig advised
Mr. Burstein of his belief that ICG could readily raise no less
8
<PAGE>
than $2,000,000 in equity financing for Predecessor if Academic and WAC were
combined as part of the transaction.
Following further telephonic discussions between Mr. Burstein and Mr. Koenig
and Mr. Koenig's provision to Mr. Burstein of background materials relating to
both Predecessor and its 3-D Internet software, Mr. Burstein was introduced by
Mr. Koenig to Steven Greenberg, a principal stockholder and consultant to WAC,
in early August 1997, at which time discussions between Mr. Burstein and Mr.
Greenberg ensued with respect to a merger or similar business combination
between Academic and WAC. A demonstration of Predecessor's 3D Internet software
was presented to Mr. Burstein in this meeting, during which Mr. Burstein
reviewed Predecessor's prior operating history with Mr. Greenberg. Mr. Burstein
and Mr. Greenberg concluded this meeting by reaching agreement as to the general
desirability of a business combination between Academic and WAC, although no
substantive aspects of a possible transaction were considered at this time.
Thereafter, on August 26, 1997, a meeting was held at the offices of WAC's
counsel at which Mr. Greenberg and Thomas Kidrin, President of WAC, were
present, along with Mr. Burstein, and counsel for each of WAC and Academic. At
this meeting, a copy of the June 1997 merger agreement between WAC and
Predecessor was provided to both Mr. Burstein and Academic's counsel. The
representatives of WAC and Academic informally agreed as to the structure of a
proposed business combination between WAC and Academic, the basic economic terms
(up to 10,400,000 shares of common stock of Academic, representing an
approximately 92% interest in Academic, in exchange for all the then outstanding
common stock of WAC after giving effect to WAC's acquisition of Predecessor but
prior to any share issuances stemming from the $2,000,000 minimum equity
financing which was a condition to the consummation of the June 1997 merger
agreement), the nature of the conditions precedent to the business combination
and the anticipated schedule.
Thereafter, counsel for Academic was instructed to prepare a draft merger
agreement, which was distributed to WAC and its counsel on September 11, 1997.
Following discussion of the initial draft merger agreement, Academic's
counsel prepared a revised draft of the merger agreement, containing no material
revision to the economic terms agreed to on August 26, 1997, which was
distributed to WAC and its counsel on September 17, 1997.
Commencing in late September 1997, WAC was separately negotiating and
preparing with ICG drafts of an offering memorandum contemplating the private
offering and sale of no less than $3,600,000 and no more than $6,000,000 in
equity securities of WAC (to be used in part to satisfy liabilities of
Predecessor, and for working capital purposes).
Discussions and meetings between and sometimes among WAC, Academic,
Predecessor and their respective counsel and accountants continued throughout
September and October 1997. On September 29, 1997, the WAC/Predecessor merger
agreement was amended to provide, among other things, for the possibility of WAC
obtaining financing through ICG and the merger of WAC into Academic. As of that
date, the definitive merger agreement between WAC and Academic was executed, the
placement agreement between WAC and ICG was also signed and WAC, through ICG,
commenced its private placement offering of equity securities.
Non-material revisions to the definitive merger agreement were made on
October 6, 1997, October 14, 1997, October 29, 1997 and November 7, 1997,
respectively.
In contemporaneous transactions on December 3, 1997, WAC's private offering
of securities was consummated, resulting in net proceeds to WAC of approximately
$3,700,000, WAC was merged with and into Academic, the former shareholders of
Predecessor and WAC acquired approximately 13% and 54%, respectively, of
Academic's then outstanding shares, and Academic changed its name to Worlds Inc.
As a consequence of the merger, Unity VCA's equity interest in Academic (now
known as Worlds Inc.) was reduced from approximately 50% to 3%.
9
<PAGE>
WORLDS/UNITY
As discussed under "Business of Unity" elsewhere herein, Unity was formed to
serve as a vehicle to effect a Business Combination with an Acquired Business.
Unity's business objective has been to seek to effect a Business Combination
with an Acquired Business which Unity believes has significant growth potential.
Following the consummation of Unity's IPO in November 1996, Unity's
executive officers commenced an active search for a prospective Acquired
Business. Approximately 90% of such net proceeds were placed in escrow
immediately following the IPO, to be released therefrom either upon consummation
of a Business Combination or if required to facilitate a Business Combination,
as applicable.
Excluding Worlds, during the period from November 1996 through May 1998,
Unity's executive officers evaluated approximately 15 prospective Acquired
Businesses in diverse industries. Serious consideration was given to effecting a
Business Combination with four of such prospective Acquired Businesses engaged
in, respectively, the communications equipment, specialty chemical, computer
systems and optical fiber industries. Unity conducted exploratory discussions
with each of these four prospective Acquired Businesses, but did not enter into
a definitive Business Combination agreement with any of such concerns.
In evaluating each prospective Acquired Business, Unity's executive officers
considered all or a majority of the following factors (collectively,
"Acquisition Criteria"):
(1) costs associated with effecting the Business Combination;
(2) equity interest in and opportunity for control of the Acquired Business;
(3) growth potential of the Acquired Business and the industry in which it
operates;
(4) experience and skill of management and availability of additional
necessary personnel of the Acquired Business;
(5) capital requirements of the Acquired Business;
(6) competitive position of the Acquired Business;
(7) stage of development of the product, process or service of the Acquired
Business;
(8) degree of current or potential market acceptance of the product, process
or service of the Acquired Business;
(9) proprietary features and degree of intellectual property or other
protection of the product, process or service of the Acquired Business;
and
(10) regulatory environment of the industry in which the Acquired Business
operates.
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All of the prospective Acquired Businesses were rejected prior to
execution of a definitive Business Combination agreement. The primary basis
or bases of rejection were as follows:
<TABLE>
<CAPTION>
NATURE OF BUSINESS UNSATISFIED ACQUISITION CRITERIA
- ------------------------------------------ ---------------------------------------------------------------------
<S> <C>
Communications Equipment (wireless Absence of demonstrable evidence of market acceptance of products;
telephone headsets) inability to recruit and retain experienced sales personnel and
greater than projected capital requirements (4th, 5th, 7th and 8th
Acquisition Criteria).
Specialty Chemicals (industrial enzymes) Principal owner and operator of target was unwilling to personally
represent target's past and present compliance with applicable
environmental laws and regulations (3rd, 5th and 10th Acquisition
Criteria).
Computer Systems (voter registration Inability to recruit chief financial officer and shortfall in
information management systems for target's projected revenues which, when combined with Unity's capital
public sector use) resources, were believed by Unity's executive officers to be
insufficient to assure future profitability (3rd, 4th, 5th and 6th
Acquisition Criteria).
Optical Fibers (plastic optical fiber Absence of demonstrable evidence of market acceptance of products;
cables for in-office server/computer/ significant additional capital requirements; extremely early state of
peripherals interface) product development (5th, 7th and 8th acquisition criteria)
</TABLE>
One of the approximately 15 prospective Acquired Businesses evaluated by
Unity's executive officers was Boston Optical Fiber, Inc. ("BOF"), a privately
held company engaged in the development of plastic optical fiber for use in the
interface of computer networks and local access communications.
On December 16, 1997, Mr. Burstein traveled to Westborough, Massachusetts,
where BOF was located, where he met with I. Edward Berman and Michael Carr,
respectively, BOF's chairman and chief financial officer. Wide ranging
discussions among Messrs. Burstein, Berman and Carr concentrated upon the
proprietary status of BOF's technology, the state of development of BOF's
products and the depth and adequacy of BOF's managerial and technological
resources. However, no substantive issues with respect to a possible Business
Combination were discussed at this meeting.
Following Mr. Burstein's return to New York, a series of telephone
conversations were held between Mr. Burstein, BOF's executive officers and
representatives of Wang Laboratories, Inc. ("Wang"), a principal shareholder of
BOF, over a period of approximately 10 days in which both the economic and
structural aspects of a Business Combination between Unity and BOF were
discussed.
On or about January 12, 1998, Mr. Burstein met in New York with John
Cunningham, identified to Mr. Burstein by Wang as a prospective new chief
operating officer for BOF. Later that week, Mr. Burstein and Wang also held
substantive telephone discussions with respect to the economic terms of BOF's
retention of Mr. Cunningham as BOF's chief operating officer.
On January 19, 1998, Mr. Burstein, together with Messrs. Berman, Cunningham
and Carr, as well as representatives of Wang, participated in several telephone
conference calls involving some or all of such persons, during the course of
which agreement was reached on the terms of a Business Combination between Unity
and BOF.
On January 20, 1998, Unity announced that it had entered into a letter of
intent to effectuate a Business Combination with BOF pursuant to which the
shareholders of Unity would acquire approximately all of BOF's outstanding
capital shares in exchange for an approximately 62.5% equity interest in Unity.
Three days, thereafter, Mr. Cunningham accepted employment as BOF's chief
operating officer.
11
<PAGE>
Commencing on or about February 26, 1998 and continuing for the balance of
February and throughout early March 1998, background information on BOF,
particularly relating to its proprietary and licensed technology, was furnished
by BOF to Unity and its counsel.
In late February 1998, Unity retained patent counsel to review the Japanese
licensor's patent and to analyze the terms of his license agreement with BOF, as
well as to review certain patent applications previously submitted to the U.S.
Patent and Trademark Office by BOF with respect to contemplated future products
that did not rely upon this licensed technology.
Contemporaneously with its retention of patent counsel, Unity retained
Grayhead Associates ("Grayhead"), an independent consulting firm based in
Cambridge, Massachusetts, to evaluate both the soundness of BOF's technology for
which patent protection had been sought but not yet awarded and the current and
prospective market for BOF's proposed second generation plastic optical fiber
products.
On March 17, 1998, Mr. Burstein, accompanied by counsel, traveled to
Westborough to meet first with BOF's executive officers and thereafter with
certain of Wang's executive officers at the office of Wang's counsel in Boston,
to discuss post-merger management issues, particularly the respective duties and
responsibilities of each of Messrs. Berman and Cunningham. Mr. Burstein
expressed some concern at this meeting that BOF's second generation product
development was not as far along as he had been led to believe. He expressed
further concern as to the uncertainty of the ultimate market for these future
products.
During the week of March 23, 1998, Mr. Burstein and counsel participated in
a telephone conversation with Grayhead in which they were introduced to a
technologist with significant experience in the optical fiber industry who had
been retained by Grayhead to assist it in Unity's requested evaluation of BOF.
Mr. Burstein advised Grayhead that of paramount importance to Unity in making a
decision as to whether or not to proceed with a Business Combination with BOF
was Grayhead's analysis not merely of the technological feasibility and ultimate
commercial viability of BOF's second generation products, but, of particular
import, the estimated time it would take to develop such products to a point
where a reasoned judgment could be made as to their future commercial viability.
On or about April 6, 1998, Mr. Burstein met in New York City with Mr.
Cunningham to discuss Unity's growing reservation as to the time frame within
which BOF could bring its own proprietary products to a stage of commercial
exploitation and specifically questioned Mr. Cunningham as to whether the
projected infusion into BOF of approximately $6,000,000 from Unity upon
consummation of the proposed Business Combination would be sufficient, when
added to BOF's present and anticipated future revenues from operations, to
permit the level of research and development activity necessary to bring BOF's
second generation products to market.
On or about April 13, 1998 and again on or about April 16, 1998, telephone
conversations were held between Mr. Burstein and Grayhead, at which time
Grayhead's consultant informed Mr. Burstein that while he instinctively believed
in the technological feasibility of BOF's second generation products, he felt it
would take no less than one year and possibly as long as 18 months to two years
to establish such feasibility. He further stated that he was not in a position
to express a firm opinion as to commercial viability until technological
feasibility was established. He specifically called Mr. Burstein's attention to
the fact that fiber optic technology was rapidly changing and there existed a
strong possibility that existing manufacturers of both copper and glass cable
would expend significant revenues during the next several years to enhance the
performance and reduce the cost of their respective interface cabling products
in an effort to maintain their dominant market share, to the possible detriment
of plastic optical fiber cable usage. He indicated that should this occur, he
questioned whether BOF would be in a position to effectively compete with such
concerns.
On April 23, 1998, Mr. Burstein advised Mr. Cunningham and Wang's
representative of the views expressed by Grayhead and of his heightened level of
concern that notwithstanding the approximately
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<PAGE>
$6,000,000 that BOF would receive as a consequence of a Business Combination
with Unity, several years could elapse without knowing whether or not BOF's
second generation products were commercially viable. Mr. Burstein indicated that
based upon discussions he had had with other members of the Unity Board, he was
unable to conclude at that date with any degree of certainty whether or not
Unity should proceed with a Business Combination between Unity and BOF. Mr.
Burstein also advised Mr. Cunningham and Wang's representative that the
provisions of the January 20, 1998 letter of intent between Unity and BOF which
prevented Unity from exploring a possible Business Combination with anyone other
than BOF, although once renewed by mutual agreement during the course of Unity's
"due diligence" investigation, had lapsed and that the Unity Board felt it was
incumbent upon them to explore the possibility of a Business Combination with an
entity other than BOF.
Subsequent to December 3, 1997, Mr. Burstein, both as an individual investor
and as a principal of Unity VCA, had kept himself apprised through frequent
telephone conversations with Messrs. Kidrin and Greenberg of the evolving
developments of Worlds' 3-D Internet technology and its diverse potential
applications, particularly in the pre-recorded music area.
On April 24, 1998, cognizant of the fact that if the Unity Board elected not
to proceed with a Business Combination with BOF Unity would have until May 12,
1998 to enter into a letter of intent for an alternative Business Combination,
failing which Unity's Certificate of Incorporation mandated Unity's liquidation,
Mr. Burstein requested a meeting with Messrs. Kidrin and Greenberg to explore
the feasibility of a possible Business Combination between Unity and Worlds.
On April 27, 1998, a meeting was held at Mr. Greenberg's office in New York
City, at which time Messrs. Kidrin and Greenberg presented a comprehensive
review of the progress made by Worlds in developing both its 3-D Internet
technology and its potential applications since December 3, 1997, apprised Mr.
Burstein of Worlds' current financial resources and of their belief that Worlds
could successfully raise approximately $2.0 million of additional funds through
the sale of its shares of common stock in a proposed non-underwritten public
offering. No substantive discussions with respect to the economic terms of a
Business Combination between Unity and Worlds occurred at this meeting.
On April 29, 1998, Mr. Burstein telephoned each of the members of the Unity
Board and explained in detail his concerns over proceeding with a Business
Combination with BOF. In particular, Mr. Burstein observed that perhaps that as
much as two years could elapse before the technological feasibility of BOF's
second generation products could be established, with no assurance at this time
as to outcome, and that even if such products were technologically feasible and
they lent themselves to patent or other proprietary protection, several
additional years could elapse before they could be brought to market. Mr.
Burstein expressed his belief that given the rapidly evolving computer network
and local access communication interface technology and the vastly superior
technological and financial resources of copper and glass manufacturers now
dominant in this area, there could be no assurance that BOF could ever be an
effective, let alone profitable competitor in the fiber optic market. Each of
the members of the Unity Board, contacted individually by Mr. Burstein on April
29, 1998, advised Mr. Burstein that Unity should not proceed with a Business
Combination with BOF.
On the afternoon of April 29, 1998, Mr. Burstein convened a telephonic
meeting of the Unity Board to apprise its members of the results of his
conversations with Messrs. Kidrin and Greenberg on April 27, 1998. Like Mr.
Burstein, the other members of the Unity Board were generally familiar with
Worlds, having been briefed from time to time by Mr. Burstein in individual
conversations given the fact that each was a shareholder of Worlds by virtue of
their prior equity interests in Academic. After reflecting upon Mr. Burstein's
recounting of his April 27, 1998 briefing by Messrs. Kidrin and Greenberg,
reviewing the several Acquisition Criteria, being also apprised by Mr. Burstein
of Mr. Greenberg's apparent relationships in the pre-recorded music and
entertainment industries, and noting the absence of any other Acquired
Businesses then under consideration, the Unity Board unanimously concluded that
Mr. Burstein should immediately enter into the negotiation of a Business
Combination between Unity and Worlds.
13
<PAGE>
On April 30, 1998, Unity issued a press release announcing the termination
of its merger negotiation with BOF.
On May 1, 1998, Mr. Burstein met with Mr. Greenberg in an effort to
negotiate the terms of a Business Combination. Messrs. Scharf and Kidrin
participated intermittently in such meeting by conference telephone. Although
the meeting lasted several hours, no agreement was reached, as the parties could
not satisfactorily resolve the issue of what equity percentage of post-Merger
Unity was to be retained by the Unity Shareholders, Messrs. Scharf and Greenberg
seeking to limit such percentage to no greater than approximately 22.7% and Mr.
Burstein requesting no less than 24.0%, respectively. These equity ownership
percentages were arbitrarily determined and did not take into account the
respective assets, liabilities, working capital and shareholders' equity of each
of Worlds and Unity.
Over that weekend and, particularly, on May 3, 1998, telephonic discussions
ensued between Mr. Burstein and the other members of the Unity Board, during the
course of which Mr. Burstein informed each member of the differences between
Unity and Worlds.
On May 4, 1998 and, again, on May 5, 1998, telephone discussions were held
between Mr. Burstein and Messrs. Scharf and Greenberg at which their differences
as to the percentage of equity ownership to be acquired by the Unity
Shareholders were narrowed, but not resolved.
On May 6, 1998, Mr. Burstein attended a meeting in Mr. Greenberg's office in
an effort to negotiate definitive merger terms. Messrs. Scharf and Kidrin
participated in this meeting telephonically. An agreement was reached between
the parties that the Unity Shareholders would collectively retain an
approximately 22.7% equity interest in post-Merger Unity, and a definitive
letter of intent executed later that afternoon.
Unity and Worlds each announced the proposed Merger Transaction on May 7,
1998.
A draft of the Merger Agreement was furnished to Worlds and its counsel on
May 12, 1998. Revised drafts, reflecting charges requested by Worlds' counsel,
were circulated on May 28, 1998, June 19, 1998, June 23, 1998 and June 24, 1998,
respectively. The definitive Merger Agreement was executed on June 25, 1998, and
announced by each of Unity and Worlds on June 26, 1998.
RECOMMENDATIONS OF THE BOARDS OF DIRECTORS AND REASONS FOR THE MERGER
UNITY. In considering whether or not to approve the Merger, the Unity Board
concluded that Worlds satisfied, or by the passage of time prior to the Merger
or upon its consumation would satisfy, all of the Acquisition Criteria, as set
forth in the fourth paragraph under "--Background of Merger--Worlds/Unity,
above, excluding only the opportunity for acquiring operating control of Worlds
in view of the unwillingness of Worlds' management to relinquish such control
and the Unity Board's lack of expertise in the Internet applications and
products industry. The Unity Board, however, did not find it practicable to, and
did not, quantify or otherwise attempt to assign relative weight to each of the
several Acquisition Criteria considered in reaching its determination.
The Unity Board also gave considerable weight to the fact that, based upon
numerous media reports, the Internet applications and products industry appeared
to be rapidly growing, and to the prior contacts and relationships of Steven
Greenberg, a consultant to Worlds and its largest shareholder, within the pre-
recorded music and entertainment industries.
The Unity Board took note of the fact that Unity's Certificate of
Incorporation required Unity to be liquidated if it did not enter into a letter
of intent to effect a Business Combination by May 12, 1998 and that absent a
Business Combination with Worlds, such liquidation, with a distribution of
approximately $5.09 per share to each of the Unity Public Shareholders, was a
virtual certainty, there being no other suitable Business Combination candidates
then available to Unity. The Unity Board, however, believed that the significant
growth potential of Worlds, although by no means assured, outweighed the
liquidation alternative.
14
<PAGE>
The Unity Board also took note of the financial condition of both Worlds and
the Predecessor as set forth in their respective financial statements and
related notes included elsewhere in this Joint Proxy Statement Prospectus and
the "going concern assumptions" discussed therein. The Unity Board was cognizant
of Worlds' needs for additional financing as expressed in such assumptions but,
following discussions with Worlds' management, concluded that Unity's cash
resources of approximately $6,000,000, which would become accessable to Worlds
upon consummation of the Merger, would satisfy Worlds' capital needs for at
least two years thereafter.
For the reasons set forth above, the Unity Board has determined that the
Merger is in the best interests of Unity and the Unity Shareholders.
Consequently, the Unity Board has unanimously approved and adopted the Merger
Agreement and Merger Transaction and recommends that the Unity Shareholders vote
FOR approval and adoption of the Merger Agreement and the transactions
contemplated thereby.
As discussed elsewhere herein under "--The Merger Agreement--Conditions to
the Merger," Unity is not obligated to complete the Merger absent its receipt of
an opinion from a recognized investment banking firm, addressed to the Unity
Board, to the effect that the consideration to be received by the Unity Public
Shareholders in the Merger is fair from a financial point of view. The Unity
Board does not believe that the terms of the Merger give rise to any inherent
conflict of interest between Unity's executive officers and directors and the
Unity Public Shareholders, given the fact that such executive officers and
directors will receive no benefit from the Merger that would not otherwise be
available to the Unity Public Shareholders as a whole. Further, the Unity Board
noted that none of Unity's current executive officers or directors were to
become salaried employees of Unity subsequent to the consummation of the Merger
and, in any event, the Merger could be effected only if approved by a vote of a
majority in interest of all Unity Public Shareholders. Nevertheless, given the
fact that such executive officers and directors and their affiliates are also
Worlds Shareholders, collectively owning approximately 2.0% of Worlds' currently
outstanding Common Stock as a consequence of their prior equity interests in
Academic, the Unity Board determined to seek such a fairness opinion inasmuch as
such persons' ownership of Worlds Common Stock could raise questions as to the
fairness to the Unity Public Shareholders, from a financial point of view, of
the Exchange Ratio. See "--Opinion of Unity Financial Advisor."
WORLDS. In considering the Merger, the Worlds Board noted that the Merger
would afford Worlds access to approximately $6,000,000 in cash through its
acquisition by virtue of the Merger of Unity's net assets, without the
anticipated cost and uncertainties attendant to Worlds' own public offering of
securities and the possibility that any such offering might not be successfully
consummated in view of then prevailing market conditions or, alternatively, the
negotiation and uncertain consummation of commercial lending arrangements.
The Worlds Board also took into account the overhang on the market of the
outstanding but unexercised warrants issued in the IPO (the "IPO Warrants") and
the potentially depressive effect of such overhang on the market price of the
Unity Common Stock subsequent to the consummation of the Merger. The Worlds
Board concluded that the possibility that the IPO Warrants would be exercised at
some time prior to their scheduled expiration in November 2002, resulting in
gross proceeds from such exercises of approximately $16,250,000, offset the risk
of such market overhang. In making such determination, the Worlds Board took
note in these regards of the fact that the respective exercise prices of the IPO
Warrants were in excess of the price paid by many of the Worlds Shareholders for
their respective interests in Worlds and, as such, were anti-dilutive to these
Worlds Shareholders. In addition, the Worlds Board also noted that the current
public market for Unity Common Stock would afford potential liquidity for the
Unity Common Stock to be acquired by the Worlds Shareholders in exchange for the
Worlds Common Stock in the Merger.
After careful consideration, the Worlds Board determined not to secure an
opinion of an independent investment banker or other financial advisor to the
effect that the Merger would be fair, from a financial point of view, to the
Worlds Shareholders in view of the fact that the Worlds Board does not believe
that the terms of the Merger give rise to any inherent conflict of interest
between Worlds' executive officers,
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directors and principal shareholder and Worlds Shareholders other than as
described in "--Interests of Certain Persons in the Merger.
The Worlds Board has determined that the Merger is in the best interests of
Worlds and the Worlds Shareholders. Consequently, the Worlds Board, has
unanimously approved and adopted the Merger Agreement and the Merger Transaction
and recommends that the Worlds Shareholders vote FOR approval and adoption of
the Merger Agreement and the transactions contemplated thereby.
OPINION OF UNITY FINANCIAL ADVISOR
In its role as financial advisor to Unity, Gilford Securities Incorporated
("Gilford") was asked by Unity to render its opinion to the Unity Board as to
the fairness to the Unity Public Shareholders, from a financial point of view,
of the Exchange Ratio.
On July 23, 1998, Gilford delivered its written opinion to the Unity Board
that, as of such date, the Exchange Ratio was fair, from a financial point of
view, to the Unity Public Shareholders.
A COPY OF THE GILFORD OPINION IS ATTACHED HERETO AS EXHIBIT B AND IS
INCORPORATED HEREIN BY REFERENCE. UNITY SHAREHOLDERS ARE URGED TO READ THE
OPINION CAREFULLY AND IN ITS ENTIRETY FOR ASSUMPTIONS MADE, MATTERS CONSIDERED,
PROCEDURES FOLLOWED AND LIMITS OF THE REVIEW UNDERTAKEN BY GILFORD. THE SUMMARY
OF THE GILFORD OPINION SET FORTH IN THIS JOINT PROXY STATEMENT/PROSPECTUS IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION. THE
GILFORD OPINION WAS PREPARED FOR THE UNITY BOARD, IS DIRECTED ONLY TO THE
FAIRNESS TO THE UNITY PUBLIC SHAREHOLDERS AS OF JULY 23, 1998, FROM A FINANCIAL
POINT OF VIEW, OF THE EXCHANGE RATIO PURSUANT TO THE MERGER AGREEMENT AND DOES
NOT CONSTITUTE A RECOMMENDATION TO ANY SHAREHOLDER AS HOW TO VOTE AT THE UNITY
SPECIAL MEETING OR AN OPINION AS TO THE MERITS OF THE MERGER. ADDITIONALLY, THE
GILFORD OPINION DOES NOT EXPRESS AN OPINION AS TO PRICE OR TRADING RANGE AT
WHICH THE UNITY COMMON STOCK WILL TRADE SUBSEQUENT TO THE DATE OF SUCH OPINION.
In arriving at its opinion, Gilford has, among other things:
1. Reviewed Unity's financial statements for the period from inception, May
30, 1996, through April 30, 1998, certain publicity available filings with the
SEC and certain other relevant financial and operating date of Unity;
2. Reviewed the financial statements of Worlds (for the period April 8,
1997 [inception] through March 31, 1998) and its Predecessor (for the period
April 26, 1994 [inception] through December 3, 1997), certain publicly available
filings with the SEC and certain other relevant financial and operating data of
Worlds;
3. Held meetings and discussions with management and senior personnel of
Unity and Worlds, respectively, to discuss the business, operations, historical
financial results and future prospects of Unity and Worlds, respectively,
including their analysis of the strategic and operating benefits anticipated
from the Merger Transaction;
4. Reviewed financial projections furnished to Gilford by the management of
Unity and Worlds, including among other things, the capital structure, sales,
net income, cash flow, capital requirements and other data of Unity and Worlds
as it deemed relevant;
5. Reviewed the results of its analyses of Unity and Worlds in comparison
with other similar publicly trade companies;
6. Reviewed the historical prices and trading activity of the securities of
Unity from November 21, 1996 to June 24, 1998 and compared those trading
histories with those of other companies which it deemed relevant; and
7. Analyzed the potential proforma financial effects of the Merger
Transaction as it relates to Unity and Worlds.
In arriving at its opinion, Gilford did not make, obtain or assume any
responsibility for any independent evaluation of any properties and facilities
or of the assets and liabilities (contingent or
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otherwise) of Unity or Worlds, nor did it make any independent evaluation of the
prospects, ongoing viability or any solvency analysis of Unity or Worlds. In
rendering its opinion, Gilford relied upon Unity's and Worlds' respective
managements with respect to the accuracy and completeness of the financial and
other information furnished to it as described above and Gilford did not assume
any responsibility for independent verification of such information. Gilford
assumed that the financial projections prepared and provided to it by the
respective managements of Unity and Worlds represented the best current judgment
of these managements as to the future financial condition and results of
operations of Unity and Worlds, respectively, and Gilford assumed that the
projections were reasonably prepared based upon such current judgment. Gilford
further relied upon assurances of the managements of both Unity and Worlds that
they are not aware of any facts that would make the information they provided to
Gilford incomplete or misleading.
Gilford also took into account its assessment of general economic, market,
and financial conditions and its experience in similar transactions, as well as
its experience in securities valuation in general. With respect to all legal
matters relating to Unity, Worlds and the Merger, Gilford relied on the advice
of legal counsel to Unity and to Worlds, as applicable. With respect to tax
treatment relating to the Merger, Gilford relied upon the advice of tax experts
to Unity. Gilford's opinion was necessarily based on regulatory, economic,
market, and financial and other conditions as they existed on, and the
information made available to it as of, July 23, 1998. It should be understood
that, although developments subsequent to July 23, 1998 may affect its opinion,
Gilford does not have any obligation to update, revise or reaffirm its opinion.
Unity did not place any limitations on Gilford's report. Unity did not ask
Gilford to render any opinion as to the fairness, from a financial point of
view, of the Merger, but only as to the fairness to the Unity Public
Shareholders, from a financial point of view, of the Exchange Ratio.
The following is a brief summary of certain financial analyses performed by
Gilford in connection with providing its written opinion to Unity on July 23,
1998. Such summary does not purport to be a complete description of all of the
analyses performed by, or all the factors considered by, Gilford in connection
with its opinion.
COMPARABLE COMPANY ANALYSIS
Gilford examined a group of Internet marketers to find a universe of
comparable companies. In performing such examination, Gilford observed that
online retailing and chat-room marketing as well as Web site creation were
relatively new industries. Of ten companies identified by Gilford with some
similarity to Worlds, only four were deemed comparable for the purpose of
valuation. Three of the four comparables, CD NOW, N2K and CyberShop
International, had yet to achieve profitability, while one had a record of
sporadic profitability. Since Worlds has only nominal revenue, and is
essentially a private company, Gilford concluded that ratio analysis compared to
this universe was problematic at best. Assuming that Worlds' management's
forecast for 1999 would be achieved, Gilford compared its value based upon a
multiple of last twelve month sales to (at a comparable revenue level) CD NOW
and N2K. With respect to K-Tel, Gilford viewed this music compiler and direct
retailer, which had only recently begun to use the Internet in its marketing, as
only a confirmation of the range of valuations calculated below. K-Tel's stock
price had advanced from $3 to $39, despite weak earnings, immediately following
its announcement of entry into Online marketing. Gilford similarly compared the
valuation of CyberShop International at the time of its initial public offering
($47 million on March 23, 1998) with its valuation of approximately $86 million
on July 23, 1998 as a measure of the appreciation potential for a combined Unity
and Worlds.
Based on the reviews and analyses discussed above, Gilford concluded that a
value of approximately $36 million was within the range which could be
attributed to Worlds as of July 23, 1998. The multiple of sales method described
above yielded a multiple of 15X at periods in the history of CD-NOW and N2K when
their sales were comparable to Worlds' anticipated 1999 revenue of $2.4 million,
yielding a value of
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$36 million for Worlds. Gilford observed that although the product line offered
by CyberShop was broad general merchandise, not targeted to the particularly
favored (by investors) music-CD market as is Worlds, it had a current market
capitalization of approximately $86 million and last twelve months revenue of
$1.7 million. Gilford noted that if Worlds/Unity were to be valued on that basis
in 1999, it would have a value, based on Worlds' management's estimate of 1999
revenues ($2.4 million) in excess of $121 million. At the time of its offering,
CyberShop International had last twelve month revenue of $1.5 million, and was
valued at a multiple of 31X revenues ($47 million).
DISCOUNTED CASH FLOW ANALYSIS
Gilford performed a Discounted Cash Flow Analysis on forecasts of results of
operation of Worlds through December 31, 2002 prepared by the management of
Worlds. In that analysis Gilford assumed that a company with the growth and
earnings that management forecast would be valued at a multiple of 5, 7 or 9
times its earnings before interest and taxes. Because of the newness of Internet
commerce and of Worlds in its current configuration, Gilford applied discount
rates of 25, 30 and 35 percent, respectively, to the resulting potential values.
The gross valuations, before discounting, ranged from a low of $49.3 million to
a high of $88.7 million. When discounted back to present value, the range was
from a low of $14.8 million to a high of $36.3 million and the median value was
$24.2 million, as compared to the Merger Transaction value of $31 million.
SUPPLEMENTARY ANALYSIS
Gilford observed that the valuation of Internet companies is an emerging
discipline. Gilford further observed that given the extremely rapid growth rates
associated with Internet participants, both consumers and businesses, and of
Internet business's revenues, new valuation models were constantly being devised
by market analysts. One method that has begun to be accepted was a comparison of
the number of users of a Web Site to a company's valuation. Gilford compared the
number of e-mail registrants on Worlds Chat's Web Site reported to Gilford to be
approximately 250,000, with the value of other Internet companies. The range of
valuation per user for Internet companies was a reported $38 to $295. This
method produced a range of values of Worlds of $9.5 million to $74.5 million
with a median of $41 million. This compared favorably with the transaction value
of $31 million being accorded to Worlds. Using a broader based average computed
by the Internet Stock Report and including ten companies produced a valuation
per user of $121. This figure is statistically very similar to Worlds' value of
$124 per e-mail address.
The summary set forth above does not purport to be a complete description of
the analyses performed by Gilford. Gilford believes that its analyses must be
considered in the aggregate, and that selecting portions of its analysis or the
factors considered by it, without considering all factors and analyses
considered by Gilford could create a misleading view of the processes underlying
its opinion. The preparation of a fairness opinion involves various
determinations as to the most appropriate and relevant methods of financial
analyses and the application of these methods to the particular circumstances,
and, therefore, such an opinion is not readily susceptible to partial analysis
or summary description. Gilford did not attribute any particular weight to any
analysis or factor considered by it, but rather made qualitative judgments as to
the significance and relevance of each analysis and factor. Accordingly,
notwithstanding the separate factors summarized above, Gilford believes, and has
advised the Unity Board, that its analyses must be considered as a whole and
that selecting portions of its analyses and the factors considered by it,
without considering all analyses and factors, could create an incomplete view of
the process underlying its opinion. In performing its analyses, Gilford made
numerous assumptions with respect to industry performance, business and economic
conditions and other matters, many of which are beyond the control of Unity and
Worlds. These analyses performed by Gilford are not necessarily indicative of
actual values or future results, which may be significantly more or less
favorable than suggested by such analyses. In addition, analyses relating to the
value of businesses do not purport to be appraisals or to reflect the prices at
which businesses or securities may actually be sold. Accordingly, such analyses
and estimates are inherently
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subject to substantial uncertainty and none of Unity, Worlds, Gilford or any
other person assumes responsibility for their accuracy.
Gilford is a recognized investment banking firm which is regularly engaged
in the valuation and pricing of businesses and their securities and in advising
corporate securities issuers on related matters. Prior to being retained on June
23, 1998, Gilford had no prior relationship with either Unity or Worlds nor with
any of its officers, directors, principal shareholders or their respective
affiliates.
For its work in formulating its opinion, Unity will pay Gilford a fee of
$75,000, $50,000 of which has been paid to date. Additionally, Unity will
reimburse Gilford for its out-of-pocket expenses incurred in connection with
this engagement. Unity has agreed to indemnify Gilford against certain losses,
expenses, liabilities or claims, including claims under the federal securities
laws, which may be incurred by Gilford in connection with its engagement by
Unity. The terms of the fee arrangement with Gilford, which are customary in
transactions of this nature, were negotiated at arm's length between Unity and
Gilford, and the Unity Board was aware of such arrangement, including the fact
that a significant portion of the aggregate fee payable to Gilford is contingent
upon approval of the Merger.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
WORLDS DIRECTORS. As contemplated by the Merger Agreement, Lawrence
Burstein, John Cattier, Barry Ridings and Norman Leben, each presently a member
of the Unity Board, will resign immediately prior to the Effective Time.
Immediately following the Merger, Unity has agreed to cause Michael Scharf,
Thomas Kidrin and Kenneth Locker, each currently a member of the Worlds Board
(such persons being hereinafter referred to as the "Designated Directors"), to
be elected to the Unity Board. The Designated Directors will comprise the
members of the Unity Board subsequent to the Effective Time of the Merger and,
consequently, will then control the business and affairs of Unity. The
Designated Directors in the aggregate hold 3,500,000 shares of Worlds Common
Stock, which will be exchanged for an aggregate of 1,249,500 shares of Unity
Merger Stock. See "Principal Shareholders of Worlds."
AFFILIATED UNITY SHAREHOLDERS. The Affiliated Unity Shareholders
collectively own 365,900 shares of Worlds Common Stock (including 100,000 shares
issuable upon exercise of warrants), representing approximately 2.0% of Worlds'
currently outstanding Common Stock. At the Effective Time, such Worlds Common
Stock will be exchanged into 130,626 shares of Unity Merger Stock (including
35,700 shares issuable upon exercise of the Unity Merger Warrants), whereupon
the ownership of the Affiliated Unity Shareholders in the surviving company, as
a result of their ownership of Worlds Common Stock, will decrease to
approximately 1.6%.
ICG. ICG will receive a fee of $150,000 upon the consummation of the
Merger, payable by post-Merger Unity, for its services in facilitating the
Merger Transaction. ICG received 425,000 shares of Worlds Common Stock as a
financial advisor for its role in the Worlds Consolidations and warrants to
purchase 110,375 shares of Worlds Common Stock for $1.00 per share as a
placement agent fee for Worlds' private offering in the winter of 1997. The
principal shareholders of ICG are also shareholders of Unity VCA.
CERTAIN TAX CONSEQUENCES OF THE MERGER
The Merger is intended to be a "tax-free reorganization" for federal income
tax purposes under Section 368(a)(1)(A) of the Internal Revenue Code of 1986, as
amended (the "Code"). As a consequence: (i) neither Unity nor Worlds will
recognize any gain or loss in the Merger; and (ii) neither the Unity
Shareholders nor the Worlds Shareholders will recognize any gain or loss in the
Merger, except for tax payable by Worlds Shareholders because of cash received
instead of fractional shares of Unity Common Stock.
Cooperman Levitt Winikoff Lester & Newman, P.C., as counsel to Unity, has
rendered to Unity an opinion dated as of the date of this Joint Proxy
Statement/Prospectus to the effect that, with respect to Unity and the Unity
Shareholders, the Merger will be a "tax-free reorganization" for federal income
tax purposes under Section 368(a) of the Code.
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Heller, Horowitz & Feit, P.C., as counsel to Worlds, has rendered to Worlds
an opinion dated as of the date of this Joint Proxy Statement/Prospectus to the
effect that, with respect to Worlds and the Worlds Shareholders, the Merger will
be a "tax-free reorganization" for federal income tax purposes under Section
368(a) of the Code.
THE TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL INFORMATION ONLY
AND IS BASED UPON PRESENT LAW. EACH UNITY AND WORLDS SHAREHOLDER SHOULD CONSULT
HIS OR HER TAX ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES OF THE MERGER TO HIM
OR HER, INCLUDING THE APPLICATION AND EFFECT OF FEDERAL, STATE, LOCAL AND OTHER
TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN FEDERAL LAW OR OTHER TAX LAWS.
THE MERGER AGREEMENT
GENERAL. The Merger Agreement provides that, at the Effective Time, each
then outstanding share of Worlds Common Stock will be converted into the right
to immediately receive approximately 0.357 of a share of Unity Common Stock, or
approximately 6,379,065 shares of Unity Common Stock. The Exchange Ratio was
established through negotiations between Unity and Worlds.
The Merger Agreement further provides that, at the Effective Time, Worlds
will be merged with and into Unity. The Certificate of Incorporation of Unity,
as the surviving corporation, will be amended at the Effective Time to change
Unity's name to "Worlds Inc."
Upon consummation of the Merger and assuming none of the Worlds Shareholders
exercise their appraisal rights, the Worlds Shareholders will own approximately
77.3% of the then outstanding shares of Unity Common Stock. On a fully diluted
basis, giving effect to the exercise of all Unity Exchange Options and Unity
Merger Warrants and the conversion of all Unity Convertible Notes, a maximum of
an additional 461,310 shares of Unity Common Stock will be issuable upon
consummation of the Merger. On such a fully diluted basis (and assuming no
exercise of the IPO Warrants, the Directors' Warrants and the Underwriters' IPO
Securities), the Worlds Shareholders would collectively own a maximum of
approximately 78.5% of the then outstanding Unity Common Stock.
None of the shares of Unity Common Stock will be converted or otherwise
modified in the Merger and all of such shares will continue to be outstanding
capital stock of Unity after the Effective Time.
REPRESENTATIONS AND WARRANTIES. The Merger Agreement contains various
representations and warranties of Worlds and Unity relating to: (i) each of
Unity's and Worlds' organization and similar corporate matters, (ii) each of
Unity's and Worlds' capital structure, (iii) the authorization, execution,
delivery, performance and enforceability of the Merger Agreement and related
documentation, (iv) the absence of any governmental or regulatory authorization,
consent or approval to consummate the Merger, (v) the documents and reports
filed by Worlds and Unity with the SEC and the accuracy of the information
contained therein, (vi) the absence of certain liabilities, (vii) the absence of
certain material events or changes, (viii) litigation, (ix) the accuracy of the
information provided by Worlds and Unity with respect to the registration
statement to be filed by Unity in connection with resales of shares of Unity
Merger Stock by Worlds Shareholders subsequent to the Merger (the "Registration
Statement") and this Joint Proxy Statement/Prospectus, (x) compliance with laws
and material agreements, (xi) taxes, (xii) retirement and other employee benefit
plans and matters relating to the Employee Retirement Income Security Act of
1974, as amended, (xiii) certain accounting matters and (xiv) the absence of
certain labor controversies.
CERTAIN COVENANTS. Pursuant to the Merger Agreement, Worlds and Unity have
agreed with the other that, during the period from the date of the Merger
Agreement until the Effective Time, except as permitted by the Merger Agreement
(including those provisions set forth or described in this Joint Proxy
Statement/Prospectus) or as consented to in writing by the other, each will: (i)
conduct its business in the ordinary and usual course and consistent with past
practice, (ii) not split, combine or reclassify its
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outstanding capital stock or declare any dividend or distribution, (iii) not
issue, sell, pledge or dispose of any additional shares, or any options or
rights to acquire additional shares, of capital stock (other than in, connection
with the exercise of outstanding options or warrants (Worlds only)), (iv) not
redeem any shares of capital stock except as permitted by the terms of such
securities, (v) not dispose of any material assets or properties other than in
the ordinary course of business, (vi) preserve the goodwill and business
relationships with its suppliers, distributors, customers and others, (vii)
confer on a regular basis with the others on material operational matters,
(viii) file with the SEC all forms, statements, reports and documents required
to be filed pursuant to the Exchange Act and (ix) prior to the Effective Time,
afford to each other reasonable access during normal business hours to its
properties, books, contracts, commitments and records.
NO SOLICITATION OF OTHER TRANSACTIONS. The Merger Agreement provides that
Worlds and its officers, directors, representatives and agents, will not solicit
any proposal or offer to acquire all or any substantial part of the business or
capital stock of Worlds from any person other than Unity. In this regard, Worlds
has agreed that any person inquiring as to the availability of the business or
shares of capital stock of either Worlds or any of its subsidiaries or making an
offer therefor will be told that Worlds is bound by the provisions of the Merger
Agreement. Each of Worlds and its officers, directors, representatives and
agents further agreed to advise Unity promptly of any such inquiry or offer. The
Merger Agreement also provides for similar restrictions on Unity and its
officers, directors, representatives and agents.
NO INDEMNIFICATION. The Merger Agreement does not provide for any
indemnification to either Worlds or Unity for any costs or expenses judgments,
fines, losses, claims, damages, liabilities and amounts paid in settlement
arising out of, relating to or in connection with any misrepresentation or
breach of representations, warranties or covenants contained in the Merger
Agreement.
CONDITIONS TO THE MERGER. The respective obligations of Unity and of Worlds
to effect the Merger are subject to a number of conditions, including: (i) the
Merger Transaction shall have been approved and adopted by the Unity
Shareholders, and no more than 20% in interest of the Unity Common Stock held by
Public Unity Shareholders vote against the Merger Transaction and affirmatively
request conversion of their shares of Unity Common Stock into cash; (ii) the
Merger Transaction shall have been approved and adopted by the Worlds
Shareholders; (iii) the Registration Statement shall have become effective and
no stop order suspending such effectiveness shall have been issued and remain in
effect; (iv) no preliminary or permanent injunction or other order or decree by
any federal or state court or any action by any state or federal governmental
agency preventing the consummation of the Merger shall have been issued or taken
and remain in effect; and (v) all consents, orders and approvals legally
required shall have been obtained and be in effect at the Effective Time.
In addition to the conditions set forth above, the obligations of Unity to
effect the Merger are subject to the following conditions: (i) Worlds shall have
performed in all material respects its agreements contained in the Merger
Agreement and all representations and warranties of Worlds contained in the
Merger Agreement shall be true and correct in all material respects on and as of
the date made and the Closing Date (as defined in the Merger Agreement); (ii)
the receipt of a written opinion from counsel to Worlds as to certain matters;
(iii) the absence of material adverse changes in the business, operations,
properties, assets, condition (financial or other), results of operations or
prospects of Worlds; (iv) the receipt of all consents, orders and approvals
required to consummate the Merger; (v) Unity's receipt of an opinion of Gilford
or another recognized investment banking firm that the Exchange Raio is fair,
from a financial point of view, to the Unity Public Shareholders; and (vi)
Worlds shall have entered into one or more agreements with nationally recognized
entertainment or pre-recorded music companies which call for the development and
commercial exploitation of Worlds' 3D Internet technology.
In addition to the conditions set forth in the first paragraph of this
subsection, the obligations of Worlds to effect the Merger are subject to the
following conditions: (i) Unity shall have performed in all material respects
its agreements contained in the Merger Agreement and the representations and
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warranties of Unity contained in the Merger Agreement shall be true and correct
in all material respects on and as of the date made and the Closing Date; (ii)
the receipt of a written opinion from counsel to Unity as to certain matters,
(iii) Unity shall have at the Closing Date at least an aggregate of $6,000,000
in cash or cash equivalents net of liabilities after giving effect to the
payment on the Closing Date of all expenses attendant to the transactions
contemplated by the Merger Agreement (exclusive of that portion of the fee of
Gilford in excess of $50,000) and any payments required to be paid to Unity
Shareholders exercising their conversion rights under Unity's Certificate of
Incorporation, discussed elsewhere herein; (iv) Unity's outstanding securities
shall be unchanged in amount except as contemplated by the Merger Agreement; and
(v) all agreements (exclusive of the Directors' Warrants referred to under
"Description of Unity's Securities") between Unity and its affiliates shall have
been terminated.
TERMINATION. The Merger Agreement may be terminated prior to the Closing
Date (i) at any time by mutual consent of the Boards of Directors of Unity and
of Worlds, (ii) by either Worlds or Unity after September 30, 1998, if the
Merger shall not have been consummated on or before such date (so long as the
party terminating has not breached its obligations under the Merger Agreement),
(iii) unilaterally by Unity: (a) if Worlds materially breaches any material
representation or warranty of Worlds set forth in the Merger Agreement, (b) upon
Worlds' willful failure to comply with or satisfy any material covenant or
condition of Worlds contained in the Merger Agreement or (c) if Worlds
shareholders fail to approve the Merger Agreement of the Worlds Special Meeting
or (iv) unilaterally by Worlds: (a) if Unity materially breaches any material
representation or warranty of Unity set forth in the Merger Agreement, (b) upon
Unity's willful failure to comply with or satisfy any material covenant or
condition of Unity contained in the Merger Agreement or (c) if Unity
shareholders fail to approve the Merger Transaction at the Unity Special
Meeting.
In the event of termination of the Merger Agreement by either Worlds or
Unity as provided above, the Merger Agreement shall become void and there will
be no further obligation on the part of any of Worlds or Unity, other than
preserving the confidentiality of confidential information of the other provided
that in connection with the Merger Transaction.
AMENDMENT AND WAIVER. At any time prior to the Effective Time, Worlds or
Unity may (i) extend the time for the performance of any of the obligations or
other acts to be performed by any other party pursuant to the Merger Agreement,
(ii) waive any inaccuracies in the representations and warranties by any other
party contained in the Merger Agreement or in any other document delivered
pursuant to the Merger Agreement and (iii) waive compliance with any of the
agreements of any other party or conditions precedent to their respective
obligations contained in the Merger Agreement.
Subject to applicable law, the Merger Agreement may be amended at any time
before or after its approval by the Unity Shareholders or the Worlds
shareholders by the written agreement of Worlds and Unity. Under applicable law,
neither Worlds nor Unity may amend the Merger Agreement subsequent to obtaining
approval of their respective shareholders if such amendments would (i) alter or
change the amount or kind of shares, securities, cash, property and/or rights to
be received in exchange for shares of such corporation, (ii) alter or change any
term of the certificate of incorporation of Unity following the Merger or (iii)
alter or change any of the terms and conditions of the Merger Agreement if such
alteration or change would adversely affect the Unity Shareholders or the Worlds
Shareholders.
ABSENCE OF REGULATORY FILINGS AND APPROVALS
The Merger is not subject to the requirements of the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, and the rules and regulations thereunder,
which provide that certain merger transactions may not be consummated until
required information and materials have been furnished to the Antitrust Division
of the Department of Justice and the Federal Trade Commission and certain
waiting periods have expired or been terminated.
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RESTRICTIONS ON SALES BY AFFILIATES
The 6,379,065 shares of Unity Common Stock to be issued in the Merger are
expected to be registered under the Securities Act as of the Effective Time of
the Merger. In such event, all of these shares will be freely transferable under
the Securities Act. However, the Merger Agreement provides that all of the
current executive officers and directors of Worlds, as well as Worlds' principal
shareholder, and their respective affiliates will not sell, pledge, transfer or
otherwise dispose of any of their respective shares of Unity Merger Stock for a
period of 12 months from the Effective Time. Thereafter, each such person may
sell the balance, if any, of his Unity Merger Stock at any time, subject to any
restrictions imposed by law. The executive officers and directors of Unity and
their respective affiliates have agreed to identical restrictions.
ACCOUNTING TREATMENT
The Merger will be treated as a capital transaction equivalent to the
issuance of stock by Worlds for Unity's net monetary assets of approximately
$6,000,000, accompanied by a recapitalization of Worlds.
EXPENSES
The Merger Agreement provides that, whether or not the Merger is
consummated, all expenses incurred in connection with the Merger Agreement and
the transactions contemplated thereby will be paid by the party incurring such
expenses.
CONVERSION RIGHTS
A condition of the completion of Unity's IPO, arbitrarily imposed upon Unity
by the IPO underwriters, was a requirement that Unity not proceed with any
Business Combination if 20% or more in interest of Unity Common Stock held by
Public Unity Stockholders request conversion of their respective shares into
cash and also vote against such Business Combination. Consequently, each Public
Unity Shareholder as of the Unity Record Date will have the right until October
, 1998, [20 business days after the date of this Joint Proxy
Statement/Prospectus] (the "Conversion Notification Date") to offer his or her
shares of Unity Common Stock to Unity for conversion to cash at an amount equal
to approximately $5.13 per share (the "Conversion Value"). Any such request for
conversion, once made, may be withdrawn at any time up to and through the
Conversion Notification Date. The Conversion Value is equal to the amount held
in a trust account (inclusive of any interest thereon) divided by the number of
shares of Unity Common Stock held by all Public Unity Shareholders, as
determined by Unity and audited by its independent public accountants,
calculated as of the Unity Record Date. If less than 20% in interest of Unity
Common Stock held by Public Unity Shareholders who vote against approval of the
Merger Transaction also elect to have their shares of Unity Common Stock
converted into cash, and the Merger is consummated, Unity will convert into cash
shares of Unity Common Stock at the Conversion Value from those Public Unity
Shareholders who affirmatively requested such conversion and who actually voted
against approval of the Merger Transaction. If 20% or more in interest of Unity
Common Stock held by Public Unity Shareholders actually vote against approval of
the Merger Transaction and affirmatively request conversion of their shares of
Unity Common Stock, Unity will not proceed with the Merger and will not convert
such shares into cash. In such event, Unity's Certificate of Incorporation
requires that Unity be liquidated.
A Public Unity Shareholder wishing to exercise his or her conversion rights
(i) must deliver to Unity, prior to or on but in no event later than the
Conversion Notification Date, a written objection to the Merger Transaction (the
"Notice of Election"), which shall include a notice of his or her election to
convert into cash his or her Unity Common Stock, his or her name and residence
address, the number of shares of Unity Common Stock which he or she owns and
demand for payment of the Conversion Value of his or her shares of Unity Common
Stock (WHICH NOTICE OF ELECTION MUST BE IN ADDITION TO AND SEPARATE FROM ANY
PROXY OR VOTE AGAINST THE MERGER TRANSACTION) and (ii) must vote against the
Merger Transaction. A vote
23
<PAGE>
against the Merger Transaction, in person or by proxy, will in and of itself not
constitute a written objection to the Merger Transaction satisfying the
requirements for exercise of the conversion rights. In addition, a proxy
directing such vote for an abstention, even if accompanied by a Notice of
Election, will not meet the requirements for exercise of the conversion rights.
A Public Unity Shareholder who elects to convert into cash his or her shares of
Unity Common Stock may not convert less than all of the shares of Unity Common
Stock beneficially owned by such shareholder as of the Unity Record Date. Public
Unity Shareholders, who timely file a Notice of Election and who vote their
Unity Common Stock against the Merger Transaction, are hereinafter referred to
as "Converting Shareholders."
ALL NOTICES OF ELECTION SHOULD BE ADDRESSED TO UNITY, 245 FIFTH AVENUE, NEW
YORK, NEW YORK 10016; ATTN.: LAWRENCE BURSTEIN, PRESIDENT.
Any Public Unity Shareholder whose shares are held in street name may
exercise his or her conversion rights by instructing his or her broker to
prepare and deliver a Notice of Election to Unity within the time frame and
containing the information set forth in the second paragraph above, except that
in lieu of setting forth the name and residence address of the Public Unity
Shareholder, it should recite the name and address of the applicable brokerage
firm and a statement to the effect that the Notice of Election is being
submitted on behalf of a customer whose shares are held in street name (without
identifying the customer). In addition, such Public Unity Shareholder should
instruct the broker to vote his or her street name shares against the Merger
Transaction.
At the Effective Time, each Converting Shareholder will cease to have any of
the rights of a Unity Shareholder, except the right to be paid the Conversion
Value for his or her shares of Unity Common Stock. To maintain his or her
position as a Converting Shareholder, a Public Unity Shareholder (or his or her
broker in the case of shares held in street name) must submit the certificate
representing his or her shares of Unity Common Stock to Unity or its transfer
agent as noted below. A Notice of Election may be withdrawn by a Public Unity
Shareholder (or his or her broker), with the written consent of Unity, prior to
20 days following the Effective Time.
Within 10 days after the date on which shareholders of Unity approve the
Merger Transaction, Unity will send written notice of such approval ("Notice of
Approval of Merger"), including the per share Conversion Value, by certified or
registered mail to each shareholder of Unity who filed a Notice of Election and
who voted his or her shares against adoption of the Merger Transaction.
Within 20 days following the date of mailing of the Notice of Approval of
Merger, Converting Shareholders must submit certificates representing their
shares of Unity Common Stock to Unity or its transfer agent. Within 30 days
following the date of mailing of the Notice of Approval of Merger, Unity will
pay each Converting Shareholder, who has submitted the certificates representing
his or her shares of Unity Common Stock to Unity or its transfer agent, the
Conversion Value for such shares. ANY CONVERTING SHAREHOLDER WHO FAILS TO SUBMIT
HIS OR HER CERTIFICATES REPRESENTING UNITY COMMON STOCK WITHIN 20 DAYS FOLLOWING
THE DATE OF MAILING OF THE NOTICE OF APPROVAL OF MERGER SHALL LOSE HIS OR HER
CONVERSION RIGHTS.
APPRAISAL RIGHTS
UNITY
Pursuant to Section 262 of the Delaware General Corporation Law ("DGCL"),
the holder of record of any shares of Unity Common Stock who does not vote such
holder's shares in favor of adoption and approval of the Merger Transaction may
assert appraisal rights and elect to have the "fair value" of such holder's
shares of Unity Common Stock determined and paid to such holder, provided that
such holder complies with the requirements of Section 262 of the DGLC,
summarized below. All references to and summaries of the rights of the
dissenting shareholders are qualified in their entirety by reference to the text
of Section 262 of the DGLC which is attached to this Proxy Statement as Exhibit
C.
24
<PAGE>
Any shareholder entitled to vote on the Merger Transaction who desires that
Unity purchase shares of Unity Common Stock held by such shareholder (the
"Dissenting Shares"), must not vote in favor of adoption and approval of the
Merger Transaction. Shares of Unity Common Stock voted in favor of adoption and
approval of the Merger Transaction will be disqualified as Dissenting Shares.
Shareholders whose shares are not voted in favor of adoption and approval of
the Merger Transaction and who, in all other respects, follow the procedures
specified in Section 262 will be entitled to have their Unity Common Stock
appraised by the Delaware Court of Chancery (the "Court") and to receive payment
of the "fair value" of such shares, exclusive of any element of value arising
from the accomplishment or expectation of the Merger, as determined by the
Court. The procedures set forth in Section 262 must be strictly complied with.
Failure to follow any such procedures will result in a termination or waiver of
appraisal rights under Section 262.
Under Section 262, a holder of Unity Common Stock electing to exercise
appraisal rights must:
(1) Deliver to Unity, before taking of the vote on the Merger
Transaction, a written demand for appraisal of such holder's Unity Common
Stock which reasonably informs Unity of the identity of the shareholder of
record and that such record shareholder intends thereby to demand appraisal
of such holder's shares. Such written demand is in addition to and separate
from any proxy or vote with respect to the Merger Transaction. Neither a
vote against or abstention from voting with respect to the Merger
Transaction nor a proxy directing such vote will satisfy the requirement
that a written demand for appraisal be delivered to Unity before the vote on
the Merger Transaction. Such written demand for appraisal should be
delivered either in person to the Secretary of Unity at the Special Meeting
on or before the vote on the Merger Transaction or in person or by mail to
the Secretary, prior to the Special Meeting, at 245 Fifth Avenue, New York,
New York 10016
(2) Not vote in favor of, or consent in writing to, the Merger
Transaction. A failure to vote against the Merger Transaction will not
constitute a waiver of appraisal rights. However, a shareholder who signs
and returns a proxy without expressly directing (by checking the applicable
box on the proxy card enclosed herewith) that such stockholder's shares be
voted against the Merger Transaction or that an abstention be registered
with respect to such shares of Unity Common Stock in connection with such
Merger Transaction will effectively have thereby waived his or her appraisal
rights as to those shares because, in the absence of express contrary
instructions, such shares will be voted in favor of the Merger Transaction.
Accordingly, a shareholder who desires to perfect appraisal rights with
respect to any shares must, as one of the procedural steps involved in such
perfection, either (i) refrain from executing and returning the enclosed
proxy card or voting in person in favor of Proposal No. 1 on such card, or
(ii) check either the "Against" or the "Abstain" boxes next to such Proposal
on such card or vote in person against the Merger Transaction or register in
person an abstention with respect thereto.
The written demand for appraisal must be made by or for the holder of record
of shares of Unity Common Stock. Accordingly, such demand must be executed by or
for such shareholder of record, fully and correctly, as such stockholder's name
appears on the stock certificates representing the shares. If the applicable
shares are owned of record in a fiduciary capacity, such as by a trustee,
guardian or custodian, execution of the demand should be made in such capacity,
and if the applicable shares are owned of record by more than one person, as in
a joint tenancy or tenancy in common, such demand should be executed by or for
all joint owners. An authorized agent, including one of two or more joint
owners, may execute the demand for appraisal for a shareholder of record.
However, the agent must identify the record owner(s) and expressly disclose the
fact that, in executing the demand, the agent is acting as agent for the record
owner(s).
A record owner, such as a broker, who holds shares as nominee for other
persons may exercise appraisal rights with respect to the shares held for all or
less than all of such other persons. In such case, the written demand should set
forth the number of shares covered by it. Where no number of shares is
25
<PAGE>
expressly mentioned, the demand will be presumed to cover all shares standing in
the name of such record owner.
Within 10 days after the Effective Time, Unity is required to, and will,
notify each shareholder who has satisfied the foregoing conditions of the date
on which the Effective Time occurred and that appraisal rights are available
with respect to shares for which a demand has been submitted. Within 120 days
after the Effective Time, Unity, or any such shareholder who has satisfied the
foregoing conditions and is otherwise entitled to appraisal rights under Section
262, may file a petition in the Court demanding a determination of the value of
the shares held by all shareholders entitled to appraisal rights. If no such
petition is filed, appraisal rights will be lost for all shareholders who had
previously demanded appraisal of their shares. Shareholders of Unity seeking to
exercise appraisal rights should not assume that Unity will file a petition with
respect to the appraisal of the value of their shares or that Unity will
initiate any negotiations with respect to the "fair value" of such shares.
Accordingly, such shareholders should regard it as their obligation to take all
steps necessary to perfect their appraisal rights in the manner prescribed in
Section 262.
Within 120 days after the date of the Effective Time, any shareholder who
has therefore complied with the applicable provisions of Section 262 will be
entitled, upon written request, to receive from Unity a statement setting forth
the aggregate number of shares not voted in favor of the Merger Transaction and
with respect to which demands for appraisal were received by Unity, and the
number of holders of such shares. Such statement must be mailed within 10 days
after the written request therefor has been received by Unity or within 10 days
after expiration of the period for delivery of demands for appraisal, which ever
is later.
If a petition for an appraisal is timely filed, at the hearing on such
petition the Court will determine the shareholders of Unity entitled to
appraisal rights. After determining the shareholders entitled to an appraisal,
the Court will appraise the value of the shares of Unity Common Stock owned by
such shareholders, determining the "fair value" thereof exclusive of any element
of value arising from the accomplishment or expectation of the Merger. The Court
will direct payment by Unity of the fair value of such shares together with a
fair rate of interest, if any, on such fair value to shareholders entitled
thereto upon surrender to Unity of stock certificates. The costs of the
proceeding may be determined by the Court and taxed upon the parties as the
Court deems equitable in the circumstances. Upon application of a shareholder,
the Court may, in its discretion, order that all or a portion of the expenses
incurred by any shareholder in connection with an appraisal proceeding,
including without limitation, reasonable attorneys' fees and fees and expenses
of experts, be charged pro rata against the value of all the shares entitled to
appraisal.
Although Unity believes that the Merger Transaction is fair, no
representation is made as to the outcome of the appraisal of fair value as
determined by the Court and shareholders should recognize that such appraisal
could result in a determination of a value higher or lower than, or the same as,
the Conversion Value. Moreover, Unity does not presently anticipate offering
more than the Conversion Value to any shareholder exercising appraisal rights
and reserves the right to assert, in any appraisal proceeding, that, for
purposes of Section 262, the "fair value" of a share of Unity Common Stock is
less than the Conversion Value. In determining the "fair value" of shares of
Unity Common Stock, the Court is required to take into account all relevant
factors. Therefore, such determination could be based upon considerations other
than, or in addition to, the price paid for shares of Unity Common Stock,
including, without limitation, the market value of shares and the asset values
and earning capacity of Unity. In WEINBERGER V. UOP, INC. ET AL., 457 A.2d
701,713 (Del. 1983), the Delaware Supreme Court stated, among other things, that
"proof of value by any techniques or methods which are generally considered
acceptable in the financial community and otherwise admissible in court" should
be considered in an appraisal proceeding. Section 262 provides that "fair value"
is to be "exclusive of any element of value arising from the accomplishment or
expectation of the merger." In WEINBERGER, the Delaware Supreme Court held that
26
<PAGE>
"elements of future value, including the nature of the enterprise, which are
known or susceptible of proof as of the date of the merger and not the product
of speculation, may be considered." Id.
Any holder of shares of Unity Common Stock who has demanded an appraisal in
compliance with Section 262 will not, after the Effective Time, be entitled to
vote such holder's shares for any purpose nor be entitled to the payment of
dividends or other distributions on such shares (other than those payable to
shareholders of record as of a date prior to the Effective Time).
If (i) no petition for an appraisal is filed within 120 days after the date
of the Effective Time or (ii) a holder of shares delivers to Unity a written
withdrawal of such holder's demand for an appraisal and an acceptance of the
Merger, either within 60 days after the Effective Time or with the written
approval of Unity thereafter (which Unity reserves the right to give or
withhold, in its sole discretion), then the right of such shareholder to an
appraisal will cease and such shareholder will remain a shareholder of Unity. No
appraisal proceeding in the Court will be dismissed as to any shareholder
without the approval of the Court, which approval may be conditioned on such
terms as the Court deems just.
Also see "Conversion Rights" above.
WORLDS
Under the New Jersey Business Corporation Act, as amended (the "NJBCA"),
shareholders of Worlds may dissent from the Merger and be paid the fair value of
their shares if they comply with the applicable provisions of the NJBCA.
Shareholders contemplating the exercise of their appraisal rights should review
the procedures set forth in Chapter 11 of the NJBCA, a copy of which is attached
to this Joint Proxy Statement/Prospectus as Exhibit D. The following is a
summary of the steps which must be taken for the exercise of Worlds dissenters'
rights and is qualified in its entirety by reference to the attached sections of
the NJBCA.
To be eligible to exercise his right of dissent, a Worlds Shareholder must
file with Worlds a written notice of dissent, stating that he intends to demand
payment for all, but not less than all, of the shares of Worlds Common Stock
owned beneficially by him, if the Merger becomes effective. The notice of
dissent must be filed before the vote of the Worlds Shareholders on the Merger
is taken. A Worlds Shareholder who votes in favor of the merger waives his right
to dissent. The notice of dissent should be delivered to Mr. Thomas Kidrin,
President, Worlds Inc., 15 Union Wharf, Boston, Massachusetts 02109.
Within 10 days after the date the Merger becomes effective, Worlds
Shareholders who have filed a notice of dissent will be notified by Worlds by
certified mail of the effective date of the Merger, except that such notice need
not be sent to any such Worlds Shareholder who voted for or consented in writing
to the Merger. Within 20 days after Worlds' notice is mailed, a Worlds
Shareholder entitled to receive such notice who wishes to dissent must file with
Worlds a written demand for the payment of the fair value of his shares of
Worlds Common Stock. Such written demand should be delivered to Mr. Thomas
Kidrin, President, Worlds Inc., 15 Union Wharf, Boston, Massachusetts 02109.
Within 20 days after making his written demand for payment, the Worlds
Shareholder must submit his share certificates for Worlds Common Stock to
Worlds. Worlds will make a notation thereon that such shareholder has made a
demand to be paid the fair value of his shares and thereafter the certificate
will merely represent the rights of a dissenting shareholder, and will not
represent shares of Worlds Common Stock.
Within 10 days after the expiration of the period within which Worlds
Shareholders may make a written demand to be paid the fair value of their
shares, Worlds will mail to each dissenting Worlds Shareholder the latest
available 12-month profit and loss statement and a balance sheet and surplus
statement as of the close of the 12-month period. The close of the profit and
loss statement and the balance sheet will be as of a date within 12 months prior
to the mailing. Worlds may accompany these financial statement with a written
offer to pay a specified price for such dissenting shareholder's shares
27
<PAGE>
deemed by Worlds to be the fair value thereof, but Worlds is not obligated to do
so. Each dissenting Worlds Shareholder will have a 30-day period following
Worlds' mailing of the financial statement to agree upon a price with Worlds. If
the Worlds Shareholder and Worlds are unable to agree upon a price within the
30-day period, such shareholder may serve a written demand on Worlds to commence
an action in the Superior Court of New Jersey for the determination of the fair
value of his Worlds shares. The Worlds Shareholder's demand to commence an
action must be served not later than 30 days after the expiration of the 30-day
period Worlds Shareholders have in which to agree upon a price with Worlds.
Worlds has 30 days after receipt of the Worlds Shareholder's demand to
commence a proceeding in the Superior Court. If Worlds fails to institute the
proceeding, such shareholder may institute the proceeding in the name of Worlds
within 60 days after expiration of Worlds' 30-day period.
In the New Jersey Superior Court proceeding, the court has jurisdiction over
all Worlds dissenting shareholders who have not agreed upon a price with Worlds
and may proceed in a summary fashion to determine the fair value of the shares
of Worlds Common Stock. The court's judgment must include interest from the date
of the dissenting shareholder's demand for payment to the date of payment unless
the court finds the refusal of any dissenting shareholder to accept Worlds'
offered price was arbitrary, vexatious or otherwise not in good faith. The costs
of the action (excluding the fees and expenses of each party's attorneys and
experts) and of any court-appointed appraiser will be apportioned equitably by
the court.
The court may in its discretion award a dissenting shareholder the
reasonable fees and expenses of his counsel and of any experts employed by the
dissenting shareholder if the court finds that the price offered by Worlds was
not offered in good faith or if no such offer was made.
OPERATIONS AFTER THE MERGER
DIRECTORS AND EXECUTIVE OFFICERS. In accordance with the Merger Agreement,
the four current members of the Unity Board will resign immediately prior to the
Effective Time. Immediately following the Merger, the three current directors of
Worlds will become the sole members of the Unity Board. In addition, all of
Unity's executive officers will resign as of the Effective Time, to be replaced
by Worlds' current executive officers. See "Management of Worlds--Directors,
Executive Officers and Consultant".
DIVIDENDS. Unity does not presently intend to pay any cash dividends as all
available cash will be utilized to further the growth of Unity's business
subsequent to the Effective Time for the proximate future thereafter. The
payment of any subsequent cash dividends will be in the discretion of the Unity
Board and will be dependent upon Unity's results of operations, financial
condition, and other factors deemed relevant by the Unity Board. See
"Description of Unity's Securities--Dividends."
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<PAGE>
PRICE RANGES OF SECURITIES
UNITY
Unity's Common Stock, Class A Redeemable Warrants and Class B Redeemable
Warrants are each quoted on the OTC Bulletin Board under the symbols UFAC, UFACW
and UFACZ, respectively. The following table sets forth the range of the high
and low bid quotations of such securities on the OTC Bulletin Board for the
periods indicated:
<TABLE>
<CAPTION>
CLASS A CLASS B
REDEEMABLE REDEEMABLE
COMMON STOCK WARRANTS WARRANTS
-------------------- ---------------------- ---------
<S> <C> <C> <C> <C> <C>
THREE MONTHS ENDED HIGH LOW HIGH LOW HIGH
- -------------------------------------------------------------------- --------- --------- --------- --- ---------
January 31, 1997(1)................................................. 4 3/4 4 3/8 1 1/4 7/8 1 1/4
April 30, 1997...................................................... 4 13/16 4 3/8 1 1/8 3/8 7/8
July 31, 1997....................................................... 4 7/8 4 7/16 1 1/4 5/16 7/8
October 31, 1997.................................................... 4 29/32 4 5/8 13/16 1/4 5/8
January 31, 1998.................................................... 5 1/2 4 11/16 1 3/8 9/16
April 30, 1998...................................................... 5 3/16 4 3/4 1 1/16 5/8 9/16
July 31, 1998....................................................... 5 5/16 4 13/16 1 3/8 7/16 1/2
October 31, 1998 (through August 31, 1998).......................... 5 1/4 4 3/4 1 1/8 7/16 1/2
<CAPTION>
<S> <C>
THREE MONTHS ENDED LOW
- -------------------------------------------------------------------- ---
January 31, 1997(1)................................................. 3/4
April 30, 1997...................................................... 1/4
July 31, 1997....................................................... 1/4
October 31, 1997.................................................... 1/8
January 31, 1998.................................................... 1/4
April 30, 1998...................................................... 1/4
July 31, 1998....................................................... 9/32
October 31, 1998 (through August 31, 1998).......................... 1/4
</TABLE>
- ------------------------
(1) Unity's securities began separate trading on November 21, 1996.
The above quotations represent prices between dealers and do not include
retail markup, markdown or commission. They do not necessarily represent actual
transactions.
On June 24, 1998 (the last trading day prior to the public announcement of
the execution of the Merger Agreement), the last reported closing bid prices of
Unity's Common Stock, Class A Redeemable Warrants and Class B Redeemable
Warrants were $5 1/8, $ 11/16 and $ 7/16, respectively. On that date, there were
34 recordholders of Unity Common Stock, although Unity believes that there are
other persons who are beneficial owners of shares of Unity Common Stock held in
street name.
WORLDS
There is not presently, nor has there been for at least the past five years,
an active trading market for Worlds Common Stock.
On September , 1998, there were 600 recordholders of Worlds Common Stock,
although Worlds believes that there are other persons who are beneficial owners
of shares of Worlds Common Stock held in street name.
29
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF WORLDS
The following selected financial data as of December 31, 1997 and for the
period April 8, 1997 (inception) through December 31, 1997 is derived from the
financial statements of Worlds included elsewhere herein, which have been
audited by BDO Seidman, LLP, independent certified public accountants. Such data
includes the operations of Academic Computer Systems, Inc. and Predecessor from
December 4, 1997. The selected statement of operations data for Predecessor for
the period from April 26, 1994 to December 3, 1997, for the year ended December
31, 1996, for the period ended December 3, 1997 and for the period April 26,
1994 (inception) to December 3, 1997 is derived from the audited financial
statements of Predecessor included elsewhere herein, which have been audited by
BDO Seidman, LLP, independent certified public accountants. The selected
statements of operations data for Predecessor for the period from April 26, 1994
to December 31, 1994 and for the year ended December 31, 1995 is derived from
Predecessor's audited financial statements not included herein. The data as of
and for the six months ended June 30, 1998 is derived from Worlds, unaudited
condensed financial statements included elsewhere in this Joint Proxy
Statement/Prospectus and which, in the opinion of management, include all
adjustments (consisting of only normal recurring adjustments) necessary for a
fair presentation of the information set forth therein. The results of
operations for the six months ended June 30, 1998 are not necessarily indicative
of the results that may be expected for the full year.
The following data should be read in conjunction with the financial
statements of the Worlds and Predecessor.
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
WORLDS INC.
(FORMERLY WORLDS
ACQUISITION CORP.)
(A DEVELOPMENT STAGE
WORLDS INC.--PREDECESSOR (A DEVELOPMENT STAGE ENTERPRISE)
----------------------------------------------------------------------
ENTERPRISE) CUMULATIVE
------------------------------ FROM APRIL
APRIL 8, APRIL 26, 26,
1997 FOR THE PERIOD 1994 1994
FOR THE (INCEPTION) FROM JANUARY 1, FOR THE YEAR ENDED (INCEPTION) (INCEPTION)
SIX MONTHS THROUGH THROUGH DECEMBER 31, THROUGH THROUGH
ENDED JUNE 30, DECEMBER 31, DECEMBER 3, ----------------------- DECEMBER 31, DECEMBER 3,
1998 1997 1997 1996 1995 1994 1997
---------------- ------------ --------------- ----------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Revenues...... $ 16,132 $ 1,420 $ 80,720 $ 3,784,019 $1,882,232 $ 279,720 $ 6,026,691
Total Costs &
Expenses........ 1,867,054 6,810,568(a) 2,885,088 13,871,984 9,561,265 1,461,300 27,779,637
Operating Loss.... (1,850,922) (6,809,148) (2,804,368) (10,087,965) (7,679,033) (1,181,580) (21,752,946)
Other Income and
(Expenses)...... 4,880 (3,099) 134,863 16,011 96,201 447 247,522
Net Loss Before
Taxes and
Extraordinary
Item............ (1,846,042) (6,812,247) (2,669,505) (10,071,954) (7,582,832) (1,181,133) (21,505,424)
Income Taxes...... -- -- (5,000) (115,000) -- -- (120,000)
Net Loss Before
Extraordinary
Item............ (1,846,042) (6,812,247) (2,674,505) (10,186,954) (7,582,832) (1,181,133) (21,625,424)
Extraordinary
Item-Gain On
Debt
Settlement...... 151,654 125,776 389,285 -- -- -- 389,285
Net Loss.......... $ (1,694,388) $(6,686,471) $(2,285,220) $(10,186,954) $(7,582,832) $(1,181,133) $(21,236,139)
Loss per share--
before
extraordinary
item (basic and
diluted)........ $ (0.11) $ (0.73) $ (0.48) $ (1.84) $ (1.44) $ (0.39)
Loss per share
(basic and
diluted)........ $ (0.10) $ (0.72) $ (0.41) $ (1.84) $ (1.44) $ (0.39)
</TABLE>
- ------------------------
(a) Includes $6,135,538 of acquired research and development costs resulting
from the merger with Predecessor.
30
<PAGE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
JUNE 30, 1998 DECEMBER 31, 1997
------------- -----------------
<S> <C> <C>
Working Capital................................................................. $ 1,765,197 $ 1,750,112
Total Assets.................................................................... $ 3,569,674 $ 3,825,994
Total Liabilities............................................................... $ 3,595,274 $ 3,834,783
Shareholders' Deficit........................................................... $ (25,600) $ (8,769)
</TABLE>
31
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF WORLDS
Worlds was originally formed on May 20, 1968. Since 1975 Worlds has been
inactive with no operations and its only income has come from interest, gain on
the sale of securities and dividends. Following the Worlds Consolidations,
Worlds has been engaged in the business and operations formerly conducted by
Predecessor. Accordingly, a discussion and analysis of Worlds' financial
condition and results of its operations would be of limited import to any reader
as it would only cover activities (or lack thereof) which have no meaning in the
context of Worlds' current operations. Thus, included herein is a discussion and
analysis of the financial condition and results of the operations of
Predecessor's pre-Worlds Consolidations operations.
BACKGROUND
Predecessor was formed in April 1994 to design, develop and commercialize 3D
multi-user tools and technologies for the Internet market. From inception
through 1997, Predecessor's operations were limited and consisted primarily of
start-up activities, including recruiting personnel, raising capital, custom
production work, and research and development. In the third quarter of 1996,
Predecessor launched its first commercial user-oriented 3D chat site, WORLDS
CHAT 1.0 and began selling the client interface software through direct sales
channels. These sales were very nominal. In October of 1996, Predecessor
introduced its first commercial toolset for developing 3D multi-user
applications. In the first quarter of 1997, after an unsuccessful effort to
raise capital, Predecessor became insolvent and released most of its personnel,
and management sought to sell Predecessor and/or its technology.
Predecessor has not generated significant revenues, and Worlds will not
generate significant revenues, if ever, until after it successfully completes
development and market testing of WORLDS PLATINUM and its 3D Internet music
sites, and attracts and retains a significant number of subscribers and/or
advertisers. Worlds anticipates that it will continue to incur significant
losses until, at the earliest, Worlds generates sufficient revenues to offset
the substantial up-front expenditures and operating costs associated with
developing and commercializing its proposed products. There can be no assurance
that Worlds will be able to attract and retain a sufficient number of
subscribers and/or advertisers to generate significant revenues or achieve
profitable operations or that its products and services will prove to be
commercially viable.
Predecessor (and now Worlds), classified its expenses into three broad
groups: (i) research and development; (ii) cost of revenues; and (iii) selling,
general and administration. Revenues consisted primarily of production service
activities and sales of technology licenses.
Software development costs (consisting primarily of salaries and related
expenses) incurred prior to establishing technological feasibility are expensed
in accordance with Financial Accounting Standards Board ("FASB") Statement No.
86. In accordance with FASB 86, Worlds will capitalize software development
costs at such time as the technological feasibility of the product has been
established.
PLAN OF OPERATION
During the next twelve months of operation Worlds intends to (i) refine and
commercialize the technology of Predecessor by producing interactive, 3D, music
related websites and distribute access to these web sites on enhanced compact
discs ("CD+") of various recording artists via traditional retail record
outlets, working in conjunction with major record labels, (ii) offer Worlds' 3D
technology for non-music applications such as corporate Intranets and (iii)
release a new version of WORLDS CHAT.
Worlds is presently completing work on WORLDS PLATINUM, the latest version
of Worlds' 3D Internet software, to adapt it for distribution and use on CD+
media. Worlds is also in discussions with several major record labels and
companies for them to distribute WORLDS PLATINUM, along with music related web
site access and graphics files co-authored by Worlds and the particular record
label or company. While
32
<PAGE>
Worlds foresees no particular obstacle to completing work on WORLDS PLATINUM,
the development of software is inherently fraught with unforeseen delays
resulting from bugs, lack of coordination among development staff, integration
with other software and hardware, and general design flaws, among other
problems. In addition, Worlds' strategy of distributing its products on CD+ is
wholly dependent upon obtaining distribution agreements with record labels or
companies. To date, Worlds has entered into two such agreements.
Worlds currently has sufficient cash resources for at least the next twelve
months. Worlds currently has 11 full-time employees and is working with eight
independent software contractors who were former employees of Worlds. Worlds
does not anticipate hiring more than 5 to 9 additional employees or purchasing
additional plant or equipment other than that needed on a day-to-day basis until
product sales increase significantly and/or additional financing is obtained.
By agreement dated as of June 25, 1998, Worlds agreed, subject to
shareholder approval and other conditions, to merge into Unity, a publicly
traded blank check company with approximately $6,000,000 in liquid assets, by
exchanging each share of Worlds Common Stock for .357 shares of Unity Common
Stock resulting in Worlds Shareholders retaining ownership of in excess of 75%
of the merged entity.
RESULTS OF OPERATIONS OF WORLDS
(NOTE TO RESULTS OF OPERATIONS. SINCE PREDECESSOR MERGED INTO WAC AND
ACADEMIC ON DECEMBER 3, 1997, A COMPARISON OF THE FISCAL YEAR ENDED DECEMBER 31,
1996 TO DECEMBER 31, 1997 WOULD NOT BE MEANINGFUL. CONSEQUENTLY, PREDECESSOR'S
RESULTS OF OPERATIONS FROM DECEMBER 31, 1996 ARE COMPARED BELOW WITH THE ELEVEN
MONTHS ENDED DECEMBER 3, 1997. RESULTS OF OPERATIONS OF WORLDS FOR THE PERIOD
FROM APRIL 8, 1997 (THE INCEPTION OF WAC, THE ACCOUNTING ACQUIROR IN THE WORLDS
CONSOLIDATIONS) THROUGH DECEMBER 31, 1997 ARE DISCUSSED SEPARATELY.)
SIX MONTHS ENDED JUNE 30, 1998 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1997
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
WORLDS INC. -
WORLDS INC. PREDECESSOR
------------- -------------
SIX MONTHS ENDED
----------------------------
JUNE 30, 1998 JUNE 30, 1997
------------- -------------
<S> <C> <C>
Net Revenues........................................................................ $ 16,132 $ 64,327
Costs & Expenses:
Cost of revenues.................................................................. (25,101) (27,629)
Selling, general & administrative................................................. (1,307,525) (1,800,488)
Research & development............................................................ (534,428) (388,159)
------------- -------------
Operating Loss...................................................................... (1,850,922) (2,151,949)
------------- -------------
Other income (expense):
Interest income................................................................... 76,992 10,344
Interest expense.................................................................. (72,112) (71,339)
Gain on disposal of equipment..................................................... -- 4,070
Income from sale of technology.................................................... -- 260,100
------------- -------------
Loss before taxes & extraordinary item.............................................. (1,846,042) (1,948,774)
Income taxes........................................................................ -- (5,000)
------------- -------------
Loss before extraordinary item...................................................... (1,846,042) (1,953,774)
Extraordinary item--gain on debt settlement......................................... 151,654 --
------------- -------------
Net loss............................................................................ (1,694,388) (1,953,774)
------------- -------------
------------- -------------
</TABLE>
33
<PAGE>
In the first six months of 1998, Worlds continued the implementation of the
new business plan. Significant expenditures were incurred towards completion of
the WORLDS PLATINUM technology and also with legal and professional fees as
Worlds proceeded with its fund raising activities. In the first quarter of 1997
Predecessor was insolvent and had failed to raise any additional capital. In
January and February 1997 the majority of Predecessor's personnel were released
and most of its management team resigned. Normal operations of Predecessor
ceased and significant wind down costs were incurred. The Seattle network
operations center and Active Worlds, an earlier generation of Predecessor's
technology ,were both sold, resulting in net proceeds of $260,100.
Revenues are nominal and are derived from Worlds' WORLDS CHAT product and
one custom production project. Revenue was $16,132 and had associated direct
costs of $25,101 for the six months ended June 30, 1998 compared to $64,327 in
revenue and $27,629 of direct costs for the same period in 1997.
Selling, general and administrative expenses were $1,307,525 for the six
months ended June 30, 1998. This represented a decrease of $492,963 from
$1,800,488 compared to the six months ended June 30, 1997. This decrease was
directly attributable to the higher costs associated with the Predecessor
ceasing normal operations in the first quarter of 1997.
Research and development costs increased by $146,269 to $534,428 for the six
months ended June 30, 1998 from $388,159 for the six months ended June 30, 1997.
This increase is directly attributable to the company ceasing development
technology at the end of the first quarter of 1997.
Other income included $76,992 of interest income in the six months to June
30,1998 earned from the proceeds of the recent public and private offerings.
Other income in the six months to June 30, 1997 included interest income of
$10,344, the sale of the Active Worlds technology in the net amount of $260,100
and a property disposal gain of $4,070. Other expenses included interest expense
of $72,112 directly attributable to the Predecessor's notes payable in the six
months to June 30, 1998. Interest expenses in the six months to June 30, 1997
were $71,339.
As a result of the foregoing, plus a gain on debt settlement of $151,654
during the first quarter of 1998, Worlds incurred a net loss of $1,694,388 for
the six months to June 30,1998, compared to a loss $1,953,774 for the six months
to June 30,1997 a decrease of 13%.
THREE MONTHS ENDED JUNE 30, 1998 COMPARED WITH 3 MONTHS ENDED JUNE 30, 1997
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
WORLDS INC. -
WORLDS INC. PREDECESSOR
------------- -------------
THREE MONTHS ENDED
----------------------------
JUNE 30, 1998 JUNE 30, 1997
------------- -------------
<S> <C> <C>
Net Revenues........................................................................ $ 12,130 $ 24,342
Costs & Expenses:
Cost of revenues.................................................................. (22,500) (9,026)
Selling, general & administrative................................................. (759,185) (556,395)
Research & development............................................................ (302,516) (76,595)
------------- -------------
Operating Loss...................................................................... (1,072,071) (617,674)
------------- -------------
Other income (expense):
Interest income................................................................... 35,054 431
Interest expense.................................................................. (35,656) (34,511)
Loss on disposal of equipment..................................................... -- (2,085)
Loss before taxes................................................................... (1,072,673) (653,839)
Income taxes........................................................................ -- (2,500)
Net loss............................................................................ (1,072,673) (656,339)
------------- -------------
------------- -------------
</TABLE>
34
<PAGE>
In the second quarter of 1998 Worlds continued the implementation of the new
business plan. Significant expenditure was incurred towards completion of the
WORLDS PLATINUM technology.
Revenues are nominal and are derived from Worlds' WORLDS CHAT product and
one custom production project. Revenues were $12,130 and had associated direct
costs of $22,500 for the three months ended June 30, 1998 compared to $24,342 in
revenue and $9,026 of direct costs for the same period in 1997.
Selling, general and administrative expenses were $759,185 for the three
months ended June 30, 1998. This represented a increase of $202,790 from
$556,395 compared to the three months ended June 30, 1997. This increase was
directly attributable to the Predecessor ceasing normal operations in the first
quarter of 1997.
Research and development costs increased by $225,921 to $302,516 for the
three months ended June 30, 1998 from $76,595 for the three months ended June
30, 1998. This increase was directly attributable to the Predecessor ceasing
normal operations in the first quarter of 1997.
Other income included $35,054 of interest income in the three months to June
30,1998 earned from the proceeds of the recent public and private offerings.
Other income in the three months to June 30, 1997 included interest income of
$431. Interest expenses in the three months to June 30, 1998 were $35,656
directly attributable to the Predecessor's notes payable. Other expenses
included interest expense of $34,511 and a property disposal loss of $2,085 in
the three months to June 30, 1997.
As a result of the foregoing Worlds incurred a net loss of $1,072,673 for
the three months to June 30,1998, compared to a loss $656,339 for the three
months to June 30,1997 a increase of 63%.
LIQUIDITY AND CAPITAL RESOURCES OF WORLDS
Net cash used by Worlds' operating activities from January 1, 1998 through
June 30, 1998 was $1,783,428. At June 30, 1998, Worlds had working capital of
$1,765,147.
On December 3, 1997, Predecessor merged with and into WAC.
Contemporaneously, WAC, closed the first round of a private placement of its
common stock (the "Private Offering") raising gross proceeds of $3.8 million (of
which it netted approximately $3,000,000) and WAC merged with and into Worlds,
then called Academic Computer Systems, Inc. ("Academic"), an inactive
corporation with approximately $560,000 of net assets, primarily cash.
Thereafter, Academic changed its name to Worlds Inc. The merger of Predecessor
into WAC and the subsequent merger of WAC with and into Academic are sometimes
hereinafter collectively referred to herein as the "Worlds Consolidations."
Prior to the Worlds Consolidations, Academic (the surviving entity of the
Worlds Consolidations) had 910,000 shares outstanding. Effective December 31,
1997, Worlds closed on an additional $585,000 of gross proceeds from the Private
Offering, of which it netted $529,000, and issued an additional 585,000 shares
of Worlds Common Stock and on January 2, 1998 received an additional $30,000, of
which it netted $26,500, and issued an additional 30,000 shares. The total
issued and outstanding shares of Worlds as of March 1, 1998 is therefore
16,149,996 shares. The terms of the Worlds Consolidations called for the
issuance, in exchange for all of the outstanding shares of WAC (which also
included the former shareholders of Predecessor), of an aggregate of 14,624,996
shares of Academic's common stock distributed, as follows: 8,400,000 to the
former shareholders of WAC; 1,999,996 to the former shareholders of Predecessor
and; 3,800,000 to the investors in the private placement offering. As part of
the Worlds Consolidations, Worlds issued 425,000 shares as a financial advisory
fee to International Capital Growth, Ltd. which also received warrants to
purchase 110,375 shares of Worlds Common Stock for $1.00 per share.
On May 1, 1998 the SEC declared effective a registration statement of Worlds
(as supplemented on May 7, 1998) covering Worlds' sale of 2,000,000 shares of
Worlds Common Stock at $1.00 per share and the sale by securityholders of
5,604,375 shares of Worlds Common Stock. On June 16, 1998, Worlds closed
35
<PAGE>
the offering raising proceeds (net of commissions) of $1,715,800 through the
sale of 1,832,000 shares of Worlds Common Stock.
in June 1998, Worlds paid $64,743 to dissenting Worlds Shareholders of the
Worlds Consolidations resulting in 113,465 shares being added to treasury.
Worlds' capital requirements relating to the development and
commercialization of WORLDS PLATINUM have been and will continue to be
significant and is currently estimated at approximately $3.0 to $5.0 million.
Worlds is dependent on the proceeds of Unity resulting from the Merger and other
future financings in order to develop and commercialize its proposed products.
Worlds anticipates, based on currently proposed business plans and
assumptions relating to its operations (including the timetable of, and costs
associated with, product development and commercialization), that the proceeds
of its recent public offering, will provide only a portion of the funds
necessary to permit Worlds to complete product development and
commercialization. Satisfactory completion of product development and
commercialization will require capital resources substantially greater than the
proceeds of its recent public offering or otherwise currently available to
Worlds. In addition, as a result of the Worlds Consolidations by operation of
law, Worlds assumed the Predecessor's liabilities of approximately $4 million.
Although Worlds is in the process of negotiating the amount and timing of
payment of some of its liabilities, there is no assurance that such negotiations
will be successful.
While Worlds hopes to raise an additional $6 million from the Merger
Transaction, Worlds has no current arrangements with respect to, or sources of,
additional financing and there can be no assurance that any such financing will
be available to Worlds on commercially reasonable terms, or at all. Any
inability to obtain additional financing will have a material adverse effect on
Worlds, including possibly requiring Worlds to significantly curtail operations.
Based upon its current projections, Worlds believes it currently has sufficient
funds to operate for the next twelve months and at least two years following the
Merger.
RESULTS OF OPERATIONS OF PREDECESSOR
FISCAL YEAR ENDED DECEMBER 31, 1996 COMPARED WITH THE ELEVEN MONTHS ENDED
DECEMBER 3, 1997.
In the first quarter of 1997 Predecessor was insolvent and had failed to
raise any additional capital. In January and February the majority of
Predecessor's personnel were released and most of its management team resigned.
Normal operations of Predecessor ceased and significant wind down costs were
incurred. In March, the board of directors appointed Regent Pacific, a firm with
experience in crisis management, as acting general manager of Predecessor. The
Seattle network operations center and Active Worlds, an earlier generation of
Predecessor's technology, were both sold, resulting in net proceeds of $260,100.
Revenue decreased by $3,703,299 to $80,720 for the eleven months ended
December 3, 1997 from $3,784,019 for the fiscal year ended December 31, 1996.
The decrease was caused primarily by the lack of any revenue from production
projects since Predecessor Worlds ceased operations during the period. The
nominal revenue for the period was derived from WORLDS CHAT CD sales and web
site hosting at the Company's Seattle operations.
Costs of revenue decreased by $5,982,128 to $32,304 for the eleven months
ended December 3, 1997 from $6,014,432 for the fiscal year ended December 31,
1996. The decrease was directly attributable to the lack of operations during
the period.
Research and development costs decreased by $1,993,827 to $452,897 for the
eleven months ended December 3, 1997 from $2,446,724 for the fiscal year ended
December 31, 1996. This was a result of a significant reduction in research and
development effort and personnel.
36
<PAGE>
Selling, general and administrative expenses decreased by $2,501,741 to
$2,399,887 for the eleven months ended December 3, 1997 from $4,901,628 for the
fiscal year ended December 31, 1996. This decrease was due to reduction in
personnel as Predecessor ceased normal operations.
Predecessor's interest expense increased by $122,900 to $139,650 for the
eleven months ended December 3, 1997 from $16,750 for the fiscal year ended
December 31, 1996. This was attributable primarily to interest on $1,685,000 in
loans received by Predecessor.
In 1997, Predecessor recognized an extraordinary gain of $389,285 upon the
partial forgiveness of debt owed in connection with technology purchases.
As a result of the foregoing, Predecessor incurred a net loss of $2,285,220,
inclusive of the $389,287 extraordinary gain, for the eleven months ended
December 3, 1997, compared to $10,186,954 for the fiscal year ended December 31,
1996, a decrease of 78%.
YEAR ENDED DECEMBER 31, 1995 COMPARED WITH YEAR ENDED DECEMBER 31, 1996.
Revenue increased by 101% from $1,882,232 for the year ended December 31,
1995 to $3,784,019 for the year ended December 31, 1996. This increase was
primarily attributable to an increase in the number of production projects and
the licensing revenue from these projects.
Costs of revenue increased by 35% from $4,445,582 for the year ended
December 31, 1995 to $6,014,432 for the year ended December 31, 1996. The
increase in costs was related to the increased number of production projects and
the high costs relative to revenue, associated with the network operations
center.
Research and Development costs increased by 8% from $2,257,082 for the year
ended December 31, 1995 to $2,446,724 for the year ended December 31, 1996. All
software development costs consisting primarily of salaries and related costs
were expensed as incurred in accordance with Financial Accounting Standards
Board ("FASB") Statement No. 86.
Selling, general and administrative expenses were $4,901,628 for the year
ended December 31, 1996 compared to $2,858,601 for the year ended December 31,
1995, an increase of 71%. The increase was attributable to several factors,
including the addition of new management personnel, increased marketing efforts,
new office facilities and increased legal costs.
Other income and expenses includes interest earned from investment capital
and interest charged on finance leases. Lawsuit settlement expenses in 1996 are
primarily associated with claims asserted by ex-employees.
As a result of the foregoing, Predecessor incurred a net loss of $10,071,954
for the year ended December 31, 1996 compared to $7,582,832 for the year ended
December 31, 1995, an increase of 33%.
37
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF UNITY
The following selected historical financial data should be read in
conjunction with the historical financial statements of Unity and the notes
thereto appearing elsewhere in this Joint Proxy Statement/ Prospectus. The
selected financial data of Unity as of July 31, 1997 and 1996, for the year
ended July 31, 1997 and for the period from inception (May 30, 1996) to July 31,
1996 have been derived from the financial statements of Unity, which have been
audited by Arthur Andersen LLP, independent public accountants. The data as of
and for the nine months ended April 30, 1998 and 1997 and for the period from
inception (May 30, 1996) to April 30, 1998 have been derived from Unity's
unaudited condensed financial statements included elsewhere in this Joint Proxy
Statement/Prospectus and which, in the opinion of management, include all
adjustments (consisting of only normal recurring adjustments) necessary for a
fair presentation of the information set forth therein. The results of
operations for the nine months ended April 30, 1998 are not necessarily
indicative of the results that may be expected for the full year.
STATEMENTS OF OPERATIONS DATA
<TABLE>
<CAPTION>
PERIOD FROM
PERIOD FROM MAY 30, 1996
NINE MONTHS ENDED MAY 30, 1996 (INCEPTION)
APRIL 30, YEAR ENDED (INCEPTION) TO TO
---------------------- JULY 31, JULY 31, APRIL 30,
1998 1997 1997(1) 1996(L) 1998
---------- ---------- --------------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Revenues................................ -- -- -- -- --
Net income (loss)....................... $ (35,290) $ (9,033) $ 6,637 $ (15,000) $ (43,653)
Income (loss) per common share (basic
and diluted).......................... $ (0.02) $ 0.01 $ 0.01 $ (0.02)
Weighted average common shares.......... 1,875,000 1,375,000 1,515,000 625,000
</TABLE>
BALANCE SHEET DATA
<TABLE>
<CAPTION>
JULY 31,
APRIL 30, ------------------------
1998 1997 1996
------------- ------------ ----------
<S> <C> <C> <C>
Total assets............................................................. $ 6,455,188 $ 6,465,021 $ 250,563
Total liabilities........................................................ $ 96,666 $ 71,209 $ 265,500
Working capital.......................................................... $ 6,358,522 $ 6,393,812 $ (14,937)
Shareholders' equity(2).................................................. $ 5,075,914 $ 5,154,432 $ (14,937)
</TABLE>
- ------------------------
(1) Unity was inactive during the period May 30, 1996 (inception) through
November 19, 1996.
(2) Does not include shares subject to possible conversion at conversion value
at April 30, 1998 and July 31, 1997.
38
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF UNITY
Unity was incorporated in May 1996 for the purpose of raising money to fund
a vehicle to effect a Business Combination with an Acquired Business. On
November 12, 1996, Unity's registration statement under the Securities Act
covering 1,250,000 units, each unit consisting of one share of Unity's Common
Stock, one Class A Redeemable Warrant and one Class B Redeemable Warrant at an
initial public offering price of $6.00 per unit, was declared effective by the
SEC. Unity derived $6,402,112 from the IPO, prior to underwriting commissions of
$600,000 and other expenses of $497,888, respectively.
For the nine months ended April 30, 1998, for the year ended July 31, 1997
and for the period from the date of inception (May 30, 1996) to July 31, 1996,
Unity had net income (loss) of $(35,290), $6,637 and $(15,000), respectively.
These results of operations were attributable to interest and dividend income
offset by general and administrative expenses, primarily consisting of
management and professional fees of $179,055, $127,775 and $15,000,
respectively, and taxes. Unity was inactive during the period May 30, 1996 (date
of inception) through November 19, 1996.
At April 30, 1998, Unity had cash and cash equivalents and short-term
investments, inclusive of restricted cash and investments of $6,415,845,
totaling $6,455,188 and total liabilities of $96,666.
See "The Merger" for information as to the Merger Agreement, the parties
thereto and the transactions contemplated thereby.
39
<PAGE>
WORLDS AND UNITY
PRO FORMA FINANCIAL STATEMENTS (UNAUDITED)
INTRODUCTION TO PRO FORMA FINANCIAL STATEMENTS (UNAUDITED)
The accompanying unaudited pro forma balance sheet presents the financial
position of Worlds and Unity as of June 30, 1998 and April 30, 1998,
respectively, assuming the Merger had been completed as of the respective
balance sheet dates. The unaudited pro forma statement of operations for the
years ended September 30, 1997 and July 31, 1997 for Worlds and Unity,
respectively, and the unaudited pro forma statement of operations for the nine
month periods ended June 30, 1998 and April 30, 1998, for Worlds and Unity,
respectively, reflect the Merger, as if the Merger had occurred on the first day
of the fiscal year presented and carried forward to the interim period
presented.
Separate pro forma financial statements have been presented for the
following circumstances: (1) that no Public Unity Shareholders exercise their
right to have their shares converted upon the consummation of the Merger, and
(2) that 19.99% of interest in Unity Common Stock held by Public Unity
Shareholders elect to have their shares converted upon the consummation of the
Merger at the conversion value of $5.13 per share, based on the amount held in
the Unity trust account, inclusive of interest income to date thereon, at April
30, 1998.
The financial information shown herein for Worlds includes the financial
information of Worlds Inc. (formerly known as Worlds Acquisition Corp.) since
its formation, and the financial information of Predecessor for the periods
prior to the acquisition of the Predecessor on December 3, 1997.
In the proposed Merger, each outstanding share of Worlds Common Stock will
be exchanged for Unity Common Stock, at an exchange ratio of approximately 0.357
of a share of Unity Common Stock to one share of Worlds Common Stock. As a
result of the Merger, the Worlds Shareholders will collectively acquire
approximately 6,379,065 shares of Unity Common Stock or approximately 77.3% of
the then outstanding Unity Common Stock. The Merger will be accounted for as a
capital transaction which is equivalent to the issuance of stock by Worlds for
Unity's net monetary assets of approximately $6,000,000, accompanied by a
recapitalization of Worlds.
The pro forma financial information does not purport to be indicative of the
results which would have actually been obtained had such transactions been
completed as of the assumed dates and for the periods presented or which may be
obtained in the future.
40
<PAGE>
WORLDS AND UNITY
PRO FORMA BALANCE SHEET--ASSETS
AS OF JUNE 30, 1998 (WORLDS) AND APRIL 30, 1998 (UNITY)
(UNAUDITED)
<TABLE>
<CAPTION>
ADDITIONAL
PRO FORMA PRO FORMA
ADJUSTMENTS COMBINED ADJUSTMENTS COMBINED
(WITH NO STOCK (WITH NO STOCK (WITH 19.99% (WITH 19.99%
WORLDS UNITY CONVERSION) CONVERSION) STOCK CONVERSION) STOCK CONVERSION)
--------- --------- -------------- -------------- ------------------ ------------------
<S> <C> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash $ (1,282,608)
equivalents....... $3,419,518 $ 39,343 $ 6,415,845(b) $ 9,074,706 (h) $7,792,098
(800,000)
(d)
Restricted cash and (6,415,845)
investments....... -- 6,415,845 (b) -- --
Other current
assets............ 34,287 -- 34,287 34,287
--------- --------- -------------- ------------------
Total current
assets........ 3,453,805 6,455,188 9,108,993 7,826,385
--------- --------- -------------- ------------------
PROPERTY AND
EQUIPMENT, NET.... 115,869 -- 115,869 115,869
--------- --------- -------------- ------------------
$3,569,674 $6,455,188 $ 9,224,862 $7,942,254
--------- --------- -------------- ------------------
--------- --------- -------------- ------------------
</TABLE>
41
<PAGE>
WORLDS AND UNITY
PRO FORMA BALANCE SHEET--LIABILITIES AND SHAREHOLDERS' EQUITY
AS OF JUNE 30, 1998 (WORLDS) AND APRIL 30, 1998 (UNITY)
(UNAUDITED)
<TABLE>
<CAPTION>
ADDITIONAL
PRO FORMA PRO FORMA
ADJUSTMENTS COMBINED ADJUSTMENTS COMBINED
(WITH NO STOCK (WITH NO STOCK (WITH 19.99% STOCK (WITH 19.99% STOCK
WORLDS UNITY CONVERSION) CONVERSION) CONVERSION) CONVERSION)
---------- ---------- --------------- --------------- ------------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
CURRENT LIABILITIES:
Trade accounts payable.......... $ 303,074 $ -- $ 303,074 $ 303,074
Accrued expenses................ 634,834 93,266 728,100 728,100
Income taxes payable............ -- 3,400 (3,400)(e) -- --
Advanced customer billings and
deferred revenue.............. 436,140 -- 436,140 436,140
Current portion of long-term
debt.......................... 314,560 -- -- 314,560 314,560
---------- ---------- --------------- -------------------
Total current liabilities..... 1,688,608 96,666 1,781,874 1,781,874
---------- ---------- --------------- -------------------
LONG-TERM LIABILITIES
Long-term debt.................. 1,906,666 -- -- 1,906,666 1,906,666
---------- ---------- --------------- -------------------
COMMITMENTS AND CONTINGENCIES:
Common stock, $.0001 par value,
249,875 shares subject to
possible conversion, at
conversion value.............. -- 1,282,608 (1,282,608)(c) -- --
SHAREHOLDERS' EQUITY:
Common stock.................... 17,982 163 (17,345)(a) 825 (25)(h) 800
25(c)
Additional paid-in capital...... 8,402,020 5,119,404 (87,651)(a) 13,916,356 (1,282,583) 12,633,773
(800,000)(d) (h)
1,282,583(c)
Accumulated deficit............. (8,380,859) (43,653) 40,253(a) (8,380,859) (8,380,859)
3,400(e)
Treasury stock, at cost,
113,465 shares................ (64,743) -- 64,743(a) -- --
---------- ---------- --------------- -------------------
Total shareholders' (deficit)/
equity...................... (25,600) 5,075,914 5,536,322 4,253,714
---------- ---------- --------------- -------------------
$3,569,674 $6,455,188 $ 9,224,862 $ 7,942,254
---------- ---------- --------------- -------------------
---------- ---------- --------------- -------------------
</TABLE>
42
<PAGE>
WORLDS AND UNITY
PRO FORMA STATEMENT OF OPERATIONS
FOR THE NINE MONTH PERIOD ENDED
JUNE 30, 1998 (WORLDS) AND APRIL 30, 1998 (UNITY)
(UNAUDITED)
<TABLE>
<CAPTION>
WORLDS
---------------------------- ADDITIONAL
WORLDS INC. PRO FORMA PRO FORMA
(FORMERLY ADJUSTMENTS COMBINED ADJUSTMENTS COMBINED
WORLDS (WITH NO (WITH NO (WITH 19.99% (WITH 19.99%
ACQUISITION STOCK STOCK STOCK STOCK
CORP.) PREDECESSOR UNITY CONVERSION) CONVERSION) CONVERSION) CONVERSION)
--------------- ----------- --------- ------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES................. $ 17,552 $ 11,622 $ -- $ 29,174 $ 29,174
--------------- ----------- --------- ------------ ------------
COSTS AND EXPENSES:
Costs of goods sold...... 25,101 2,748 -- 27,849 27,849
Research and
development............ 534,428 51,552 585,980 585,980
General and
administrative......... 1,814,600 140,605 236,265 131,250(f) 2,322,720 2,322,720
Acquired research and
development............ 6,135,538 -- -- 6,135,538 6,135,538
--------------- ----------- --------- ------------ ------------
Total costs and
expenses............. 8,509,667 194,905 236,265 9,072,087 9,072,087
--------------- ----------- --------- ------------ ------------
OTHER INCOME/ (EXPENSE):
Investment income/
(expense).............. 1,781 (68,313) 222,268 155,736 (43,609)(i) 112,127
(Loss) before
extraordinary item
and provision for
income taxes......... (8,490,334) (251,596) (13,997) (8,887,177) (8,930,786)
PROVISION FOR INCOME
TAXES.................. -- -- 21,293 (21,293)(e) -- --
--------------- ----------- --------- ------------ ------------
Net loss before
extraordinary item... $(8,490,334) $(251,596) $ (35,290) $(8,887,177) $(8,930,786)
EXTRAORDINARY ITEM--GAIN
ON DEBT SETTLEMENT..... 277,430 15,952 -- $ 293,382 $ 293,382
--------------- ----------- --------- ------------ ------------
Net loss............... $(8,212,904) $(235,644) $ (35,290) $(8,593,795) $(8,637,404)
--------------- ----------- --------- ------------ ------------
--------------- ----------- --------- ------------ ------------
NET LOSS PER SHARE BEFORE
EXTRAORDINARY ITEM
(BASIC AND DILUTED).... $ (0.02) $ (1.08) $ (1.12)
--------- ------------ ------------
--------- ------------ ------------
NET LOSS PER SHARE (BASIC
AND DILUTED)........... $ (0.02) $ (1.04) $ (1.08)
--------- ------------ ------------
--------- ------------ ------------
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES
OUTSTANDING............ 8,254,065(g) 8,004,190(j)
------------ ------------
------------ ------------
</TABLE>
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WORLDS AND UNITY
PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1997 (WORLDS) AND JULY 31, 1997 (UNITY)
(UNAUDITED)
<TABLE>
<CAPTION>
WORLDS
------------------------
WORLDS INC. PRO FORMA ADDITIONAL
(FORMERLY ADJUSTMENTS PRO FORMA
WORLDS (WITH NO COMBINED ADJUSTMENTS COMBINED
ACQUISITION STOCK (WITH NO STOCK (WITH 19.99% (WITH 19.99%
CORP.) PREDECESSOR UNITY CONVERSION) CONVERSION) STOCK CONVERSION) STOCK CONVERSION)
----------- ----------- --------- ----------- -------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES................. $ -- $1,162,853 $ -- $ 1,162,853 $ 1,162,853
----------- ----------- --------- ----------- -------------- ------- -----------------
COSTS AND EXPENSES:
Costs of goods sold...... 1,561,515 -- 1,561,515 1,561,515
Research and
development............ 912,841 -- 912,841 912,841
General and
administrative......... 167,955 3,286,068 192,489 175,000(f) 3,821,512 3,821,512
----------- ----------- --------- ----------- -------------- ------- -----------------
Total costs and
expenses............... 167,955 5,760,424 192,489 6,295,868 6,295,868
----------- ----------- --------- ----------- -------------- ------- -----------------
OTHER INCOME/ (EXPENSE):
Investment income/
(expense).............. -- (52,979) 202,701 149,722 (39,761)(i) 109,961
Income from sale of
technology............. -- 260,100 -- 260,100 260,100
Lawsuit settlements...... -- (239,200) -- (239,200) (239,200)
Loss on disposal of
property and
equipment.............. -- (17,732) -- (17,732) (17,732)
----------- ----------- --------- ----------- -------------- ------- -----------------
Income (loss) before
extraordinary income
and provision for
income taxes........... (167,955) (4,647,382) 10,212 (4,980,125) (5,019,886)
PROVISION FOR INCOME
TAXES.................. -- 42,160 3,575 (3,575)(e) 42,160 42,160
----------- ----------- --------- ----------- -------------- ------- -----------------
Net income (loss) before
extraordinary item..... (167,955) (4,689,542) 6,637 (5,022,285) (5,062,046)
----------- ----------- --------- ----------- -------------- ------- -----------------
----------- ----------- --------- ----------- -------------- ------- -----------------
EXTRAORDINARY ITEM-GAIN
ON DEBT SETTLEMENT..... -- 373,333 -- 373,333 373,333
Net loss................. $(167,955) ($4,316,209) $ 6,637 $ (4,648,952) $(4,688,713)
----------- ----------- --------- -------------- -----------------
----------- ----------- --------- -------------- -----------------
NET INCOME (LOSS) PER
SHARE BEFORE
EXTRAORDINARY ITEM..... $ 0.01 $ (0.64) $ (0.66)
--------- -------------- -----------------
--------- -------------- -----------------
NET INCOME (LOSS) PER
SHARE.................. $ (0.59) $ (0.61)
-------------- -----------------
-------------- -----------------
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES
OUTSTANDING............ 7,894,065(g) 7,644,190(j)
-------------- -----------------
-------------- -----------------
</TABLE>
44
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NOTES TO PRO FORMA FINANCIAL STATEMENTS (UNAUDITED)
1) BASIS OF PRESENTATION
The pro forma balance sheet combines the balance sheets of Worlds and Unity
as June 30, 1998 and April 30, 1998, respectively, assuming that the Merger had
been completed as of the respective balance sheet dates. The pro forma
statements of operations combine the statement of operations of Worlds for the
year ended September 30, 1997 with the statement of operations of Unity for the
year ended July 31, 1997 and the statements of operations of Worlds and Unity
for the nine months ended June 30, 1998 and April 30, 1998, respectively,
assuming that the Merger occurred at the beginning of the periods presented.
Separate pro forma financial statements have been presented for the
following circumstances: (1) that no Public Unity Shareholders exercise their
right to have their shares converted upon the consummation of the Merger, and
(2) that 19.99% of interest in Unity Common Stock held by Public Unity
Shareholders elect to have their shares converted upon the consummation of the
Merger at the conversion value of $5.13 per share, based on the amount held in
the Unity trust account, inclusive of interest income to date thereon, at April
30, 1998.
The historical balance sheets used in the preparation of the pro forma
financial statements have been derived from Worlds' and Unity's unaudited
financial statements as of June 30, 1998 and April 30, 1998, respectively. The
historical statements of operations for the year ended September 30, 1997
(Worlds) and the year ended July 31, 1997 (Unity) have been derived from the
unaudited and audited statements of operations, respectively. The historical
statements of operations for the nine months ended June 30, 1998 (Worlds) and
April 30, 1998 (Unity) have been derived from the companies' respective
unaudited financial statements.
The financial information shown herein for Worlds includes the financial
information of Worlds Inc. (formerly known as World Acquisition Corp.) since its
formation, and the financial information of Worlds' predecessor for the periods
prior to the acquisition of the Predecessor on December 3, 1997.
2) UNAUDITED PRO FORMA ADJUSTMENTS
A description of the adjustments included in the unaudited pro forma
financial statements are as follows:
(a) Reflects the recapitalization of Worlds through the elimination of
Unity's accumulated deficit and adjustment of equity accounts upon the
exchange of Worlds Common Stock into 6,379,065 shares of Unity Common Stock.
(b) Reflects the release of Unity's restricted cash as a result of the
Merger.
(c) Reflects the reclassification of the conversion value of the Unity
Common Stock to Shareholder's Equity assuming no stock conversion.
(d) Reflects the estimate of total expenses to be incurred in connection
with the Merger.
(e) Reflects the reduction of the income tax provision and accrual
recorded by Unity for periods presented.
(f) Reflects the additional costs of employment contracts entered into
in connection with the Merger over historical compensation costs of those
individuals.
(g) Reflects the weighted average shares outstanding for Unity of
1,515,000 and 1,875,000 for the year ended July 31, 1997 and nine months
ended April 30, 1998, respectively, plus 6,379,065 shares to be issued upon
consummation of the Merger.
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2) UNAUDITED PRO FORMA ADJUSTMENTS (CONTINUED)
(h) Reflects the redemption of 19.99% of interest in Unity Common Stock
held by Public Unity Shareholders, or 249,875 shares, at the conversion
value of $5.13 per share. The number of shares assumed converted is based on
the total Unity shares outstanding prior to the Merger of 1,875,000, less
625,000 Unity shares held by Non-Public Unity Stockholders, and represents
the maximum number of shares that may be elected to be converted without
precluding the consummation of the Merger.
(i) Reflects a reduction of Unity's interest income assuming the
proceeds of the Merger were used to convert 249,875 Unity shares as
described in (j). The estimate of reduction in interest income is based on
the combined entity having $1,282,608 less in proceeds, assuming an average
rate of return consistent with that earned by Unity of approximately 3.1%
for the year ended July 31, 1997, and 3.4% for the nine months ended April
30, 1998.
(j) Reflects the weighted average shares outstanding for Unity of
1,515,000 and 1,875,000 for the year ended July 31, 1997 and nine months
ended April 30, 1998, respectively, less the 249,875 Unity shares assumed
converted as described in (j), plus 6,379,065 shares to be issued upon
consummation of the Merger.
46
<PAGE>
BUSINESS OF WORLDS
OVERVIEW
Worlds develops applications for its three-dimensional ("3D") Internet
technology for different markets. At present Worlds is targeting three different
markets for its 3D Internet technology. First, Worlds is in the process of
marketing its 3D Internet technology with record companies to produce music-
oriented websites; second, Worlds is in the process of marketing its WORLDS CHAT
technology to businesses for corporate Intranet applications; and third, Worlds
intends to market an updated version of WORLDS CHAT, a 3D chat site on the
Internet, to consumers on the Internet.
Prior to the Worlds Consolidations, Predecessor marketed WORLDS CHAT,
developed and marketed 3D toolsets and servers and performed contract
development work. However, Worlds has changed its focus and while it intends to
introduce a new and improved upgraded version of WORLDS CHAT and to use WORLDS
CHAT as a base vehicle for developing 3D corporate Intranet sites, Worlds does
not anticipate that, over time, they will generate the bulk of the Company's
revenues.
Worlds' primary objective is to create 3D music web sites and other 3D
Internet entertainment, and to develop Intranet applications for businesses.
These applications may be created directly by Worlds or Worlds may license its
technology for creation by third parties or the end user.
Worlds' primary focus is upon marketing its 3D Internet technology to record
companies to produce music-oriented websites. Worlds intends to produce
interactive, 3D, music related websites and distribute access to these web sites
on enhanced compact discs ("CD+") of various recording artists via traditional
retail record outlets, working in conjunction with major record labels.
With respect to the development of music-oriented web sites, Worlds is
currently developing the combination of its 3D Internet technology with the
extra available capacity on the CD to create an interactive experience for the
CD purchaser. By utilizing Worlds' technology distributed on a CD+ (a standard
CD with its excess memory carrying a "bonus" as an enhancement), a consumer
using the CD ROM drive of the consumer's computer with Internet access or
services provider could enter into the interactive 3D world or site of the
recording artist, be able to interact with other fans utilizing voice or text
chat via the PC, visit the artist's merchandise shops, visit secret rooms of the
artist, see and hear advance videos and record clips of the artist, and enter
special VIP areas that would offer free concert tickets, among other things.
Worlds intends to enter into revenue sharing with recording labels and artists,
from selling VIP on-line subscriber memberships, advertising and database sales.
In addition, Worlds anticipates the possibility of additional revenues from the
sale of merchandise of the artist on the site.
PREDECESSOR'S HISTORY
Predecessor was formed with the intention of selling or licensing its 3D
servers, 3D browsers, and 3D toolsets to aid programmers in the creation of
unique 3D user experiences on the Internet that would be sold or offered as
turnkey solutions, such as custom production of 3D environments on the Internet.
Predecessor expected that it would host newly created 3D environments on its own
servers and charge license fees to the owners of such 3D environments. This
market did not develop as rapidly as Predecessor had anticipated. Until
meaningful 3D Internet license fees could be developed using Predecessor's
technology, Predecessor entered the custom production business to showcase its
3D Internet technology, hiring as many as 60 full-time artists and independent
contractors, integrators, and producers to help create 3D virtual Internet
environments for companies such as, among others, Steven Spielberg's Starbright
Foundation, IBM, Visa International, MGM, Disney, and Tandem Computers Inc.
("Tandem").
By January 1997, after almost all of Predecessor's funds had been depleted,
including approximately $17 million in equity financing, Pearson Inc. and Tandem
loaned Predecessor $1.5 million to continue Predecessor's operations until such
time as new capital could be invested in Predecessor or Predecessor could be
acquired.
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Recognizing the extent of its poor and rapidly deteriorating financial
condition, in early 1997, Predecessor began substantial layoffs to reduce costs.
In March 1997, Predecessor's Board of Directors decided to retain an outside
crisis management organization as Predecessor's general manager, which, after
Board approval, determined to proceed with the Worlds Consolidations.
From inception in April 1994 through 1997, Predecessor's operations were
limited and consisted primarily of start-up activities, including recruiting
personnel, raising capital, custom production work and research and development.
In the third quarter of 1996, Predecessor launched its first commercial user-
oriented 3D chat site, WORLDS CHAT 1.0 and began selling the client interface
software through direct sales channels. These sales were very nominal. In
October of 1996, Predecessor introduced its first commercial toolset for
developing 3D multi-user applications. From inception through the date of the
Worlds Consolidations, Predecessor generated revenues of only approximately $6
million and had an accumulated deficit of approximately $21 million.
Worlds will not generate any meaningful revenues until after Worlds
successfully completes development and market testing of WORLDS PLATINUM (also
known as "Gamma," Worlds' newest 3D toolset, as further described below) and its
3D Internet music sites, and attracts and retains a significant number of
subscribers. Worlds anticipates that it will continue to incur significant
losses until, at the earliest, Worlds generates sufficient revenues to offset
the substantial up-front expenditures and operating costs associated with
developing and commercializing its proposed products. There can be no assurance
that Worlds will be able to attract and retain a sufficient number of
subscribers to generate meaningful revenues or achieve profitable operations or
that its products and services will prove to be commercially viable.
THE MARKET
Currently, the World Wide Web is almost entirely two dimensional ("2D"), in
part, because the high speed data transmission technology required to receive
detailed 3D images is not yet available to the average Internet user. However,
much of the data required for interactive 3D images is template or dynamic
toolkit data that is reasonably constant and can be distributed to a user
off-line on a CD, allowing the transmission of data on-line through the Internet
to provide the updatable, interactive, variable portion of the user's 3D
experience.
The CD+ appears to be an optimal medium to distribute Worlds' 3D data. The
traditional audio CD sold at record stores has excess storage capacity. Since
the audio CD is the same medium as the CD that runs on the CD ROM drive of a
personal computer ("PC"), the CD+ can be used to run computer programs on the
user's PC. Many recently manufactured PCs also have sound production capability
that allows the user to play the audio portion on the CD+ on the PC.
By utilizing Worlds' technology distributed on a CD+, a consumer could enter
into the interactive 3D world or site of the recording artist, be able to
interact with other fans utilizing voice or text chat via the PC, visit the
artist's merchandise shops, visit secret rooms of the artist, see and hear
advance videos and record clips of the artist, and enter special VIP areas that
would give away free concert tickets, among other things. Worlds believes these
services could generate revenues from consumer subscriptions, purchases, and
advertising. While a number of recording artists have released CD+s for use
exclusively on PCs, to the best of Worlds' knowledge, no record company or
artist has yet released a CD+, with a high level of interactive entertainment
and on-line extension capability.
MARKET ENTRY STRATEGY
Worlds plans to enter the market in two phases. First, Worlds plans to
develop proprietary 3D music sites in conjunction with record companies, record
labels, and recording artists designed to generate revenues from advertising,
merchandise sales and VIP Tier Level subscription sales. Second, Worlds plans
48
<PAGE>
to seek strategic alliances with computer manufacturers, and telecommunication,
video game and merchandise sale companies through contracts, joint ventures,
business combinations and/or technology licensing structured to generate fee and
royalty revenue.
In order for Worlds to develop sales, it is imperative that relationships be
developed between Worlds and record companies, record labels (which are either
owned and/or distributed by the record companies or independently owned), and
the recording artist or group and their management companies.
In addition to numerous independent record companies, there are six major
record companies that operate worldwide: Warner Bros. Music, Sony Music,
Polygram, BMG Entertainment, Universal Music Group (MCA), and EMI. These
companies in the aggregate sold approximately 800 million CD units in the U.S.
and 2.5 billion CD units worldwide in 1996. The record companies typically
create and finance new labels which might be owned, in whole or in part, by
them, manufacture and distribute recorded music for company and/or independently
owned labels, and provide marketing and technical assistance to their owned
and/or distributed labels. The individual record label's primary responsibility
is to sign, develop, and create records by the recording artist or group, which
is then turned over to the record company for manufacture and distribution.
While it is best to have the full commitment and support of the record
companies, labels and artists in implementing Worlds' 3D artist site program on
an enhanced CD or CD+, Worlds believes that record company support is the most
important because with their commitment to a particular effort or format, the
record company can give Worlds access to labels it either owns and/or
distributes and the hundreds of artists that record for these labels. Toward
this end, during the second and third quarters of 1997 and prior to and after
the Worlds Consolidations, management had numerous conversations and/or meetings
with representatives and/or high level management and/or executives from all six
major record companies. Worlds believes it has received a positive response to
its concept and on-line artist's prototype from each of the companies and
intends to continue discussions with each of them.
3D INTERNET ENVIRONMENTS; VIRTUAL REALITY MODELING LANGUAGE ("VRML")
The technology to deliver Internet-based 3D experiences to a user's desktop
has only been developed over the past four years. This new technology received a
boost from an early standardization effort called Virtual Reality Modeling
Language ("VRML") which increased consumer and developer awareness of the
medium. The VRML effort evolved into a consortium of approximately 55 companies
(including Predecessor), all with competing interests and underlying
technologies.
VRML is supposed to deliver rich and dynamic 3D experiences over the
Internet, viewable through the most commonly used Web browsers. However, VRML
based Internet experiences and the companies developing these tools and
technologies have not yet achieved significant market penetration for several
reasons. To date, the user's experience with VRML has been unsatisfactory. VRML
is slow in rendering images, has a long download time, confusing user interfaces
and scene description language that is difficult to manipulate, and because it
lacks standards for support of other media within the scene, the user
experiences are less dynamic. Adequate VRML performance also requires high-end
PCs, precluding effective use by average consumers with less advanced PCs. A new
version of VRML, VRML 2.0 was just released at the end of 1997 with enhanced
performance characteristics addressing some of VRML's performance problems. If
and when VRML appears to be on the verge of overcoming its current limitations,
Worlds believes that its proprietary technology can be made VRML compliant.
Worlds believes that the VRML standard will ultimately overcome its limitations
but the current problems make a proprietary solution such as Worlds' technology
attractive for Worlds' intended use of 3D Internet technology.
Predecessor spent the last two years attempting to solve VRML's performance
and production quality problems and has, in management's opinion, reduced, at
least for the intended use of Worlds, the barriers to the adoption of 3D
multi-user environments on the Internet. Predecessor's technical solutions
deliver
49
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user experiences that are rendered considerably faster than equivalent VRML
browsers. Typical Predecessor environments are highly textured, object and
behavior rich with a multi-user component that Worlds believes delivers user
experiences far more interesting than what many VRML environments provide today.
WORLDS' TECHNOLOGY
The following is a summary of Worlds' technologies, all of which were
developed and released by Predecessor. Worlds' development efforts are now
focused on adapting WORLDS PLATINUM to produce music-oriented websites.
WORLDS PLATINUM
The WORLDS PLATINUM Development Kit, Worlds' third generation and newest 3D
toolset, is substantially complete, with samples distributed for "beta testing"
in June 1998. Worlds believes that WORLDS PLATINUM will deliver a considerably
faster frame rate for user experiences and, in some cases, a meaningful
productivity increase in art production and integration over its previous
generation production tools.
The WORLDS PLATINUM Development Kit has substantial elements written in Sun
Microsystem's programming language, Java, including the WORLDSBROWSER PLATINUM
and the WORLDSSHAPER PLATINUM so Worlds expects that it can be made portable
across Windows and UNIX Platforms because of Java's platform independence.
- WORLDSSHAPER PLATINUM: The WORLDSSHAPER PLATINUM is an advanced
compositing 3D building tool that integrates pre-existing or custom
content, such as 3D models created in Kinetix' 3D Studio, textures or
images created in Adobe's Photoshop, or .midi or .wave sound files, with
foundation world architectural geometry and interactive behaviors and
actions written in Java. The architectural building blocks for creating 3D
worlds, the flexibility and power of integrating professional modeling and
imaging tools, and the extensibility via Java make the WORLDSSHAPER
PLATINUM a tool well-suited for rapid world creation. Additional
Application Programming Interfaces for more sophisticated, programmatic
control of the spaces will also be included. Initially, the WORLDSSHAPER
PLATINUM will only output in Worlds' proprietary file format. If demand
and market needs warrant, WORLDSSHAPER PLATINUM'S extensibility might be
expanded to include support for ActiveX enabled scripting languages.
- WORLDSSERVER PLATINUM: The WORLDSSERVER PLATINUM is the server software
that Worlds anticipates will be used to control and operate its future
on-line virtual community, WORLDS OF WORLDS, that is currently in
development. If Worlds is successful in developing this concept, the
WORLDSSERVER PLATINUM is being designed to manage the registration and
authentication of users, the locations of users within the 3D environment,
the physical structure of the 3D environment, all information regarding
objects that are "shared" by the participants and any of the interactions
between the users, such as text chat. It is currently proposed that the
server will come in configurations that support 5, 20, 50, 100, 500,
1,000, and 1,000+ simultaneous users and is hoped to be available with a
variety of add-on modules which, among other features, are intended to
include, user tracking, encryption, person-to-person and multi-person
voice conversations, streaming audio, electronic commerce transactions,
and custom avatars. Additionally, the WORLDSSERVER PLATINUM will include
generalization of a "Bot" API to enable the use of Artificial Intelligence
inference engines.
- WORLDSBROWSER PLATINUM: The WORLDSBROWSER PLATINUM is used to access the
3D environments created with the WORLDS PLATINUM Development Kit. The
browser is optimized for speed, delivering 10--20 frame rates per second
in highly textured virtual 3D worlds. After its initial introduction,
Worlds may make the browser an ActiveX control for Microsoft's Internet
Explorer and a plug-in for the Netscape Navigator.
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- WORLDS PLATINUM LIBRARIES: The WORLDS PLATINUM Libraries are composed of
sample worlds, textures, models, avatars, actions, sensors, sounds, motion
sequences, and other behaviors. The WORLDS PLATINUM Libraries will be made
available as part of the WORLDSSHAPER PLATINUM and can easily be
customized by the user or extended by adding new library elements.
The markets for Worlds' products are characterized by rapidly changing
technology and evolving industry standards, often resulting in product
obsolescence or short product life cycles. Accordingly, the ability of Worlds to
compete will be dependent on Worlds' ability to complete development of WORLDS
PLATINUM in a timely manner. There can be no assurance that competitors will not
develop technologies or products that render Worlds' products obsolete or less
marketable or that Worlds will be able to successfully enhance its products or
develop new products.
WORLDS CHAT 1.0 GOLD
Worlds also owns its own proprietary on-line 3D Internet chat site known as
WORLDS CHAT. WORLDS CHAT is the 3D environment originally created by Predecessor
and launched in 1996 to test its technologies and to learn about user behaviors
and preferences in 3D environments. WORLDS CHAT enhances users' chat experiences
by allowing users to see a representation of each other in the form of highly
textured characters, known as avatars, and to explore a 3D environment together.
Avatars can be created by the individual or chosen from pre-defined figures
chosen from Worlds' library. Users communicate with each other through text
chat. The client interface for the WORLDS CHAT environment was originally
distributed through a free download and later was sold on a CD which has a
greater selection of avatars, persistent users names, and access to six virtual
worlds (over 500 rooms, compared to 100 available in the free demo version).
Worlds believes that the user base to WORLDS CHAT site will develop into a
valuable asset. Although Worlds has no plans to build advertising or
subscription revenues through this site, such revenues may be possible in the
future as Worlds is now preparing to release a more updated version of this
product and attempting to market a customized version of this product for
Intranet applications by corporations. Currently, Worlds collects a name and an
e-mail address from its demo version users and a complete name, address, and
credit card information from its direct customers. In order to rapidly increase
the number of potential subscribers of its 3D music sites, Worlds plans to offer
a new and improved updated version of WORLDS CHAT product at a much lower price
and, in certain instances, for free. The objective in this marketing approach is
that by reducing the price barrier, Worlds may generate a significant number of
members to its Chat service. These new members may be matriculated to the 3D
music sites when launched. Additionally, the proliferation of WORLDS CHAT may
increase corporate brand identity that could translate into valuable consumer
data and related advertising potential.
Worlds believes that there is an opportunity to further exploit the WORLDS
CHAT product in modified form. Worlds is now preparing a marketing campaign for
WORLDS CHAT as a corporate Intranet chat and information service to human
resource administrators in major corporations worldwide. The modified
application of WORLDS CHAT, if successfully modified and then marketed, could
provide the company with an ongoing revenue stream based on the licensing fees
for Worlds' server technology, as well as a per employee annual subscription
fee.
CUSTOMERS
While Worlds has entered into two agreements to integrate its 3D Internet
technology onto enhanced musical CDs, neither product has as yet been released
or has generated any revenues. Worlds does not believe that such products will
generate significant revenues in the immediate future. Although Worlds
anticipates releasing an updated version of its WORLDS CHAT 3D Internet chat
service during the fourth quarter of 1998, such product will be sold, as well as
offered, for a nominal monthly fee; it is not currently anticipated to generate
significant revenues. While the original WORLDS CHAT product is currently
licensed
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for use in Asia, no significant license revenues have been generated to date and
none are anticipated. Worlds has also developed a prototype corporate Intranet
application, which is derived from its WORLDS CHAT 3D product, for a single
customer. However, resultant revenues have been minimal and Worlds currently has
no other customers for this application.
Worlds will not generate any meaningful revenues, if ever, until after it
successfully completes development and market testing of its 3D Internet music
web site(s), obtains contracts with a significant number of record companies,
record labels and artists and attracts and retains a significant number of
advertisers and subscribers. There can be no assurance that Worlds will be able
to obtain contracts with a significant number of record companies, record labels
and artists, and attract and retain a sufficient number of advertisers and
subscribers to generate meaningful revenues or achieve profitable operations or
that its 3D Internet music site(s) will prove to be commercially viable.
COMPETITION
The markets in which Worlds is currently operating and those it intends to
enter are characterized by intense competition and an increasing number of new
market entrants which have developed or are developing competitive products.
Worlds will face competition from numerous sources, including prospective
customers which may develop and market their own competitive products and
services, software companies, and on-line and Internet service providers. Worlds
believes that competition will be based primarily on ease of use, features
(including communications capabilities and content) and price.
In addition, certain companies have developed or may be expected to develop
technologies or products in related market segments which could compete with
certain technologies or products being developed by Worlds. Worlds expects that
such companies, as well as other companies (including established and newly
formed companies), may attempt to develop products directly competitive with
WORLDS PLATINUM. Certain of such competitors have substantially greater
financial, technical, marketing, distribution personnel and other resources than
Worlds, permitting such companies to implement extensive marketing campaigns.
Technologically, the market targeted by Worlds is sought after by a
combination of numerous recent start-ups and well established 3D graphics
companies. Each company has a slightly different focus and each claims a
different combination of product offerings. Worlds' product solution includes
three major components: tools for building 3D worlds (known as shapers), servers
for distributing those worlds and making those worlds multi-user, and browsers
that enable end-users to enter and experience those worlds. Many of the
competitors in this market have adopted the VRML and VRML 2.0 scene description
language as their file format and have limited their expertise and scope to only
one of the above categories.
The most competitive environment is in the area of 3D world building tools.
Competitors in this area can be grouped into two categories: newcomers, who are
developing tools to create real-time, networked virtual worlds, and 3D modeling
companies, which have been successful in more traditional multimedia application
development and distribution. To the best of Worlds' knowledge, companies in the
former category include Paragraph (acquired by Silicon Graphics), Superscape, OZ
Interactive, Dimension X (acquired by Microsoft), New Fire, Virtus, VREAM,
Sense8, Sony, and Electric Communities. Many 3D modeling companies have been
extending their products to import and export VRML files that would enable them
to be used in real-time networked applications. These companies include Kinetix
(Autodesk), SGI, Microsoft, Macromedia, and Caligari.
Multi-user virtual world servers is a somewhat less competitive area with
companies such as OnLive! (which, to Worlds' knowledge, no longer offers 3D
contract production) and Black Sun (now called Blaxxun and currently focused on
corporate applications) currently having a product available. Others have
announced their intention of bringing to market multi-user servers.
52
<PAGE>
Each of the above mentioned organizations or technologies, as well as
possibly others not now known to Worlds in some way competes with Worlds. The
competition may be through entry into the same markets as Worlds, or through
technology that either obviates Worlds' advantages or lowers the barrier to
entry in one of Worlds' markets.
Besides technological competition, Worlds will be competing with established
on-line music retailers with substantial resources and established user bases.
Among the leaders in on-line music web sites are N2K and CDNow. Each of these
companies, as well as others that are currently selling on-line music related
products, including CDs and other merchandise, have financial and management
resources significantly in excess of Worlds'. These companies have established
themselves with consumers as music merchandise and music review destinations;
they all sell music-related products and have generated revues in on-line sales.
Notwithstanding the foregoing, to the best of Worlds' knowledge, no other
company is currently offering a product that integrates 3D Internet technology
with a music industry content application similar to that which Worlds proposes
to offer.
EMPLOYEES
Worlds currently has eight full time employees, of whom one is an executive
officer, seven are engaged in product development, one is engaged in financial
activities and one is engaged in marketing activities. Worlds has also
re-established relationships with 11 independent contractors (software
developers/programmers) who until early 1997 were performing technological
development work on its WORLDS PLATINUM platform.
Prior to the Effective Time, Worlds intends to hire up to 5 to 9 additional
employees, at least two of whom will be in the area of artist/integration
production of music sites, and up to three of whom will be in artist relations
and/or administration. It is possible that one or more of the people who might
be hired for one or more of these positions will be retained as independent
consultants.
Worlds' employees are not represented by a labor union. Worlds believes that
its relations with its employees are good.
FACILITIES
Worlds' facilities are located in approximately 2,500 square feet of leased
office space in San Francisco, California and 2,500 square feet of leased office
space in Boston, Massachusetts. The lease in San Francisco is on a month by
month basis at $4,700 per month and in Boston the lease expires in September
2000 and provides for an annual rental of approximately $50,000. Worlds has only
negligible costs relating to environmental compliance laws.
LEGAL PROCEEDINGS
Worlds is not currently involved in any material legal proceedings.
53
<PAGE>
MANAGEMENT OF WORLDS
DIRECTORS, EXECUTIVE OFFICERS AND CONSULTANT
The directors and executive officers of Worlds are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------ --- ---------------------------------------------------------------------
<S> <C> <C>
Michael J. Scharf................... 55 Chairman of the Board
Thomas Kidrin....................... 45 President, Chief Executive Officer, Secretary, Treasurer and Director
Kenneth A. Locker................... 49 Director
</TABLE>
MICHAEL J. SCHARF has been Chairman of the Board since December 3, 1997.
Prior to the Worlds Consolidations, Mr. Scharf was Chairman and Secretary of
Worlds Acquisition Corp. ("WAC") since June 4, 1997, and a Director since
inception. Since 1993 he has been Chairman and President of Niagara Corporation,
a company engaged in the manufacturing and distribution of steel bars. From 1983
until 1989, Mr. Scharf was Chairman and Chief Executive Officer of Edgcomb
Corporation, the largest independent distributor of steel in the United States.
Mr. Scharf received an A. B. degree from Princeton University and an M. B. A.
from Harvard Business School. From 1989 (when Edgcomb was sold) until 1993 (when
Niagara was founded) Mr. Scharf managed his personal investments.
THOMAS KIDRIN has been President, Chief Executive Officer, Secretary and
Treasurer since December 3, 1997. Prior to the Worlds Consolidations, Mr. Kidrin
was President of WAC since its inception, Treasurer since June 4, 1997 and a
Director since inception. He has been engaged in developing the business plan
and prototype for Worlds' business for over one year. From 1991 to 1996, Mr.
Kidrin was a founder, director, and President of UC Television Network Corp., a
company engaged in the design and manufacture of interactive
entertainment/advertising networks in public venues.
KENNETH A. LOCKER has been a Director since December 3, 1997 and prior to
the Worlds Consolidations was a Director of WAC since June 4, 1997. Since 1996
he has been Executive Producer for MGM Interactive where he is responsible for
creating and implementing the MGM Interactive on-line business strategy. From
1994 to 1996, Mr. Locker was a founder and Vice President of Predecessor. From
1993 to 1994, Mr. Locker was Senior Program Consultant for Ziff Davis
Communications. From 1990 to 1993, Mr. Locker was Executive Vice President and
Head of Production for RHI Entertainment which at the time was 50% owned by New
Line Cinema. Mr. Locker is also on the Board of Directors of Softbank Forums,
Inc., a division of Softbank Corp.
STEVEN A. GREENBERG was a founder of WAC and was substantially involved in
the implementation of the early and current stages of its business. It is
anticipated that Mr. Greenberg will remain involved in Worlds as a consultant.
From 1991 until the present, Mr. Greenberg has been a financial consultant and
private investor. In June 1994, Mr. Greenberg settled a civil proceeding
instituted against him by the SEC. Mr. Greenberg, without admitting or denying
the allegations of the SEC complaint, consented to an injunction against future
violations of the insider trading provisions of the federal securities laws and
paid a civil penalty. See "Risk Factors--Consent Decree of Founder." The action
had absolutely no relationship to Mr. Greenberg's affiliation with Worlds and
Worlds does not anticipate incurring any costs or liability in connection with
the matter. Worlds' Board of Directors is aware of the SEC's civil lawsuit and
Mr. Greenberg's settlement thereof and understands that several factors come
into play in settling a pending legal action, not the least of which is the
curtailment of ongoing litigation costs.
In addition to the above listed directors, the holders of Worlds'
convertible promissory notes have the right to elect one member to the Worlds
Board. As of the date of this Joint Proxy Statement/Prospectus, such holders
have not exercised this right.
54
<PAGE>
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Worlds' By-Laws includes certain provisions permitted pursuant to the NJBCA,
whereby officers and directors of Worlds are to be indemnified against certain
liabilities. These provisions of the By-Laws have no effect on any director's
liability under Federal securities laws or the availability of equitable
remedies, such as injunction or recession, for breach of fiduciary duty. Worlds
believes that these provisions will facilitate Worlds' ability to continue to
attract and retain qualified individuals to serve as directors and officers of
Worlds.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent of Worlds where indemnification might be
required or permitted. Worlds is not aware of any threatened litigation or
proceeding that might result in a claim for such indemnification.
COMPENSATION OF DIRECTORS
Non-employee directors of Worlds, excluding Mr. Scharf, will be reimbursed
for reasonable travel and lodging expenses incurred in attending meetings of the
Board of Directors and any committee on which they may serve, as well as $2,000
per Board meeting. Worlds estimates total Board related expenses, including
travel, lodging, and director's fees, will be approximately $40,000 per year.
COMPENSATION OF EXECUTIVE OFFICERS
Prior to the Worlds Consolidations, Worlds had not paid any compensation to
its executive officers or directors during the prior three years. From December
3, 1997 (effective date of the Worlds Consolidations) through December 31, 1997,
Worlds paid $21,903 in compensation to its President and Chief Executive
Officer. Worlds intends to enter into an employment agreement with its
President, Thomas Kidrin that will expire in December 2000. The agreement, among
other things, will provide for base compensation payable to Mr. Kidrin of
$175,000 in the first year, and bonuses to be determined. The agreement will
also provide for employment on a full-time basis and contain a provision that
Mr. Kidrin will not compete or engage in a business competitive with Worlds for
a period of one year after termination.
1997 STOCK OPTION PLAN
The Worlds Board and Worlds Shareholders have adopted a Stock Option Plan
(the "Option Plan") as an incentive for, and to encourage share ownership by,
Worlds' officers, directors and other key employees and/or consultants and
potential management of possible future acquired companies. The Option Plan
provides that options to purchase a maximum of 1,000,000 shares of Common Stock
(subject to adjustment in certain circumstances) may be granted under the Option
Plan. The Option Plan also allows for the granting of stock appreciation rights
("SARs") in tandem with, or independently of, stock options. Any SARs granted
will not be counted against the 1,000,000 limit.
The purpose of the Option Plan is to make options (both "incentive stock
options" within the meaning of Section 422A of the Internal Revenue Code of
1986, as amended (the "Code"), and non-qualified options) and "stock
appreciation rights" (with non-qualified options only, if in tandem) available
to officers, directors and other key employees and/or consultants of Worlds in
order to give such individuals a greater personal interest in the success of
Worlds and, in the case of employees, an added incentive to continue and advance
in their employment.
The Option Plan is currently administered by the majority vote of a
Committee (the "Committee") appointed by the Board of Directors and comprised of
at least two "independent" members of the Board, or alternatively, by the entire
Board, who are not eligible to receive options, other than pursuant to a
formula, it being intended that such plan shall qualify under Rule 16b-3 as
promulgated pursuant to the
55
<PAGE>
Securities Exchange Act of 1934, as amended. With specified limitations, the
Committee may amend the terms of the Option Plan.
The Committee will designate those persons to receive grants under the
Option Plan and determine the number of options and/or SARs, as the case may be,
to be granted and the price payable for the shares of Common Stock thereunder.
The price payable for the shares of Common Stock under each option will be fixed
by the Committee at the time of the grant, but, for incentive stock options,
must be not less than 100% (110% if the person granted such option owns more
than 10% of the outstanding shares of Common Stock) of the fair market value of
Common Stock at the time the option is granted. The Committee will also
determine the term and vesting schedule of all options and SARs granted,
provided that no option may be exercisable later than ten years after the date
of grant (or five years in the case of a 10% shareholder). The Committee may
also institute divesting schedules. All options are payable in cash or check, by
delivery of a secured personal interest bearing note, or by delivery of shares
of Common Stock equal in value to the cost of the options.
There are currently 165,000 stock options outstanding at an exercise price
of $.50, which vest in equal amounts over a three year period, including 60,000
to one of Worlds' outside directors; 270,000 options outstanding at an exercise
price of $1.00, which vest in equal amounts over a three year period, including
40,000 to one of Worlds' outside directors; and 35,000 non-plan stock options
outstanding at an exercise price of $1.00, which vest in May 1999.
CERTAIN TRANSACTIONS
Worlds intends to enter into a month-to-month consulting agreement with
Steven A. Greenberg, a founder of WAC. The agreement will provide for monthly
compensation of $15,000 plus reimbursement of reasonable expenses actually
incurred. In addition to providing consulting services, Mr. Greenberg will also
make his offices and support staff available to Company employees. During 1997,
Mr. Greenberg loaned $77,000 to WAC of which $71,000 was repaid as of December
31, 1997. Also, during 1997, Mr. Greenberg received $20,000 in consulting fees.
56
<PAGE>
PRINCIPAL SHAREHOLDERS OF WORLDS
The following table sets forth information as of September , 1998 with
respect to the beneficial ownership of shares of Worlds Common Stock, and upon
consummation of the Merger the number of shares of Unity Common Stock expected
to be held, by (i) each person known by Worlds to be the owner of more than 5%
of the outstanding shares of Worlds Common Stock, (ii) each current director,
and (iii) all executive officers and directors as a group:
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
OF OF
WORLDS COMMON STOCK UNITY COMMON STOCK
PRIOR TO THE MERGER AFTER THE MERGER
(2) (2)(3)
---------------------- ----------------------
NAME AND ADDRESS OF NUMBER NUMBER
BENEFICIAL OWNER (1) OF SHARES PERCENT OF SHARES PERCENT
- ---------------------------------------------------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Michael J. Scharf................................... 1,900,000 10.6% 678,300 8.2%
Thomas Kidrin....................................... 1,600,000 9.0% 571,200 6.9%
Kenneth A. Locker(4)................................ 20,000 * % 7,140 * %
Steven A. Greenberg................................. 4,500,000 25.2% 1,606,500 19.5%
All directors and executive officers as a group (3
persons).......................................... 3,520,000 19.7% 1,256,640 15.2%
</TABLE>
- ------------------------
* Denotes less than 1% of outstanding Worlds Common Stock.
(1) Each shareholder's address is c/o Worlds Inc., 15 Union Wharf, Boston,
Massachusetts 02109.
(2) As used herein, beneficial ownership means the sole or shared power to vote,
or direct the voting of, a security, or the sole or shared power to invest
or dispose, or direct the investment or disposition, of a security. Except
as otherwise indicated, all persons named herein and therein have sole
voting power and investment power with respect to their shares of Worlds
Common Stock, except to the extent that authority is shared by spouses under
applicable law and (ii) record and beneficial ownership with respect to
their shares of Worlds Common Stock. With respect to each shareholder,
includes any shares issuable upon exercise of all options or warrants held
by such shareholder that are currently exercisable or will become
exercisable within 60 days of June 30, 1998.
(3) Assumes no cash conversions of Unity Common Stock by Unity Shareholders or
exercise by Unity Shareholders and Worlds Shareholders of their respective
appraisal rights.
(4) Consists solely of vested stock options.
57
<PAGE>
DESCRIPTION OF WORLDS' SECURITIES
GENERAL
Worlds has authorized capital stock consisting of 30,000,000 shares of
Common Stock, par value $.001 per share. As of the date of this Prospectus,
17,868,531 shares of Common Stock are issued and outstanding.
The following is a description of the material terms of the securities
offered hereby. The rights of the holders of shares of the Company's capital
stock are established by Worlds' Certificate of Incorporation, Worlds' Bylaws
and New Jersey Law. The following statements do not purport to be complete or
give full effect to statutory or common law, and are subject in all respects to
the applicable provisions of the Certificate of Incorporation, Bylaws and state
law.
The holders of Common Stock have no preemptive or subscription rights in
later offerings of Common Stock and are entitled to share ratably (i) in such
dividends as may be declared by the Board of Directors out of funds legally
available for such purpose and (ii) upon liquidation, in all assets of Worlds
remaining after payment in full of all debts and obligations of Worlds and any
preferences granted in the future to any preferred stock. Worlds has not paid
any dividends on the Common Stock.
Holders of Common Stock are entitled to one vote for each share held and
have no cumulative voting rights. Accordingly, the holders of more than 50% of
the issued and outstanding shares of Common Stock entitled to vote for election
of directors can elect all the directors if they choose to do so. All shares of
Common Stock now outstanding, including the shares of Common Stock which are the
subject of this Offering, are fully paid and nonassessable. The Board of
Directors is authorized to issue additional shares of Common Stock within the
limits authorized by Worlds' Certificate of Incorporation without shareholder
action.
Under New Jersey law, no offeror shall make a takeover bid to purchase a
number of equity securities of target company that together with presently owned
shares will exceed 10% of outstanding shares of any class of equity securities,
unless at least twenty days prior to making a bid the offeror files a statement
with the New Jersey Bureau of Securities. No offeror shall make a takeover bid
without permission of Bureau Chief which may be after a public hearing conducted
by the Bureau.
The New Jersey Shareholder Protection Act prohibits Worlds from engaging in
business combinations with any interested shareholder for a period of five years
following stock acquisition date by interested shareholder unless: (1) approved
by board of directors before such stock acquisition date and (2) certain other
conditions are met, including approval by vote of two-thirds of voting stock not
beneficially owned by the interested shareholder and fair price requirements.
SHARES AVAILABLE FOR FUTURE SALE
Worlds currently has 17,868,531 shares of Common Stock outstanding (up to
approximately 19,153,279 shares if all the currently outstanding options,
warrants and convertible promissory notes are exercised or converted). Of these
shares, 7,468,535 shares are freely tradable without restriction or further
registration under the Securities Act, except for any shares purchased by an
"affiliate" of Worlds (in general, a person who has a control relationship with
Worlds) which will be subject to the limitations of Rule 144 adopted under the
Securities Act. An additional 10,399,996 shares, inclusive of 8,000,000 held by
affiliates of Worlds, will become eligible for sale pursuant to Rule 144 in
December 1998.
In general, under Rule 144 as currently in effect, subject to the
satisfaction of certain other conditions, a person, including an affiliate of
Worlds (or persons whose shares are aggregated with an affiliate of Worlds), who
has owned restricted shares of Common Stock beneficially for at least one year
is entitled to sell, within any three-month period, a number of shares that does
not exceed the greater of 1% of the total
58
<PAGE>
number of outstanding shares of the same class (approximately 178,685 shares
assuming only the existing shares of Worlds are outstanding) or the average
weekly trading volume of Worlds Common Stock on all exchanges and/or reported
through the automated quotation system of a registered securities association
during the four calendar weeks preceding the date on which notice of the sale is
filed with the SEC. Sales under Rule 144 are also subject to certain manner of
sale provisions, notice requirements and the availability of current public
information about Worlds. A person who has not been an affiliate of Worlds for
at least the three months immediately preceding the sale and who has
beneficially owned shares of Common Stock for at least two years is entitled to
sell such shares under Rule 144 without regard to any of the limitations
described above.
59
<PAGE>
BUSINESS OF UNITY
Unity was formed in May 1996 to serve as a vehicle to effect a merger,
exchange of capital stock, asset acquisition or other similar business
combination with an operating business.
In November 1996, Unity successfully consummated an IPO from which it
derived net proceeds of $6,402,112 million. Approximately 90% of such net
proceeds, inclusive of interest income thereon, are presently held in trust
pending the consummation of a Business Combination and will be released to Unity
upon consummation of the Merger.
Unity's executive offices are located at 245 Fifth Avenue, New York, New
York 10016, its telephone number is (212) 696-4282.
MANAGEMENT OF UNITY
PRIOR TO THE MERGER
EXECUTIVE OFFICERS AND DIRECTORS
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------ --- ---------------------------------------------------------------------
<S> <C> <C>
Lawrence Burstein................... 55 President, Treasurer and Director
John Cattier........................ 65 Director
Barry Ridings....................... 45 Director
Norman Leben........................ 38 Secretary and Director
</TABLE>
LAWRENCE BURSTEIN has been President, Treasurer and a director of Unity
since its inception. For approximately ten years prior thereto, Mr. Burstein was
the President, a director and principal shareholder of Trinity Capital
Corporation, a private investment banking concern ("Trinity"). Trinity ceased
operations upon the formation of Unity VCA. Since March 1996, Mr. Burstein has
been President and a principal shareholder of Unity VCA. Mr. Burstein is a
director of four public companies, being, respectively, T-HQ Inc., which designs
and markets Nintendo and Sega games, Brazil Fast Food Corp., the owner and
operator of the second largest fast food restaurant chain in Brazil, CAS Medical
Systems, Inc., engaged in the manufacture and marketing of blood pressure
monitors and other medical products principally for the neonatal market, and The
MNI Group Inc., engaged in the marketing of specially formulated medical foods.
Mr. Burstein received an L.L.B. from Columbia Law School.
JOHN CATTIER has been a director and shareholder of Unity since its
inception. Since May 1996, Mr. Cattier has been a director and shareholder of
Unity VCA. Mr. Cattier has been an independent consultant since January 1985.
From 1957 to December 1984, Mr. Cattier was associated with White Weld & Co.,
investment bankers, serving as a general partner, and with Credit Suisse White
Weld (which subsequently became Credit Suisse First Boston), investment bankers,
in various capacities. Mr. Cattier is a director of Pacific Assets Trust PLC, a
United Kingdom investment trust, and Vice Chairman of Laredo National
Bancshares, Inc. of Laredo, Texas, a one bank holding company. Mr. Cattier
received a B.A. from Yale University.
BARRY RIDINGS has been a director of Unity since its inception. Since March
1990, Mr. Ridings has been a Managing Director of Alex. Brown & Sons, investment
bankers. From June 1986 to March 1990, Mr. Ridings was a Managing Director of
Drexel Bumham Lambert, investment bankers. Mr. Ridings is a director of
SubMicron Systems Corporation, a semi-conductor capital equipment manufacturer,
Transcor Waste Services Corp., a waste management company, Noodle Kidoodle,
Inc., an operator of specialty toy stores, New Valley Corp., formerly known as
Western Union, Search Capital Group, an auto finance Company, Telemundo Group, a
Spanish language television network, and Norex Industries Inc., a shipping
company. Mr. Ridings received an M.B.A. from Cornell University.
60
<PAGE>
NORMAN LEBEN has been Secretary and a director of Unity since its inception.
Mr. Leben is, and since 1988 has been, a partner of Dalessio Miliner & Leben
("DML"), certified public accountants. Prior thereto and from 1985, Mr. Leben
was engaged in the acquisition, management, syndication and operation of real
estate and other emerging market businesses. Prior to 1985, Mr. Leben was
employed by Laventhol & Horwath. Mr. Leben received a B.B.A. from George
Washington University.
All directors hold office until the next annual meeting of shareholders and
the election and qualification of their successors. Directors receive no
compensation for serving on the Board of Directors other than reimbursement of
reasonable expenses incurred in attending meetings. Officers are elected
annually by the Board of Directors and serve at the discretion of the Board. Mr.
Burstein devotes approximately 30% of his time to the affairs of Unity. Unity
has not entered into employment agreements with either of its officers.
EXECUTIVE COMPENSATION
No executive officer has received any cash compensation from Unity since
inception for services rendered. Unity's officers receive no compensation for
serving as officers other than accountable reimbursement for any reasonable
business expenses incurred in connection with activities on behalf of Unity.
See "Description of Unity's Securities--Directors' Warrants" for information
as to warrants to purchase in the aggregate 400,000 shares of Unity Common
Stock.
DIRECTORS' COMPENSATION
Directors receive no compensation for serving on the Board of Directors
other than reimbursement of reasonable expenses incurred in attending meetings.
CERTAIN TRANSACTIONS
In June 1996, Unity issued an aggregate of 625,000 shares of Unity Common
Stock at a price of $.0001 per share, as follows: 25,000 shares to Unity VCA;
150,000 shares to Mr. Burstein; 15,000 shares to Mr. Leben; an aggregate of
76,500 shares to Heptagon Investments Ltd. ("Heptagon") and its affiliate;
39,000 shares to Cricket Services Ltd. ("Cricket"); 6,000 shares to Barry
Ridings; and 313,500 shares to 24 other persons. Mr. Cattier is Chairman of
Heptagon's board of directors and exercises voting and dispositive control over
approximately 7.6% of Heptagon's shares of capital stock. Mr. Cattier disclaims
any voting or dispositive power over shares of Unity Common Stock held by
Heptagon. Mr. Cattier exercises voting and dispositive control over the shares
of Unity Common Stock held by Cricket. Both Heptagon and Cricket are private
investment companies.
In June 1996, Unity issued 58,334, 58,333, 58,333 and 25,000 Class A and
Class B Warrants to each of, respectively, Messrs. Burstein, Leben, Cattier and
Ridings (collectively, the "Directors' Warrants"), in consideration for future
services to be rendered by such persons on behalf of Unity. The Directors'
Warrants are identical to Unity's Series A and Series B Warrants offered and
sold in the IPO but are not redeemable by Unity and may not be transferred until
the consummation of a Business Combination.
Unity has been obligated to pay Unity VCA, since June 1, 1996, a monthly fee
of $7,500 for general and administrative services pursuant to an agreement which
may be canceled by either party upon 30 days' prior written notice. Such fee
includes the use of approximately 500 square feet of office space in premises
occupied by Unity VCA. DML, an accounting firm which is an affiliate of Mr.
Leben affords Unity VCA the use of such space at a monthly rental of $2,000.
Messrs. Burstein, Cattier and Leben are each directors and shareholders of Unity
VCA.
Unity VCA had made non-interest demand loans aggregating approximately
$50,000 to Unity as of the IPO date to cover expenses incurred by Unity in
connection with the IPO. Unity repaid these loans out of the proceeds of the
IPO.
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<PAGE>
DML has performed bookkeeping, tax and accounting services for certain of
the "blank check" companies of which Messrs. Burstein, Cattier and Ridings, have
been directors and shareholders from their dates of inception through the
consummation of their respective Business Combinations and performs similar
services for Unity at an aggregate cost of $14,275 for the year ended July 31,
1997.
AFTER THE MERGER
Upon consummation of the Merger, the executive officers and directors of
Worlds and certain other persons will become the executive officers and
directors of Unity. See "Management of Worlds-- Directors, Executive Officers
and Consultant."
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<PAGE>
PRINCIPAL SHAREHOLDERS OF UNITY
The following table sets forth information as of September , 1998 and as
of such date, giving effect to the Merger, based on information obtained from
the persons named below, with respect to the beneficial ownership of shares of,
respectively, Unity Common Stock and Worlds Common Stock by (i) each person
known by Unity to be the owner of more than 5% of its outstanding shares of
Common Stock, (ii) each director of Unity and (iii) all executive officers and
directors of Unity as a group:
<TABLE>
<CAPTION>
BENEFICIAL
BENEFICIAL OWNERSHIP OF BENEFICIAL
OWNERSHIP OF UNITY WORLDS COMMON OWNERSHIP OF
COMMON STOCK PRIOR STOCK PRIOR UNITY COMMON STOCK
TO THE MERGER(1)(2) TO THE MERGER(1) AFTER THE MERGER(3)
------------------------ ------------------------ ------------------------
NAME AND ADDRESS NUMBER OF NUMBER OF NUMBER OF
OF BENEFICIAL OWNER(1) SHARES PERCENT SHARES PERCENT SHARES(9) PERCENT
- ------------------------------ ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Lawrence Burstein............. 175,000(4) 9.3% 234,000( (7) 1.3% 375,206(10) 4.5%
245 Fifth Avenue
New York, NY 10016
John Cattier.................. 140,500( (5) 7.5% 213,300( (8) 1.2% 333,314(11) 4.0%
Achlain Invermoriston
Inverneshire,
Scotland IV3 6YN
United Kingdom
Barry Ridings................. 6,000 * 3,600 * 57,285(12) *
Lilac Lane
Princeton, NJ 08540
Norman Leben.................. 40,000(4) 2.1% 103,000(6) * 193,437(13) 2.3%
245 Fifth Avenue
New York, NY 10016
311,500( (5) 16.6% 365,900( (8) 2.0% 842,126(14) 9.7%
All executive officers and
directors
as a group (4 persons)......
</TABLE>
- ------------------------
* Denotes less than 1% of outstanding Unity Common Stock.
(1) As used herein, beneficial ownership means the sole or shared power to vote,
or direct the voting of, a security, or the sole or shared power to invest
or dispose, or direct the investment or disposition, of a security. Except
as otherwise indicated, all persons named herein have (i) sole voting power
and investment power with respect to their respective shares of Unity Common
Stock and Worlds Common Stock, except to the extent that authority is shared
by spouses under applicable law and (ii) record and beneficial ownership
with respect to their respective shares of Unity Common Stock and Worlds
Common Stock. With respect to each shareholder, includes any shares issuable
upon exercise of all options or warrants held by such shareholder that are
currently exercisable or will become exercisable within 60 days of June 30,
1998.
(2) Does not include shares issuable upon exercise of the Directors' Warrants
(as hereinafter defined) which are beneficially owned by each of the persons
named in the above table but which are not exercisable until the
consummation of a Business Combination.
(3) Assumes no cash conversions of Unity Common Stock by Unity Shareholders or
exercise by Unity Shareholders and Worlds Shareholders of their respective
appraisal rights.
(4) Includes 25,000 shares of Unity Common Stock owned by Unity VCA, over which
shares Messrs. Burstein, Leben and Cattier share voting and investment
power.
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(5) Includes (i) 75,000 shares held by Heptagon, (ii) 1,500 shares held by an
affiliate of Heptagon and (iii) 39,000 shares held by Cricket. Mr. Cattier
is Chairman of Heptagon's board of directors and exercises voting and
dispositive control over approximately 7.6% of Heptagon's shares of capital
stock. Mr. Cattier disclaims any voting or dispositive power of the shares
of Unity Common Stock held by Heptagon.
(6) Includes 94,000 shares of Worlds Common Stock owned by Unity VCA, over which
Messrs. Burstein, Leben and Cattier share voting and investment control.
(7) Includes 50,000 shares issuable upon exercise of warrants.
(8) Includes (i) 50,000 shares issuable upon exercise of warrants, (ii) 45,000
shares held by Heptagon, (iii) 900 shares held by an affiliate of Heptagon
and (iv) 23,400 shares held by Cricket. Mr. Cattier is Chairman of
Heptagon's board of directors and exercises voting and dispositive control
over approximately 7.6% of Heptagon's shares of capital stock. Mr. Cattier
disclaims any voting or dispositive power of the shares of Worlds Common
Stock held by Heptagon.
(9) Includes (i) the number of shares of Unity Common Stock beneficially held
prior to the Merger and (ii) the number of shares of Worlds Common Stock
beneficially held prior to the Merger multiplied by the Exchange Ratio.
(10) Includes 116,668 shares issuable upon exercise of the Directors' Warrants.
(11) Includes 116,666 shares issuable upon exercise of the Directors' Warrants.
(12) Includes 50,000 shares issuable upon exercise of the Directors' Warrants.
(13) Includes 116,666 shares issuable upon exercise of the Directors' Warrants.
(14) Includes 400,000 shares issuable upon exercise of the Directors' Warrants.
The shares of Unity Common Stock owned by the persons named above have been
placed in escrow with American Stock Transfer & Trust Company, as escrow agent,
until the earlier to occur of (i) the consummation of the Merger or (ii) the
mandatory liquidation of Unity pursuant to its Certificate of Incorporation due
to the failure of Unity to effect a Business Combination by November 12, 1998.
During the escrow period, such persons will not be able to sell or otherwise
transfer their respective shares of Unity Common Stock, but will retain all
other rights as shareholders of Unity, including, without limitation, the right
to vote such shares.
Messrs. Burstein, Cattier, Leben and Unity VCA may be deemed to be "parents"
and "promoters" of Unity, as such terms are defined under the Federal securities
laws.
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DESCRIPTION OF UNITY'S SECURITIES
GENERAL
Unity is authorized to issue 20,000,000 shares of Unity Common Stock, par
value $.0001 per share and 5,000 shares of Preferred Stock, par value $.01 per
share. As of the date of this Joint Proxy Statement/ Prospectus, 1,875,000
shares of Unity Common Stock are outstanding, held of record by 34 persons. No
shares of Preferred Stock are currently outstanding.
COMMON STOCK
The holders of Unity Common Stock are entitled to one vote for each share
held of record on all matters to be voted on by shareholders. There is no
cumulative voting with respect to the election of directors, with the result
that the holders of more than 50% of the shares voted for the election of
directors can elect all of the directors. The holders of Unity Common Stock are
entitled to receive dividends when, as and if declared by the Board of Directors
out of funds legally available therefor. In the event of liquidation,
dissolution or winding up of Unity, the holders of Unity Common Stock except for
the Non-Public Unity Shareholders who have agreed to waive their rights to share
in any distribution upon their respective shares of Unity Common Stock relating
to a liquidation of Unity due to the failure of Unity to effect a Business
Combination by May 12, 1998 (which date will be automatically extended until
November 12, 1998 to permit consummation of the Merger Transaction or, if the
Merger Transaction is terminated prior to May 12, 1998, to permit the
consummation of any other Business Combination which may be contemplated in a
letter of intent entered into between Unity and an Acquired Business other than
Worlds prior to such date) are entitled to share ratably in all assets remaining
available for distribution to them after payment of liabilities and after
provision has been made for each class of stock, if any, having preference over
the Unity Common Stock. Holders of shares of Unity Common Stock, as such, have
no redemption, preemptive or other subscription rights. Except as set forth
under "The Merger--Conversion Rights," there are no conversion provisions
applicable to the Unity Common Stock. All of the outstanding shares of Unity
Common Stock are, and the shares of Unity Common Stock issuable in the Merger,
when delivered in accordance with the terms of the Merger Agreement, will be,
fully paid and nonassessable.
PREFERRED STOCK
Unity's Certificate of Incorporation authorizes the issuance of 5,000 shares
of "blank check" preferred stock (the "Preferred Stock") with such designation,
rights and preferences as may be determined from time to time by the Unity
Board. Accordingly, the Unity Board is empowered, without shareholder approval,
to issue Preferred Stock with dividend, liquidation, conversion, voting or other
rights which could adversely affect the voting power or other rights of the
holders of Unity Common Stock. The Preferred Stock could be utilized, under
certain circumstances, as a method of discouraging, delaying or preventing a
change in control of Unity subsequent to the Effective Time of the Merger.
Although Unity does not currently intend to issue any shares of Preferred Stock,
there can be no assurance that Unity will not do so subsequent to the
consummation of the Merger.
DIVIDENDS
Unity does not presently intend to pay any cash dividends as all available
cash will be utilized to further the growth of Unity's business subsequent to
the Effective Time of the Merger and for the proximate future thereafter. The
payment of any subsequent cash dividends will be in the discretion of the Unity
Board and will be dependent upon Unity's results of operations, financial
condition, contractual restrictions and other factors deemed relevant by the
Unity Board.
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TRANSFER AGENT
The transfer agent for the Unity Common Stock is American Stock Transfer &
Trust Company, 40 Wall Street, New York, New York 10005.
IPO WARRANTS
As of the date of this Joint Proxy Statement/Prospectus, there were
1,250,000 Class A Redeemable Warrants and 1,250,000 Class B Redeemable Warrants
outstanding, held of record by 6 and 5 persons, respectively.
Each Class A Redeemable Warrant entities the registered holder to purchase
one share of Unity Common Stock at a price of $5.50 per share, subject to
adjustment in certain circumstances, for a period of five years commencing on
the later of a Business Combination or November 12, 1997. Each Class B
Redeemable Warrants entities the registered holder to purchase one share of
Unity Common Stock at a price of $7.50 per share subject to adjustment in
certain circumstances, for a period of five years commencing on the later of a
Business Combination or November 12, 1997. Unity may call the Class A Redeemable
Warrants and the Class B Redeemable Warrants for redemption, each as a class, in
whole and not in part, at the option of Unity, at a price of $.05 per IPO
Warrant at any time upon not less than 30 days' prior written notice, provided
that the reported high bid price of Unity Common Stock equals or exceeds $8.50
per share with respect to the Class A Warrants, and $10.50 per share with
respect to the Class B Warrants for the 20 consecutive trading days immediately
prior to the notice of redemption to warrantholders. The warrantholders shall
have exercise rights until the close of business on the date fixed for
redemption.
The IPO Warrants are issued in registered form under a Warrant Agreement
between Unity and American Stock Transfer & Trust Company, as Warrant Agent.
The exercise price and number of shares of Unity Common Stock issuable on
exercise of the IPO Warrants are subject to adjustment in certain circumstances
including in the event of a stock dividend, recapitalization, reorganization,
merger or consolidation of Unity. However, the IPO Warrants are not subject to
adjustment for issuances of Unity Common Stock at a price below their respective
exercise prices.
Unity has the right, in its sole discretion, to decrease the exercise price
of the IPO Warrants for a period of not less than 30 days on not less than 30
days' prior written notice to the warrantholders. In addition, Unity has the
right, in its sole discretion, to extend the expiration date of the IPO Warrants
on five business days' prior written notice to the warrantholders.
The IPO Warrants may be exercised upon surrender of the Warrant Certificate
on or prior to the expiration date at the offices of the Warrant Agent, with the
exercise form on the reverse side of the Warrant Certificate completed and
executed as indicated, accompanied by full payment of the exercise price (by
certified check, payable to Unity) to the Warrant Agent for the number of IPO
Warrants being exercised. The warrantholders do not have the rights or
privileges of holders of Unity Common Stock.
No IPO Warrants will be exercisable unless at the time of exercise Unity has
filed with the SEC a current prospectus covering the shares of its Common Stock
issuable upon exercise of such IPO Warrants and such shares have been registered
or qualified or deemed to be exempt under the securities laws of the state of
residence of the holder of such IPO Warrants. Unity will use its best efforts to
have all shares so registered or qualified on or before the exercise date and to
maintain a current prospectus relating thereto until the expiration of the IPO
Warrants, subject to the terms of the Warrant Agreement. While it is Unity's
intention to do so, there is no assurance that it will be able to do so.
No fractional shares will be issued upon exercise of the IPO Warrants.
However, if a warrantholder exercises all IPO Warrants then owned of record by
him, Unity will pay to such warrantholder, in lieu of
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the issuance of any fractional share which is otherwise issuable to such
warrantholder, an amount in cash based on the market value of Unity Common Stock
on the last trading day prior to the exercise date.
UNDERWRITERS' IPO SECURITIES
In connection with the IPO, Unity sold to GKN Securities Corp. and Gaines,
Berland Inc., for nominal consideration, the right to purchase up to an
aggregate of 125,000 units (the "Underwriters' IPO Securities"). Each unit
issuable upon exercise of the Underwriters' IPO Securities consists of one share
of Unity Common Stock, one Class A Warrant and one Class B Warrant (the Class A
Warrants and the Class B Warrants are collectively referred to herein as the
"Warrants"). The Warrants are identical to the IPO Warrants described above
except that the Warrants cannot be redeemed. The Underwriters' IPO Securities
are exercisable initially at $6.60 per unit (the "Exercise Price") for a period
of five years commencing on November 12, 1996. The Underwriters' IPO Securities
contain anti-dilution provisions providing for adjustment of the Exercise Price
upon the occurrence of certain events including the issuance of shares of Unity
Common Stock or other securities convertible into or exercisable for shares of
Unity Common Stock at a price per share less than the Exercise Price, or in the
event of any recapitalization, reclassification, stock dividend, stock split,
stock combination or similar transaction.
Unity also agreed at the time of the issuance of the Underwriters' IPO
Securities to use its best efforts to maintain an effective registration
statement with respect to the Underwriters' IPO Securities and the underlying
units. In addition, the Underwriters' IPO Securities grants to the holders
thereof certain "piggy back" and "demand" rights for periods of seven and five
years, respectively, from November 12, 1996 with respect to the registration
under the Securities Act of the securities directly and indirectly issuable upon
exercise of the Underwriters' IPO Securities.
DIRECTORS' WARRANTS
In June 1996, Unity issued to each of Messrs. Burstein, Leben, Cattier and
Ridings, 58,334, 58,333, 58,333 and 25,000 Class A and Class B Warrants,
respectively, in consideration for future services to be rendered by such
persons on behalf of Unity. Such Warrants are identical to the Class A and Class
B Redeemable Warrants but are not redeemable by Unity and may not be exercised
until the consummation of a Business Combination.
LIMITATIONS UPON TRANSACTIONS WITH "INTERESTED SHAREHOLDERS"
Unity is subject to the provisions of Section 203 of the Delaware General
Corporation Law. In general, Section 203 prohibits a publicly-held Delaware
corporation from engaging in a "business combination" with an "interested
shareholder" for a period of three years after the date of the transaction in
which the person became an interested shareholder, unless (i) prior to the date
of the business combination, the transaction is approved by the board of
directors of the corporation, (ii) upon consummation of the transaction which
resulted in the shareholder becoming an interested shareholder, the interested
shareholder owns at least 85% of the outstanding voting stock, or (iii) on or
after such date the business combination is approved by the board of directors
and by the affirmative vote of at least 66 2/3% of the outstanding voting stock
which is not owned by the interested shareholder. A "Business Combination"
includes mergers, asset sales and other transactions resulting in a financial
benefit to the interested shareholder. Subject to certain exceptions, an
"interested shareholder" is a person who, together with affiliates and
associates, owns (or within three years, did own), 15% or more of the
corporation's voting stock.
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COMPARISON OF RIGHTS OF HOLDERS
OF UNITY COMMON STOCK AND WORLDS COMMON STOCK
If the Merger Agreement is approved and the Merger becomes effective, Worlds
Shareholders will become Unity Shareholders and their rights as shareholders
will be determined by the DGCL and Unity's Certificate of Incorporation and
By-Laws. Differences between the DGCL and the NJBCA, as well as those between
the respective Certificates of Incorporation and By Laws of Unity and Worlds,
are summarized below. This summary is not intended to be complete and is
qualified in its entirety by reference to the DGCL, the NJBCA, and the
respective Certificates of Incorporation and By-Laws of Unity and Worlds.
COMPARISON OF DGCL AND NJBCA
APPRAISAL RIGHTS IN MERGER OR CONSOLIDATION
Under New Jersey law, unless the certificate of incorporation otherwise
provides, a dissenting shareholder of a New Jersey corporation which is a party
to a consolidation, or which is not the surviving corporation in a merger, or
which is the surviving corporation in a merger requiring shareholder approval,
has appraisal rights with respect to any shares other than (1) shares listed on
a national securities exchange or held of record by not less than 1,000 holders
and (2) in exchange for which, pursuant to the plan of merger or consolidation,
the shareholder will receive cash and/or securities which will be listed on a
national securities exchange or held of record by not less than 1,000 holders.
The Worlds Certificate of Incorporation does not modify the statutory appraisal
rights.
Under Delaware law, shareholders of a Delaware corporation have appraisal
rights in a merger or consolidation, except for certain mergers and
consolidations not requiring any vote by shareholders of the corporation, with
respect to any shares other than shares listed on a national securities exchange
or held of record by more than 2,000 holders. However, even with respect to
shares so listed or held, appraisal rights exist if, pursuant to the plan of
merger, the shareholder is to receive in exchange for his shares anything other
than stock of the surviving corporation listed on a national securities exchange
or held of record by more than 2,000 holders or cash in lieu of fractional
shares.
APPRAISAL RIGHTS ON DISPOSITION OF ASSETS
Under New Jersey law, a dissenting shareholder in a New Jersey corporation
has appraisal rights in the case of any sale, lease, exchange or other
disposition of substantially all of the assets of the corporation not in the
usual or regular course of business as conducted by the corporation, except with
respect to (1) shares listed on a national securities exchange or held of record
by not less than 1,000, holders, or (2) a transaction pursuant to a plan of
dissolution of the corporation which provides for the distribution of
substantially all of its net assets to shareholders according to their interests
within one year, where such transaction is wholly for cash and/or securities
which will be listed on a national securities exchange or held of record by not
less than 1,000 holders or (3) a sale pursuant to court order
The DGCL does not provide for appraisal rights in connection with
disposition of assets.
VOTE REQUIRED TO AUTHORIZE CERTAIN ORGANIC CHANGES
In general, under New Jersey law, in the case of corporations organized
prior to 1969, such as Worlds, a disposition of all or substantially all of the
assets other than in the regular course of business, a charter amendment or a
merger or consolidation must be authorized by the affirmative vote of two-thirds
of the votes cast, and by such vote of each class entitled to vote as a class,
with respect to any such matter, except, however, that such a corporation, may
amend its charter by the affirmative vote of two-thirds of the votes cast to
provide that the vote of a majority of the votes cast will suffice.
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In general, under Delaware law, a sale, lease or exchange or all or
substantially all of the assets, a charter amendment or merger or consolidation
must be authorized by the affirmative vote of a majority of the outstanding
shares entitled to vote.
CLASS VOTING ON MERGER OR CONSOLIDATION
Under New Jersey law, any class or series of shares shall be entitled to
vote as a class if the plan of merger or consolidation contains any provision
which, if contained in a proposed charter amendment, would entitle the class or
series to vote as a class on the amendment.
The DGCL does not provide for a class vote on a plan merger or
consolidation.
SOURCE OF DIVIDENDS
Under New Jersey law, dividends may not be paid if, after giving effect to
the dividend, either (1) the corporation would be unable to pay its debts as
they become due in the ordinary course of its business or (2) the corporation's
total assets would be less than its total liabilities.
Under Delaware law, dividends may be paid out of surplus or, in the absence
thereof, out of the net profits of the current and/or next preceding fiscal
year, except where capital represented by stock enjoying a preference upon the
distribution of assets thereby would be impaired.
POWER TO ADOPT, AMENDED OR REPEAL BY-LAWS
Under New Jersey law, the power to adopt, amend and repeal by-laws of a
corporation is vested in the Board of Directors unless such power is reserved to
the shareholders in the certificate of incorporation, but by-laws made by the
Board of Directors may be amended and/or repealed and new by-laws adopted by the
shareholders and the shareholders may prescribe in such by-laws that the Board
may not amend or repeal by-laws approved by shareholders. The Worlds By-laws may
be amended by the Board of Directors or by the shareholders.
Under Delaware law, the power to adopt, amend or repeal by-laws of a
corporation is vested in the corporation's shareholders, although the
corporation's certificate of incorporation may also vest such power in the
corporation's board of directors. The Unity Certificate of Incorporation
provides that the Unity By-Laws may be adopted, amended or repealed by the Unity
Board.
ACTION BY SHAREHOLDERS BY WRITTEN CONSENT IN LIEU OF A MEETING
Under New Jersey law, except as otherwise provided in a certificate of
incorporation, any action, (other than the election of directors) required or
permitted to be taken at a meeting of the corporation's shareholders, may be
taken without a meeting upon the written consent of shareholders who would have
been entitled to cast the minimum number of votes which would have been
necessary to take such action at a meeting at which all shares entitled to vote
thereon were present and voted (except that the election of directors requires
unanimous written consent of all shareholders). The corporation must give all
shareholders advance notice of such proposed action if the proposed action
involves a merger, consolidation or sale of substantially all of the assets of a
corporation.
Under Delaware law, except as otherwise provided in a company's certificate
of incorporation, any action required or permitted to be taken at the meeting of
a corporation's shareholders may be taken without a meeting if a written
consent, setting forth the action so taken, is signed by the holders of
outstanding shares having not less than the minimum number of votes that would
have been necessary to take such action at a meeting at which all share entitled
to vote thereon were presented and voted.
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REMOVAL OF DIRECTORS
Under New Jersey law, one or more or all directors of a corporation may be
removed for cause or, unless otherwise provided in the certificate of
incorporation, without cause by shareholders by the affirmative vote of the
majority of the votes cast by the holders of shares entitled to vote thereon.
The provisions of the DGCL are similar to those of the NJBCA.
SPECIAL MEETINGS OF SHAREHOLDERS
Under New Jersey law, holders of not less than 10% of a corporation's voting
stock may apply to the New Jersey Superior Court for an order directing a
special meeting of shareholders to be held. The Worlds By-Laws provide that a
special meeting of shareholders for any purpose or purposes may be called by the
Board of Directors, Chairman of the Board or President, and shall be called by
the Chairman of the Board, President or Secretary at the request in writing by
shareholders owning not less than a majority of the entire capital stock of the
company issued and outstanding and entitled to vote.
Under Delaware law, special meetings of shareholders may be called by the
Board of Directors or by such person or persons as may be authorized by a
company's certificate of incorporation or the by-laws. The Unity By-Laws
relating to special meetings of the shareholders will be identical to those
Worlds.
DE FACTO MERGER
Under New Jersey law, shareholders have the same voting and dissent and
appraisal rights as if they were shareholders of a surviving corporation in a
merger, if (1) voting shares outstanding or issuable after the transaction
exceed by more than 40% voting shares outstanding before the transaction or (2)
shares entitled to participate without limitation in distributions outstanding
or issuable after the transaction exceed by more than 40% such shares
outstanding before the transaction.
The DGCL does not contain a comparable provision.
GUARANTY
Under New Jersey law, a corporation may give a guaranty not in furtherance
of its direct or indirect business interests only when authorized at a meeting
of shareholders by the affirmative vote of all of the votes cash by the holders
of each class and series of shares entitled to vote thereon. If authorized by
such a vote, the guaranty may be secured by the corporation's property.
Under Delaware law, a Delaware corporation may guaranty obligations of a
third party, whether or not in furtherance of a specific corporate purpose,
without shareholder approval.
SHAREHOLDERS' DERIVATIVE ACTIONS
New Jersey law contains certain provisions which have the effect of
discouraging derivative actions. Specifically, New Jersey law authorizes the
Court to award reasonable expenses and attorney's fees to the successful
defendants in a derivative action upon a finding that the action was brought
without cause. In addition, the corporation may require the plaintiff or
plaintiffs to give security for the reasonable expenses, including attorneys'
fees, that may be incurred by the corporation or by other named defendants for
which the corporation may become legally liable if plaintiff or plaintiffs are
holders of less than 5% of the outstanding shares of any class or series of such
corporation (or voting trust certificates therefor) unless the shares or trust
certificates so held have a market value in excess of $25,000.
The DGCL does not contain comparable provisions.
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PROXIES
Under New Jersey law, a proxy is valid for no longer than eleven months
unless a longer period is specified. In addition, a proxy is revocable at will
unless coupled with an interest. The death or incapacity of a shareholder does
not revoke a proxy and it will continue in force until revocation by the
shareholder's personal representative.
Under Delaware law, a proxy is not valid beyond three years from its date
unless it so provides for a longer period. In addition, for a proxy to be
irrevocable it must so state and be coupled with an interest in the stock itself
or in the corporation generally. In the case of a revocable proxy, death or
incapacity will revoke the proxy.
INSPECTION OF BOOKS AND RECORDS
Under New Jersey law, a shareholder of record for at least six months
immediately preceding his demand or any holder (or a person authorized on behalf
of such holder) of at least 5% of the outstanding shares of any class or series
shall have the right to examine for any proper purpose the books and records.
Under Delaware law, any shareholder upon written demand under oath stating
the purpose thereof has the right during usual business hours to inspect for any
proper purpose the stock ledger, list of shareholders and other books and
records, and to make copies or abstracts therefrom.
ANTI-TAKEOVER STATUTE
New Jersey has adopted a type of anti-takeover statute known as a "business
combination" statute. Subject to a numerous qualifications and exceptions, the
statute prohibits an interested stockholder of a corporation from effecting a
business combination with the corporation for a period of five years unless the
corporation's board approved the transaction prior to the stockholder becoming
an interested stockholder. An "interested stockholder" is defined to include any
beneficial owner of more than 10% of the voting power of the outstanding voting
stock of the corporation and any affiliate of the corporation who within the
prior five year period has at any time owned 10% or more of the voting power.
The term "business combination" is defined broadly to include, inter alia,
merger of the corporation with the interested stockholder or any corporation
which after such merger would be an affiliate of the interested stockholder, and
any transfer of 10% or more of the corporation's assets to the interested
stockholder or affiliate thereof. The effect of the statute is to protect
non-tendering post-acquisition minority shareholders from mergers in which they
will be "frozen out" after the merger, by prohibiting transactions in which an
acquiror could favor itself at the expense of minority shareholders. The New
Jersey statute, however, does not apply to companies which do not have either
their principal executive offices or significant business operations located in
New Jersey. Therefore, the New Jersey statute does not apply to Worlds.
Delaware has adopted a business combination type of anti-takeover statute
which operates in a manner similar to the New Jersey statute. Although there are
numerous differences between the Delaware statute and the New Jersey statute,
the most significant include the following: (i) under the Delaware statute, the
moratorium imposed on a business combination with an interested stockholder is
three years, as opposed to five years under the New Jersey statute; (ii) the
Delaware statute defines "interested stockholder" using a 15% ownership
threshold rather than the 10% threshold under the New Jersey statute; (iii) the
Delaware statute permits an interest stockholder to avoid the moratorium by
acquiring 85% of the corporation's voting power in the same transaction in which
that stockholder becomes an interested stockholder; the New Jersey statute does
not contain a comparable provision; and (iv) the Delaware statute applies to
Delaware corporations regardless of the locations of their offices and business
operations; the law would therefore apply to Unity.
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COMPARISON OF CERTIFICATES OF INCORPORATION AND BY-LAWS OF UNITY AND WORLDS
AUTHORIZED SHARES OF CAPITAL STOCK
The Worlds Certificate of Incorporation, as amended, authorizes the issuance
of 30,000,000 shares of Worlds Common Stock, 17,868,531 shares of which were
issued and outstanding as of the Worlds Record Date.
The Unity Certificate of Incorporation, as amended, authorizes the issuance
of 20,000,000 shares of Unity Common Stock, 1,875,000 shares of which were
issued and outstanding as of the Unity Record Date, and 5,000 shares of
Preferred Stock none of which were issued on the Unity Record Date.
MEETINGS
Pursuant to the Worlds By-Laws, annual meetings of Worlds Shareholders shall
be held on the second Tuesday in April if not a legal holiday, or at such other
date and at such other time as the Worlds Board may determine. At each annual
meeting, the Worlds Shareholders entitled to vote shall elect a Board of
Directors, and they may transact such other corporate business as may properly
be brought before the meeting. Special meetings of Worlds Shareholders may be
called for any purpose by the Worlds Board, the Chairman of the Board or the
President. Written notice of any meeting of Worlds Shareholders shall be mailed
not less than ten nor more than sixty days before such meeting to each Worlds
Stockholder entitled to vote thereat.
Special meetings of the Worlds Board may be called by the Chairman of the
Board or the President on two days' notice to each director, or such shorter
period of time before the meeting as will be sufficient for the convenient
assembly of the directors so notified. Special meetings shall be called by the
Secretary in like manner and notice on the written request of two or more
directors.
Pursuant to the Unity By Laws, annual meetings of Unity Shareholders for the
election of directors and for such other business as may be stated in the notice
of the meeting shall be held at such date as the Unity Board shall determine and
as set forth in the notice of the meeting. At each annual meeting, the Unity
Shareholders entitled to vote shall elect a Board of Directors and they may
transact such other corporate business as shall be stated in the notice of the
meeting. Special meetings of Unity Shareholders may be called for any purpose by
the President or Secretary by resolution of the directors, or by a notice signed
by the registered holders of no less than 10% of Unity's then issued and
outstanding capital stock. Written notice shall be given to each Unity
Stockholder entitled to vote thereat not less than ten nor more than fifty days
before the date of the meeting.
Special meetings of the Unity Board may be called by the President or the
Secretary on the written request of any two directors on at least two days'
notice to each director.
DIRECTORS AND OFFICERS
Pursuant to the Worlds By-Laws, the Worlds Board may fix the number of
directors, but such number may not be less than one nor more than nine persons.
The Worlds Board has currently fixed the number of directors at three. The
officers of Worlds shall be a Chairman of the Board, a President, a Secretary
and a Treasurer and there may be one or more Vice Presidents, one or more
Assistant Secretaries and one or more Assistant Treasurers as the Worlds Board
may elect.
Pursuant to the Unity By-Laws, the number of directors comprising the Unity
Board shall not be less than one nor more than seven persons. The Unity Board
has currently fixed the number of directors at four. The officers of Unity shall
be a President, a Treasurer and a Secretary. In addition, the Unity Board may
elect a Chairman, one or more Vice Presidents and such Assistant Secretaries and
Assistant Treasurers as they may deem proper.
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LEGAL MATTERS
Matters relating to the legality of the shares of Unity Common Stock offered
by this Joint Proxy Statement/Prospectus are being passed upon by Cooperman
Levitt Winikoff Lester & Newman, P.C., 800 Third Avenue, New York, New York
10022. Members of such firm own shares of Unity Common Stock (less than 1%) and
a member of such firm owns 3,500 shares of Worlds Common Stock.
EXPERTS
The financial statements of Unity as at July 31, 1997 and 1996, and for the
year ended July 31, 1997, for the period from inception (May 30, 1996) to July
31, 1996 and for the period from inception (May 30, 1996) to July 31, 1997
included in this Joint Proxy Statement/Prospectus have been audited by Arthur
Andersen LLP, independent public accountants, as indicated in their reports with
respect thereto and are included herein in reliance upon the authority of said
firm as experts in giving said report.
The financial statements of Worlds Inc. (a development stage enterprise) as
of December 31, 1997 and for the period from April 8, 1997 (inception) to
December 31, 1997 and Worlds Inc. - Predecessor (a development stage enterprise)
as of December 3, 1997 and for the period ended December 3, 1997, the year ended
December 31, 1996 and the period from April 26, 1994 (inception) to December 3,
1997, included in the Joint Proxy Statement/Prospectus have been audited by BDO
Seidman, LLP, independent certified public accountants, to the extent and for
the periods set forth in their reports (both of which contain an explanatory
paragraph regarding such companies' ability to continue as going concerns)
appearing elsewhere herein, and are included in reliance upon such reports given
upon the authority of said firm as experts in accounting and auditing.
The statements in this Joint Proxy Statement/Prospectus under the captions
"Joint Proxy Statement/ Prospectus Summary--Tax Consequences of the Merger" and
"The Merger--Certain Tax Consequences of the Merger" have been reviewed by
Cooperman Levitt Winikoff Lester & Newman, P.C., counsel to Unity, and by
Heller, Horowitz & Feit, P.C., counsel for Worlds, as experts on such matters,
and, based upon that review, such statements are included herein.
73
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Worlds Inc.
Report of Independent Certified Public Accountants................................. F-3
Balance Sheet as of December 31, 1997.............................................. F-4
Statement of Operations for the period from inception (April 8, 1997) to
December 31, 1997................................................................ F-5
Statement of Stockholders' Deficit for the period from inception (April 8, 1997) to
December 31, 1997................................................................ F-6
Statement of Cash Flows for the period from inception (April 8, 1997) to
December 31, 1997................................................................ F-7
Summary of Accounting Policies..................................................... F-8
Notes to Financial Statements...................................................... F-11
Worlds Inc.--Predecessor
Report of Independent Certified Public Accountants................................. F-18
Balance Sheet as of December 3, 1997............................................... F-19
Statements of Operations for the year ended December 31, 1996, for the period
ended December 3, 1997 and for the period from inception (April 26, 1994) to
December 3, 1997................................................................. F-20
Statements of Stockholders' Deficit for the year ended December 31, 1996 and for
the period ended December 3, 1997................................................ F-21
Statements of Cash Flows for the year ended December 31, 1996, for the period
ended December 3, 1997, and for the period from inception (April 26, 1994)
to December 3, 1997.............................................................. F-22
Summary of Accounting Policies..................................................... F-23
Notes to Financial Statements...................................................... F-25
Worlds Inc.
Balance Sheets as of December 31, 1997 and June 30, 1998 (unaudited)............... F-32
Statements of operations for the period from April 8, 1997 (inception) to June 30,
1997, for the three months ended June 30, 1998, for the six months ended June 30,
1998 and for the
period from inception (April 8, 1997) to June 30, 1998 (unaudited)............... F-33
Statements of Stockholders' Deficit for the period from inception (April 8, 1997)
to
December 31, 1997 and for the six months ended June 30, 1998 (unaudited)......... F-34
Statements of Cash Flows for the six months ended June 30, 1998 and for the period
from inception (April 8, 1997) to June 30, 1998 (unaudited)...................... F-35
Summary of Accounting Policies (unaudited)......................................... F-36
Notes to Financial Statements (unaudited).......................................... F-39
Worlds Inc.--Predecessor
Statements of Operations for the three months ended June 30, 1997, for the six
months ended June 30, 1997 and for the period from inception (April 26, 1994) to
December 3, 1997 (unaudited)..................................................... F-42
</TABLE>
F-1
<PAGE>
<TABLE>
<S> <C>
Statements of Cash Flows for the six months ended June 30, 1997 and for the
period from inception (April 26, 1994) to December 3, 1997 (unaudited)........... F-43
Summary of Accounting Policies (unaudited)......................................... F-44
Notes to Financial Statements (unaudited).......................................... F-46
Unity First Acquisition Corp.
Report of Independent Public Accountants........................................... F-47
Balance Sheets as of July 31, 1997 and 1996........................................ F-48
Statements of Operations for the year ended July 31, 1997, for the period from
inception (May 30, 1996) to July 31, 1996, and for the period from inception
(May 30, 1996) to July 31, 1997.................................................. F-49
Statement of Changes in Stockholders' Equity (Deficit) for the period from
inception
(May 30, 1996) through July 31, 1996 and for the year ended July 31, 1997........ F-50
Statements of Cash Flows for the year ended July 31, 1997, for the period from
inception (May 30, 1996) to July 31, 1996, and for the period from inception
(May 30, 1996) to July 31, 1997.................................................. F-51
Notes to the Financial Statements.................................................. F-52
Balance Sheets as of April 30, 1998 and July 31, 1997 (unaudited).................. F-57
Statements of Operations for the nine months ended April 30, 1997 and 1996,
for the three months ended April 30, 1997 and 1996, and for the period from
inception
(May 30, 1996) to April 30, 1998 (unaudited)..................................... F-58
Statement of Changes in Shareholders Equity for the nine months ended April 30,
1998 (unaudited)................................................................. F-59
Statements of Cash Flows for the nine months ended April 30, 1998 and 1997 and
for the period from inception (May 30, 1996) to April 30, 1998 (unaudited)....... F-60
Selected Notes to the Financial Statements (unaudited)............................. F-61
</TABLE>
F-2
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Worlds Inc.
Boston, Massachusetts
We have audited the accompanying balance sheet of Worlds Inc. (the
"Company") (a development stage enterprise) as of December 31, 1997, and the
related statements of operations, stockholders' deficit and cash flows for the
period from April 8, 1997 (inception) to December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Worlds Inc. at December 31,
1997 and the results of its operations and its cash flows for the period from
April 8, 1997 (inception) to December 31, 1997, in conformity with generally
accepted accounting principles.
As discussed in Note 1, the accompanying financial statements have been
prepared assuming Worlds Inc. will continue as a going concern. The Company is
in the development stage, has a stockholders' deficit, has had minimal revenues
from operations and will require substantial additional funds for development
and marketing of its products. These matters raise substantial doubt about its
ability to continue as a going concern. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
BDO Seidman, LLP
New York, New York
March 25, 1998
F-3
<PAGE>
WORLDS INC.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<S> <C>
ASSETS
CURRENT:
Cash and cash equivalents..................................................... $3,541,829
Trade receivables, less allowance for doubtful accounts of $140,318........... 538
Prepaid expenses and other current assets..................................... 74,175
---------
TOTAL CURRENT ASSETS........................................................ 3,616,542
PROPERTY AND EQUIPMENT, NET (NOTE 4)............................................ 209,452
---------
$3,825,994
---------
---------
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT:
Accounts payable.............................................................. $ 568,707
Accrued expenses (Note 11).................................................... 592,250
Advanced customer billings and deferred revenue............................... 436,140
Current maturities of notes payable (Note 5).................................. 269,333
---------
TOTAL CURRENT LIABILITIES................................................... 1,866,430
LONG-TERM PORTION, NOTES PAYABLE (NOTE 5)....................................... 1,968,333
---------
TOTAL LIABILITIES........................................................... 3,834,763
---------
COMMITMENTS AND CONTINGENCIES (NOTES 6 AND 11)
STOCKHOLDERS' DEFICIT (NOTES 2, 3 AND 7):
Common stock, $.001 par value--shares authorized 30,000,000; outstanding
16,119,996.................................................................. 16,120
Additional paid-in capital 6,661,582
Deficit accumulated during the development stage.............................. (6,686,471)
---------
TOTAL STOCKHOLDERS' DEFICIT................................................. (8,769)
---------
$3,825,994
---------
---------
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
F-4
<PAGE>
WORLDS INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF OPERATIONS
<TABLE>
<S> <C>
PERIOD FROM APRIL 8, 1997 (INCEPTION) TO DECEMBER 31, 1997 (A)
- --------------------------------------------------------------------------------
NET REVENUES.................................................................... $ 1,420
COSTS AND EXPENSES:
Selling, general and administrative........................................... (675,030)
Acquired research and development (Note 1).................................... (6,135,538)
----------
OPERATING LOSS.............................................................. (6,809,148)
OTHER INCOME (EXPENSES):
Interest income............................................................... 13,593
Interest expense.............................................................. (16,692)
----------
LOSS BEFORE EXTRAORDINARY ITEM.............................................. (6,812,247)
EXTRAORDINARY ITEM--GAIN ON DEBT SETTLEMENT (NOTE 9)............................ 125,776
----------
NET LOSS........................................................................ $(6,686,471)
----------
----------
LOSS PER SHARE (BASIC AND DILUTED) (NOTE 10):
Loss before extraordinary item................................................ $ (.73)
Extraordinary item............................................................ .01
----------
NET LOSS PER SHARE (BASIC AND DILUTED)...................................... $ (.72)
----------
----------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic and diluted............................................................. 9,336,569
----------
----------
</TABLE>
- ------------------------
(a) Includes the results of Predecessor and Academic (from December 4, 1997)
which were merged into the Company on December 3, 1997.
See accompanying summary of accounting policies and notes to financial
statements.
F-5
<PAGE>
WORLDS INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF STOCKHOLDERS' DEFICIT (NOTE 7)
<TABLE>
<CAPTION>
PERIOD FROM APRIL 8, 1997 (INCEPTION) TO DECEMBER 31, 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
DEFICIT
ACCUMULATED
COMMON STOCK ADDITIONAL DURING THE TOTAL
-------------------- PAID-IN DEVELOPMENT STOCKHOLDERS'
SHARES AMOUNT CAPITAL STAGE DEFICIT
--------- --------- ----------- ---------- -----------
Issuance of common stock to
founding stockholders............ 8,400,000 $ 8,400 $ 195,600 $ -- $ 204,000
Sale of shares in private offering
memorandum and shares issued to
placement agent (Note 3)......... 4,810,000 4,810 3,689,866 -- 3,694,676
Issuance of shares to Academic
Computer Systems, Inc. (Note
2)............................... 910,000 910 557,116 -- 558,026
Issuance of shares pursuant to
merger with Predecessor (Note
2)............................... 1,999,996 2,000 1,998,000 -- 2,000,000
Capital contribution resulting from
forgiveness of debt to
shareholders of Predecessor (Note
5)............................... -- -- 221,000 -- 221,000
Net loss for the period April 8 to
December 31, 1997................ -- -- -- (6,686,471) (6,686,471)
--------- --------- ----------- ---------- -----------
BALANCE, DECEMBER 31, 1997......... 16,119,996 $ 16,120 $6,661,582 $(6,686,471) $ (8,769)
--------- --------- ----------- ---------- -----------
--------- --------- ----------- ---------- -----------
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
F-6
<PAGE>
WORLDS INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF CASH FLOWS
(NOTE 12)
<TABLE>
<CAPTION>
PERIOD FROM APRIL 8, 1997 (INCEPTION) TO DECEMBER 31, 1997
- --------------------------------------------------------------------------------------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................................. $ (6,686,471)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization........................................... 16,323
Gain on debt settlement................................................. (125,776)
Acquired research and development....................................... 6,135,538
Changes in operating assets and liabilities, net of effects from merger
with Predecessor and Academic:
Trade receivables................................................... (538)
Prepaid expenses and other assets................................... 93,716
Accounts payable and accrued expenses............................... 214,361
--------------
NET CASH USED IN OPERATING ACTIVITIES............................. (352,847)
--------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock to founding stockholders............... 204,000
Proceeds from sale of common stock in private offering memorandum......... 3,694,676
Payments on note payable.................................................. (4,000)
--------------
NET CASH PROVIDED BY FINANCING ACTIVITIES......................... 3,894,676
--------------
NET INCREASE IN CASH AND CASH EQUIVALENTS................................... 3,541,829
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............................. --
--------------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................................... $ 3,541,829
--------------
--------------
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
F-7
<PAGE>
WORLDS INC.
(A DEVELOPMENT STAGE ENTERPRISE)
SUMMARY OF ACCOUNTING POLICIES
DEFINITIONS
The Company is the resulting entity of two contemporaneous mergers (the
"Mergers") of Worlds Inc., a Delaware corporation ("Predecessor"), with and into
Worlds Acquisition Corp., a Delaware corporation ("WAC"), and WAC with and into
Academic Computer Systems, Inc., a New Jersey corporation ("Academic"), which
changed its name to Worlds Inc. (see Note 2). While Academic was the legal
entity that survived the mergers, WAC was the accounting acquiror in both
mergers. The Company's fiscal year-end is December 31.
The term the "Company," as used herein, refers to the consolidated entity
resulting from the two contemporaneous mergers, as well the pre-merger
Predecessor, WAC and Academic; however, Predecessor, WAC and Academic are
hereinafter sometimes referred to separately as the context requires.
NATURE OF BUSINESS
WAC was incorporated on April 8, 1997 to design, develop and market
three-dimensional ("3D") music oriented Internet sites on the World Wide Web.
These web sites are anticipated to utilize 3D technologies developed by
Predecessor.
BASIS OF PRESENTATION
The financial statements include the results of Predecessor and Academic
from December 3, 1997, the date of the Mergers (the "Merger Date").
The financial statements have been prepared in accordance with the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 7,
"Accounting, and Reporting by Development Stage Enterprises," which requires
development stage enterprises to employ the same accounting principles as
operating companies.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments, including cash and short-term
debt, approximated fair value as of December 31, 1997 because of the relatively
short maturity of the instruments. The carrying value of long-term debt,
including the current portion, approximates fair value as of December 31, 1997,
based upon estimates for similar debt issues.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures 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 these estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents are comprised of highly liquid money market
instruments, which have original maturities of three months or less at the time
of purchase.
F-8
<PAGE>
WORLDS INC.
(A DEVELOPMENT STAGE ENTERPRISE)
SUMMARY OF ACCOUNTING POLICIES
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives of the assets, which
range from two to five years.
REVENUE RECOGNITION
Revenue from technology development and licensing contracts is recognized
upon the attainment of contractual milestones (approximating the
percentage-of-completion method). Cash received in advance of revenues earned is
recorded as deferred revenue.
SOFTWARE DEVELOPMENT COSTS
Software development costs are charged to expense when incurred until the
technological feasibility of the product has been established. After
technological feasibility has been established, any additional costs would be
capitalizable in accordance with the Financial Accounting Standards Board's
("FASB") SFAS No. 86 ("SFAS No. 86"). No such costs have been capitalized to
date.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred.
INCOME TAXES
The Company uses the liability method of accounting for income taxes in
accordance with SFAS No. 109, "Accounting for Income Taxes." Deferred income tax
assets and liabilities are recognized based on the temporary differences between
the financial statement and income tax bases of assets, liabilities and
carryforwards using enacted tax rates. Valuation allowances are established,
when necessary, to reduce deferred tax assets to the amount expected to be
realized.
LOSS PER SHARE
In 1997, the FASB's SFAS No. 128, "Earnings per Share," replaced the
calculation of primary and fully diluted earnings (loss) per share with basic
and diluted earnings (loss) per share. Unlike primary earnings per share, basic
earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. The loss per share amounts
have been presented to conform to SFAS No. 128 requirements. The common stock
equivalents which would arise from the exercise of stock options and warrants
are excluded from calculation of diluted loss per share since their effect is
anti-dilutive. Therefore, the amounts reported for basic and diluted loss per
share are the same. (See Note 10)
STOCK-BASED COMPENSATION
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). SFAS No. 123 encourages entities to adopt the
fair value method in place of the provisions of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"), for
all arrangements under which employees receive shares of stock or other equity
instruments of the employer or the employer incurs liabilities to employees in
amounts based on the price of its stock. The Company has not adopted the fair
value method encouraged by SFAS No. 123 and will continue to account for such
transactions in accordance with APB No. 25.
F-9
<PAGE>
WORLDS INC.
(A DEVELOPMENT STAGE ENTERPRISE)
SUMMARY OF ACCOUNTING POLICIES
NEW ACCOUNTING STANDARDS NOT YET ADOPTED
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income", which establishes standards for reporting and display of comprehensive
income, its components and accumulated balances. Comprehensive income is defined
to include all changes in equity except those resulting from investments by
owners and distributions to owners. Among other disclosures, SFAS No. 130
requires that all items that are required to be recognized under current
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information", which supersedes SFAS No. 14, "Financial Reporting Segments of a
Business Enterprise", establishes standards for the way that public enterprises
report information about operating segments in interim financial statements
issued to the public. It also establishes standards for disclosures regarding
products and services, geographic areas and major customers. SFAS No. 131
defines operating segments as components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance.
Both of these new standards are effective for financial statements for
periods beginning after December 15, 1997 and require comparative information
for earlier years to be restated. The adoption of these standards is not
expected to impact the Company's financial statements or disclosures.
F-10
<PAGE>
WORLDS INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
1. GOING CONCERN
As discussed in Note 3, the Company completed a private placement raising
gross proceeds of $4,385,000 and consummated a merger agreement with a
development stage enterprise, Predecessor. Predecessor had not generated
significant revenues from operations and had an accumulated deficit from
inception to the Merger Date of $21,236,139 and a capital deficit of $4,135,538.
The acquisition of Predecessor by the Company was accounted for as a purchase.
Accordingly, $6,135,538, the portion of the purchase allocable to in-process
research and development projects that had not reached technological feasibility
and had no probable alternative future uses, was expensed by the Company at the
date of merger.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company is in the development
stage and has had minimal revenues from operations since the series of merger
transactions. These matters raise substantial doubt about its ability to
continue as a going concern.
The Company anticipates that it currently has only a portion of the funds
necessary to complete product development and commercialization. There can be no
assurance that the Company will be able to obtain the substantial additional
capital resources necessary to pursue its business plan or that any assumptions
relating to its business plan will prove to be accurate. The Company is pursuing
sources of additional financing and there can be no assurance that any such
financing will be available to the Company on commercially reasonable terms, or
at all. Any inability to obtain additional financing will have a material
adverse effect on the Company, including possibly requiring the Company to
significantly curtail or cease operations.
These factors raise substantial doubt about the ability of the Company to
continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
2. THE MERGERS
On December 3, 1997, Predecessor was merged with and into WAC in a series of
related transactions which included a simultaneous capital transaction between
the Company and Academic (the "Mergers") and a private offering of WAC's
securities (the "Private Placement"). In both the merger with Predecessor and
the capital transaction with Academic, WAC was the acquiror for accounting
purposes.
The acquisition of Predecessor was accounted for as a purchase whereby all
of the common and preferred stock of Predecessor were exchanged for 1,999,996
shares of WAC. The shares issued to Predecessor common and preferred
shareholders were valued at $1.00 per share which represented the share value in
the private placement that occurred during this time period (see Note 3); a
purchase price of approximately $2,000,000. The exchange ratio was determined
after extensive negotiation between management of Predecessor and WAC.
Predecessor was a development stage company, had not generated significant
revenues from operations and had an accumulated deficit from inception to
December 3, 1997 of $21,236,139 and a capital deficit of $4,135,538. The assets
acquired of Predecessor (cash, prepaid expenses, property and equipment) were
recorded at fair market value which approximated book value at December 3, 1997,
and, as discussed in Note 1 above, since technological feasibility of the
various Predecessor technologies acquired had not been established, the excess
purchase price over Predecessor's capital deficit of $6,135,538 was expensed as
acquired research and development.
F-11
<PAGE>
WORLDS INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. THE MERGERS (CONTINUED)
Academic was an inactive company with no operations. The value assigned to
the 910,000 shares in the capital transaction with Academic on December 3, 1997
represented Academic's net tangible assets (primarily cash) of $558,026.
Academic voluntarily reported under the Securities Exchange Act of 1934 (the
"Exchange Act").
The Company intends to continue reporting under the Exchange Act. While no
trading market existed for the securities of Academic, or currently exists for
the securities of the Company, the Company intends to cause its common stock to
be traded on the Bulletin Board.
3. THE PRIVATE PLACEMENT
The Private Placement called for WAC to offer for sale a maximum of 50 units
(57 1/2 with the over-allotment), each consisting of 120,000 shares of WAC's
common stock (the "Units") at a price of $120,000 per Unit. In connection with
the Private Placement, the placement agent was to receive one warrant to
purchase one share of WAC's common stock at $1 per share for every $40 of gross
proceeds from the sale of the Units. On November 21, 1997, WAC sold 31.67 Units
with gross proceeds of $3,800,000 (3,800,000 shares) (the "Initial Private
Placement Closing") and the placement agent was issued 425,000 shares of common
stock. On December 31, 1997, the Company sold 4.88 Units with gross proceeds of
$585,000 (585,000 shares). Net proceeds, after commissions and expenses of the
offering, were $3,694,676. WAC agreed to include the shares of common stock
underlying the Units sold in the Private Placement (the "Private Placement
Shares") in a registration statement to be filed with the Securities and
Exchange Commission (the "SEC"). In the event that the Company does not use its
best efforts to have a registration statement declared effective by the SEC by
May 20, 1998, the Company has agreed, upon the occurrence of such event, to
issue to purchasers of the Units one warrant to purchase one share of common
stock, at an exercise price of $1, for each three Private Placement Shares.
4. PROPERTY AND EQUIPMENT
A summary of property and equipment as of December 31, 1997 is as follows:
<TABLE>
<S> <C>
Computers, software and equipment................................................. $ 650,557
Less: Accumulated depreciation and amortization................................... 441,105
---------
$ 209,452
---------
---------
</TABLE>
F-12
<PAGE>
WORLDS INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. NOTES PAYABLE
Long-term debt at December 31, 1997 consists of the following:
<TABLE>
<S> <C>
Convertible promissory notes payable--stockholders, maturing December 3, 2000,
plus interest at 7.5% compounded annually. The notes are convertible into
shares of the Company's common stock as follows: pre December 3, 1998 at
$4.375 per share, from December 4, 1998 to December 3, 1999 at $5.00 per share
and after December 4, 1999 at $5.625 per share. (Stockholders granted
forgiveness of accrued interest of $106,000 on this debt which had previously
been assumed as an accrued expense in the merger--see (a) below).............. $1,685,000
Note payable--technology obligation (noninterest bearing), payable in monthly
installments of $3,333 until November 2001.................................... 186,667
Note payable--stockholder, payable in monthly installments of $6,944 until
December 2000, plus interest at 8%. (Stockholder granted forgiveness of
$115,000 which had previously been assumed as an account payable in the
merger--SEE (A) below)........................................................ 250,000
Note payable--investment banker, payable in monthly installments of $2,000 until
September 1998, with a final payment of $100,000, plus interest at 8%......... 116,000
---------
2,237,667
Less: Current maturities........................................................ 269,333
---------
Long-term portion........................................................... $1,968,334
---------
---------
</TABLE>
- ------------------------
(a) As a result of the mergers discussed in Note 2, the Company was granted
forgiveness of debt by certain stockholders of Predecessor. Such
forgiveness, aggregating $221,000, has been accounted for as a contribution
of capital to the Company for the period ended December 31, 1997.
Approximate maturities of long-term debt over the next four years are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- --------------------------------------------------------------------------------
<S> <C>
1998............................................................................ $ 269,333
1999............................................................................ 123,333
2000............................................................................ 1,808,334
2001............................................................................ 36,667
</TABLE>
6. COMMITMENTS
(a) During September 1997, the Company commenced leasing of office space in
Boston under a noncancelable operating lease expiring in September 2000. Minimum
rentals under this lease are approximately as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- ----------------------------------------------------------------------------------
<S> <C>
1998.............................................................................. $ 48,000
1999.............................................................................. 50,000
2000.............................................................................. 34,000
----------
Total minimum payments............................................................ $ 132,000
----------
----------
</TABLE>
F-13
<PAGE>
WORLDS INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. COMMITMENTS (CONTINUED)
Rent expense for the period ended December 31, 1997 was approximately
$21,000.
(b) The Company anticipates entering into an employment agreement with its
president that calls for minimum annual compensation of $175,000. Bonuses will
be determined at the discretion of the Board of Directors. The agreement is
anticipated to expire in December 2000.
7. STOCKHOLDERS' DEFICIT
COMMON STOCK SPLIT
On September 15, 1997, the Company's Board of Directors approved a
two-for-one split of the common stock. The additional shares resulting from the
stock split were distributed on September 15, 1997 to all stockholders of record
at the close of business on September 15, 1997. The balance sheet as of December
31, 1997 and the statement of stockholders' equity for the period from April 8,
1997 to December 31, 1997 reflect the retroactive recording of the stock split
as if it had occurred on April 8, 1997. Further, all references in the financial
statements to average number of shares outstanding and related prices, per share
amounts and stock option data have been restated for all periods to reflect the
stock split.
STOCK OPTION PLAN
During September 1997, the Board of Directors and stockholders of the
Company adopted a stock option plan (the "Option Plan") as an incentive for, and
to encourage share ownership by, the Company's officers, directors and other key
employees and/or consultants and potential management of possible future
acquired companies. The Option Plan provides that options to purchase a maximum
of 1,000,000 shares of common stock (subject to adjustment in certain
circumstances) may be granted under the Option Plan. The Option Plan also allows
for the granting of stock appreciation rights ("SAR's") in tandem with, or
independent of, stock options. Any SAR's granted will not be counted against the
1,000,000 limit.
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees", and related Interpretations in accounting for the Option Plan. Under
APB Opinion No. 25, no compensation cost was recognized because the exercise
price of Worlds' employee stock options equaled the market price of the
underlying stock on the date of grant.
FASB Statement No. 123, "Accounting for Stock-Based Compensation", requires
the Company to provide pro forma information regarding net loss as if
compensation cost for the Company's stock option plans had been determined in
accordance with the fair value based method prescribed in FASB Statement No.
123. The Company estimates the fair value of each stock option at the grant date
by using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1997, no dividend yield; 30%
volatility; risk-free interest rate of 5.85%; and expected life of 3 years. The
Company granted 165,000 options to a director and employees during 1997 and thus
835,000 options remain available for grant as of December 31, 1997.
F-14
<PAGE>
WORLDS INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. STOCKHOLDERS' DEFICIT (CONTINUED)
Under the accounting provisions of FASB Statement No. 123, the Company's net
loss and net loss per share would have been adjusted to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
PERIOD ENDED DECEMBER 31, 1997
- -------------------------------------------------------------------------------
<S> <C>
Net loss:
As reported.................................................................. $ (6,686,471)
Pro forma.................................................................... (6,751,856)
Net loss per share (basic and diluted):
As reported.................................................................. $ (.72)
Pro forma.................................................................... (.72)
</TABLE>
The following table summarizes the stock option activity:
<TABLE>
<CAPTION>
OPTIONS
OUTSTANDING WEIGHTED
---------------------------- AVERAGE PRICE
SHARES PRICE PER SHARE PER SHARE
--------- ----------------- ---------------
<S> <C> <C> <C>
Options granted during 1997............................................. 165,000 $ .50 $ .50
Options exercised....................................................... -- -- --
Options canceled........................................................ -- -- --
--------- --- ---
Balance, December 31, 1997.............................................. 165,000 $ .50 $ .50
--------- --- ---
--------- --- ---
Options exercisable at year-end......................................... 55,000 $ .50 $ .50
--------- --- ---
--------- --- ---
Weighted average fair value of options granted during the year.......... $ .59
---
---
</TABLE>
8. INCOME TAXES
The use of the Predecessor's net operating loss ("NOL") is subject to annual
limits due to the ownership change for the Mergers. In general, an ownership
change occurs if, during any three-year test period, the aggregate of all
increases in percentage ownership by stockholders is more than 50%. Upon
completion of the Mergers discussed in Note 2, such an ownership change
occurred.
At December 31, 1997, after accounting for the estimated limitation of the
Predecessor's NOL carryforward (approximately $100,000 per year over 15 years),
the Company has a NOL aggregating approximately $2 million to be used to offset
future Federal income taxes. A deferred income tax asset for the Company's NOL
has been completely offset by a valuation allowance since management cannot
determine that it is more likely than not that the deferred tax asset can be
realized.
9. EXTRAORDINARY ITEM
During December 1997, the Company negotiated settlement of certain trade
payables assumed in the merger with Predecessor. Such payables which amounted to
$193,501 were reduced to $67,725 resulting in a gain on debt forgiveness of
$125,776.
F-15
<PAGE>
WORLDS INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
10. LOSS PER SHARE
The following table sets forth the computation of basic and diluted loss per
share for the period from April 8, 1997 (inception) to December 31, 1997:
<TABLE>
<S> <C>
Numerator:
Loss before extraordinary item................................................ $(6,812,247)
Extraordinary item............................................................ 125,776
----------
Net loss, numerator for basic loss per share............................ (6,686,471)
Effect of dilutive securities:
Convertible debt............................................................ --
----------
Net loss, numerator for diluted loss per share.......................... $(6,686,471)
----------
----------
Denominator:
Denominator for basic loss per share--weighted average common shares.......... 9,336,569
Effect of dilutive securities:
Convertible debt.......................................................... --
Stock options and warrants................................................ 33,343
----------
Dilutive potential common shares........................................ 33,343
----------
Denominator for diluted loss per share--adjusted weighted average common
shares and assumed conversions.............................................. 9,369,912
----------
----------
Basic loss per share............................................................ $ (.72)
----------
----------
Diluted loss per share--as calculated........................................... $ (.71)
----------
----------
Diluted loss per share--as disclosed due to anti-dilutive effect of stock
options....................................................................... $ (.72)
----------
----------
</TABLE>
For additional disclosure regarding stock options, warrants and convertible
debt, see Notes 7, 3 and 5, respectively.
Options to purchase 50,000 shares of common stock at $5 per share were
outstanding during 1997 but were not included in the computation of diluted loss
per share because the option exercise price was greater than the fair value of
common shares and, therefore, the effect would be anti-dilutive.
11. CONTINGENCIES
The Company is currently a defendant in two lawsuits filed by a former
employee of Predecessor: Fraser v. Knowledge Adventure Worlds, Inc. d/b/a Worlds
Inc., et al., San Francisco Superior Court No. 974470 ("State Court Action");
and Fraser v. Worlds Inc., U.S. District Court, Northern District of California
No. C97-0277 CW ("Federal Action").
In the State Court Action filed in December 1995, Fraser alleged various
contract and tort claims for wrongful termination and sought damages ranging
from $500,000 to $2,000,000. Pursuant to mediation in July 1996, the parties
reached a tentative settlement. In February 1997, parties again reached a
tentative settlement, this time in connection with both the State Court and
Federal Actions. Pursuant to terms of the stipulated settlement, Fraser filed a
motion for entry of judgment. The Company filed its opposition to this motion
and, at a hearing on December 4, 1997, the Court ruled in favor of the Company
and approved the
F-16
<PAGE>
WORLDS INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. CONTINGENCIES (CONTINUED)
Company's proposed version of the settlement agreement which, among other
things, would terminate both the State Court and Federal Actions. On December
18, 1997, Fraser filed a motion for reconsideration and a motion to take
discovery. The Court again ruled in favor of the Company and denied Fraser's
motions at a hearing on January 22, 1998.
In the Federal Action, filed in January 1997, Fraser asserted claims for
damages of $200,000 in connection with the use of "Worlds" name on the World
Wide Web. On September 26, 1997, Fraser filed a motion requesting enforcement of
his version of the terms of the tentative settlement of February 1997. On
October 23, 1997, Fraser also moved for a temporary restraining order and a
preliminary injunction. The Company opposed both of Fraser's motions and, on
October 31, the Court denied the October 23 motion. On November 7, 1997, the
Court also denied Fraser's motion of September 26, and ordered the parties to
participate in a settlement conference, scheduled for January 5, 1998. That
conference has now been continued to April 13, 1998.
Company management and counsel believe that the maximum additional liability
for resolution of these two lawsuits would be approximately $150,000, which
amount has been included in accrued expenses at December 31, 1997.
During February 1998, the Company was named as a defendant in a lawsuit
filed by a former employee of Predecessor seeking damages of approximately
$70,000 (plus interest and fees) relating to termination of an employment
contract. The lawsuit is in the pre-discovery phase. Management believes that
settlement, if any, would not have a material adverse effect on the Company's
financial position or results of operations.
12. SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid during the period ended December 31, 1997 was approximately
$1,600. Noncash investing and financing activities during the period ended
December 31, 1997 included the following:
(a) As discussed in Note 2, WAC exchanged all of the outstanding common and
preferred stock of the Predecessor in exchange for 1,999,996 shares of WAC.
Also, Academic exchanged all of their outstanding common and preferred stock for
910,000 shares of WAC and WAC was merged into Academic.
(b) The Company recognized a gain of $221,000 from forgiveness of debt to
shareholders of Predecessor that was recorded as a capital contribution.
(c) The Company paid for $120,000 of accrued professional fees by issuing a
note payable (see Note 5).
(d) The Company converted accounts payable of $250,000 and accrued expenses
of $35,000 into notes payable (see Note 5).
F-17
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
and Stockholders of
Worlds Inc.--Predecessor
We have audited the accompanying balance sheet of Worlds Inc.--Predecessor
(a development stage enterprise) (the "Predecessor") as of December 3, 1997, and
the related statements of operations, stockholders' deficit and cash flows for
the period ended December 3, 1997, the year ended December 31, 1996 and the
period from April 26, 1994 (inception) to December 3, 1997. These financial
statements are the responsibility of the Predecessor's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Worlds Inc.--Predecessor as
of December 3, 1997, and the results of its operations and its cash flows for
the period ended December 3, 1997, the year ended December 31, 1996 and the
period from April 26, 1994 (inception) to December 3, 1997, in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Predecessor will continue as a going concern. As discussed in the summary of
accounting policies, the Predecessor is in the development stage and has
suffered recurring losses from operations, has a working capital deficit, and
has a stockholders' deficit since inception that raise substantial doubt about
its ability to continue as a going concern. Management's plans in regard to
these matters are described in Note 1 (Development Stage Risks) and Note 10
(Merger) to the financial statements. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
BDO Seidman, LLP
San Francisco, California
March 25, 1998
F-18
<PAGE>
WORLDS INC.-PREDECESSOR
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 3, 1997(A)
- -------------------------------------------------------------------------------
<S> <C>
ASSETS
CURRENT:
Cash and cash equivalents.................................................... $ 56,345
Trade receivables, less allowance for doubtful accounts of $140,318.......... --
Prepaid expenses and other current assets.................................... 167,891
-----------
TOTAL CURRENT ASSETS..................................................... 224,236
PROPERTY AND EQUIPMENT, NET (NOTE 2)........................................... 225,775
-----------
$ 450,011
-----------
-----------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable............................................................. $ 1,082,236
Accrued expenses (Note 9).................................................... 669,109
Advanced customer billings and deferred revenue.............................. 436,140
Advance from Worlds Inc. (formerly Worlds Acquisition Corp.) (Note 10)....... 561,397
Current maturities of notes payable (Note 3)................................. 70,000
-----------
Total current liabilities................................................ 2,818,882
LONG-TERM PORTION, NOTES PAYABLE (NOTE 3)...................................... 1,766,667
-----------
TOTAL LIABILITIES........................................................ 4,585,549
-----------
COMMITMENTS AND CONTINGENCIES (NOTES 1, 4, 9 AND 10)
STOCKHOLDERS' DEFICIT (NOTE 5):
Preferred stock, $.0001 par value; designated as Series A; 2,000,000 shares
authorized, 1,801,533 shares issued and outstanding........................ 180
Preferred stock, $.0001 par value; designated as Series B; 2,300,000 shares
authorized, 1,022,726 shares issued and outstanding........................ 102
Common stock, $.0001 par value; 15,000,000 shares authorized; 5,535,646
shares issued and outstanding.............................................. 553
Deferred compensation related to stock options............................... (5,337)
Additional paid-in capital................................................... 17,105,103
Deficit accumulated during development stage................................. (21,236,139)
-----------
TOTAL STOCKHOLDERS' DEFICIT.............................................. (4,135,538)
-----------
$ 450,011
-----------
-----------
</TABLE>
- ------------------------
(a) Date of merger with Worlds Inc. (formerly Worlds Acquisition Corp.)
See accompanying summary of accounting policies and notes to financial
statements.
F-19
<PAGE>
WORLDS INC. -- PREDECESSOR
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 26, 1994
YEAR ENDED PERIOD ENDED (INCEPTION) TO
DECEMBER 31, 1996 DECEMBER 3, 1997(A) DECEMBER 3, 1997
----------------- ------------------- ----------------
<S> <C> <C> <C>
NET REVENUES (NOTE 6).................................. $ 3,784,019 $ 80,720 $ 6,026,691
----------------- ------------------- ----------------
COSTS AND EXPENSES:
Cost of revenues..................................... 6,014,432 32,304 11,279,348
Research and development............................. 2,446,724 452,897 5,388,340
Selling, general and administrative.................. 4,901,628 2,399,887 10,602,749
Lawsuit settlements (Note 9)......................... 509,200 -- 509,200
----------------- ------------------- ----------------
TOTAL COSTS AND EXPENSES....................... 13,871,984 2,885,088 27,779,637
----------------- ------------------- ----------------
OPERATING LOSS................................. (10,087,965) (2,804,368) (21,752,946)
OTHER INCOME AND (EXPENSES):
Interest income...................................... 115,956 10,343 237,629
Interest expense..................................... (16,750) (139,650) (171,082)
Gain (loss) on disposal of property and equipment.... (83,195) 4,070 (79,125)
Income from sale of technology (Note 7).............. -- 260,100 260,100
----------------- ------------------- ----------------
LOSS BEFORE INCOME TAXES AND EXTRAORDINARY
ITEM......................................... (10,071,954) (2,669,505) (21,505,424)
INCOME TAXES (NOTE 8).................................. (115,000) (5,000) (120,000)
----------------- ------------------- ----------------
LOSS BEFORE EXTRAORDINARY ITEM................. (10,186,954) (2,674,505) (21,625,424)
EXTRAORDINARY ITEM--GAIN ON DEBT SETTLEMENT (NOTE 3)... -- 389,285 389,285
----------------- ------------------- ----------------
NET LOSS............................................... $ (10,186,954) $ (2,285,220) $ (21,236,139)
----------------- ------------------- ----------------
----------------- ------------------- ----------------
</TABLE>
- ------------------------
(a) Date of merger with Worlds Inc. (formerly Worlds Acquisition Corp.)
See accompanying summary of accounting policies and notes to financial
statements.
F-20
<PAGE>
WORLDS INC. -- PREDECESSOR
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
PREFERRED STOCK
----------------------------------------------
DEFERRED
COMMON STOCK SERIES A SERIES B COMPENSATION ADDITIONAL
---------------------- ---------------------- ---------------------- ON STOCK PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT OPTIONS CAPITAL
--------- ----------- --------- ----------- --------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1,
1996................ 5,274,260 $ 527 1,801,533 $ 180 -- $ -- $ (45,647) $ 8,385,184
Issuance of common
stock............... 261,386 26 -- -- -- -- -- 112,795
Issuance of Series B
preferred stock at
$8.80 per share, net
of issuance costs of
$381,000............ -- -- -- -- 1,022,726 102 -- 8,618,887
Compensation related
to stock options.... -- -- -- -- -- -- 24,202 (9,394)
Net loss for the
year................ -- -- -- -- -- -- -- --
--------- ----- --------- ----- --------- ----- ------------- -----------
BALANCE, DECEMBER 31,
1996................ 5,535,646 553 1,801,533 180 1,022,726 102 (21,445) 17,107,472
Compensation related
to stock options.... -- -- -- -- -- -- 16,108 (2,369)
Net loss for the
period ended
December 3, 1997.... -- -- -- -- -- -- -- --
--------- ----- --------- ----- --------- ----- ------------- -----------
BALANCE, DECEMBER 3,
1997................ 5,535,646 $ 553 1,801,533 $ 180 1,022,726 $ 102 $ (5,337) $17,105,103
--------- ----- --------- ----- --------- ----- ------------- -----------
--------- ----- --------- ----- --------- ----- ------------- -----------
<CAPTION>
TOTAL
ACCUMULATED STOCKHOLDERS'
DEFICIT DEFICIT
------------ ------------
<S> <C> <C>
BALANCE, JANUARY 1,
1996................ $ (8,763,965) $ (423,721)
Issuance of common
stock............... -- 112,821
Issuance of Series B
preferred stock at
$8.80 per share, net
of issuance costs of
$381,000............ -- 8,618,989
Compensation related
to stock options.... -- 14,808
Net loss for the
year................ (10,186,954) (10,186,954)
------------ ------------
BALANCE, DECEMBER 31,
1996................ (18,950,919) (1,864,057)
Compensation related
to stock options.... -- 13,739
Net loss for the
period ended
December 3, 1997.... (2,285,220) (2,285,220)
------------ ------------
BALANCE, DECEMBER 3,
1997................ $(21,236,139) $ (4,135,538)
------------ ------------
------------ ------------
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
F-21
<PAGE>
WORLDS INC.--PREDECESSOR
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED APRIL 26, 1994
DECEMBER 31, PERIOD ENDED (INCEPTION) TO
1996 DECEMBER 3, 1997(A) DECEMBER 3, 1997
---------------- ------------------- ----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................................. $ (10,186,954) $ (2,285,220) $ (21,236,139)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization.................................... 344,345 213,434 721,097
(Gain) loss on disposal of property and equipment................ 83,195 (4,070) 79,125
Gain on debt settlement.......................................... -- (389,284) (389,284)
Compensation related to stock options............................ 14,808 13,739 761,453
Compensation related to common stock issuance.................... 58,525 -- 58,525
Licensed technology expense...................................... -- -- 750,000
Changes in operating assets and liabilities:
Trade receivables.............................................. 342,294 489,050 --
Prepaid expenses and other assets.............................. 266,057 (42,575) (167,891)
Accounts payable and accrued liabilities....................... 226,212 (2,755) 1,856,619
Advanced customer billings and deferred revenue................ (396,667) -- 436,140
---------------- ------------------- ----------------
NET CASH USED IN OPERATING ACTIVITIES........................ (9,248,185) (2,007,681) (17,130,355)
---------------- ------------------- ----------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Acquisition of property and equipment................................ (476,966) (2,063) (999,302)
---------------- ------------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock............................... 54,296 -- 116,857
Proceeds from issuance of preferred stock, net of issuance costs..... 8,618,989 -- 16,163,766
Advance from Worlds Inc. (formerly Worlds Acquisition Corp.)......... -- 561,397 561,397
Payments on capital lease............................................ (56,724) -- (116,018)
Payments on note payable............................................. (110,000) (40,000) (190,000)
Proceeds from note payable........................................... 1,000,000 650,000 1,650,000
---------------- ------------------- ----------------
NET CASH PROVIDED BY FINANCING ACTIVITIES.................... 9,506,561 1,171,397 18,186,002
---------------- ------------------- ----------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................... (218,590) (838,347) 56,345
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD......................... 1,113,282 894,692 --
---------------- ------------------- ----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD............................... $ 894,692 $ 56,345 $ 56,345
---------------- ------------------- ----------------
---------------- ------------------- ----------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid........................................................ $ 9,234 $ -- $ 23,916
Income taxes paid.................................................... 5,064 556 5,620
DISCLOSURES OF NONCASH FINANCING AND INVESTING ACTIVITIES:
In 1997, as part of the restructuring of operations, the Predecessor disposed of property and equipment with a net book value
of $252,180, which included $138,439 of equipment under capital leases. The related capital lease obligations, totaling
$123,013, were assumed by the lessor and a party which acquired certain assets used in the Predecessor's prior Seattle
operations. The agreement with this party also resulted in a reduction of trade payables totaling $87,226.
</TABLE>
- ------------------------
(a) Date of merger with Worlds Inc. (formerly Worlds Acquisition Corp.)
See accompanying summary of accounting policies and notes to financial
statements.
F-22
<PAGE>
WORLDS INC.--PREDECESSOR
(A DEVELOPMENT STAGE ENTERPRISE)
SUMMARY OF ACCOUNTING POLICIES
NATURE OF BUSINESS
Worlds Inc. (the "Predecessor") was incorporated under the laws of Delaware
on April 26, 1994. The Predecessor was formed to develop and commercialize 3D
multi-user tools and technologies for the Internet market. The Predecessor is in
the development stage and, as such, has not generated significant revenues from
operations.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared assuming that the
Predecessor will continue as a going concern. The Predecessor is in the
development stage (see Note 1) and has suffered recurring losses from operations
since its inception that raises substantial doubt about its ability to continue
as a going concern. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty. As more fully described in
Note 10, on December 3, 1997, the Predecessor consummated a merger agreement
with Worlds Inc. (formerly Worlds Acquisition Corp.) ("WAC"), a company which
had completed a private placement offering of securities.
The financial statements have been prepared in accordance with the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 7,
"Accounting and Reporting by Development Stage Enterprises," which requires
development stage enterprises to employ the same accounting principles as
operating companies.
RESTRUCTURING OF OPERATIONS
Due to recurring losses, insufficient revenue, a working capital deficit and
a net stockholders' deficit, the Predecessor's management made significant
reductions in operations in February 1997 that are reflected in the
Predecessor's financial statements for the period ended December 3, 1997. In
March 1997, the Predecessor engaged an outside management firm to assist with
the downsizing of operations which has included a major reduction in employees
and a consolidation of all operations to one location in San Francisco. The
Predecessor decided in December 1996 to close its Seattle operations resulting
in a $110,000 charge to operations for the year ended December 31, 1996.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures 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 these estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents are comprised of highly liquid money market
instruments, which have original maturities of three months or less at the time
of purchase.
F-23
<PAGE>
WORLDS INC.--PREDECESSOR
(A DEVELOPMENT STAGE ENTERPRISE)
SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives of the assets, which
range from two to five years. Maintenance and repairs are expensed as incurred
and improvements are capitalized.
REVENUE RECOGNITION
Revenue from technology development and licensing contracts is recognized
upon the attainment of contractual milestones (approximating the
percentage-of-completion method). Cash received in advance of revenues earned is
recorded as deferred revenue.
SOFTWARE DEVELOPMENT COSTS
Software development costs are charged to expense when incurred until the
technological feasibility of the product has been established. After
technological feasibility has been established, any additional costs would be
capitalizable in accordance with SFAS No. 86. No such costs have been
capitalized to date.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred.
INCOME TAXES
The Predecessor uses the liability method of accounting for income taxes in
accordance with SFAS No. 109, "Accounting for Income Taxes.". Deferred income
tax assets and liabilities are recognized based on the temporary differences
between the financial statement and income tax bases of assets, liabilities and
carryforwards using enacted tax rates. Valuation allowances are established,
when necessary, to reduce deferred tax assets to the amount expected to be
realized.
CONCENTRATION OF CREDIT RISK
The Predecessor derives revenues from corporate customers in a variety of
industries. For the year ended December 31, 1996, five customers accounted for
74% of the Predecessor's revenues. For the period ended December 3, 1997, no
individual customer accounted for more than 10% of revenues.
NEW ACCOUNTING STANDARDS
Effective January 1, 1996, the Predecessor adopted the provisions of SFAS
No. 123, "Accounting for Stock-Based Compensation". Under this standard,
companies are encouraged, but not required, to adopt the fair value method of
accounting for employee stock-based transactions. Under the fair value method,
compensation cost is measured at the grant date based on the fair value of the
award and is recognized over the service period, which is usually the vesting
period. Companies are permitted to continue to account for employee stock-based
transactions under Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees," but are required to disclose pro
forma net income and earnings per share as if the fair value method has been
adopted. The Predecessor compensation under APB No. 25 (see Note 5). has elected
to continue to account for stock-based
F-24
<PAGE>
WORLDS INC.--PREDECESSOR
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
1. GOING CONCERN
The accompanying financial statements have been prepared on a going-concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the financial
statements, the Predecessor, as of December 3, 1997, had incurred recurring
losses since inception totaling $21,236,139 had a working capital deficit of
$2,368,871 and a stockholders' deficit of $4,135,538. As discussed in Note 10,
on December 3, 1997, the Predecessor consummated a merger agreement with WAC, a
company which had completed a private placement offering of securities whereby
$4,385,000 of gross proceeds was raised.
The Predecessor anticipates, however, that it currently has only a portion
of the funds necessary to permit it to complete product development and
commercialization. There can be no assurance that the Predecessor will be able
to obtain the substantial additional capital resources necessary to permit the
Predecessor to pursue its business plan or that any assumptions relating to its
business plan will prove to be accurate. WAC is pursuing sources of additional
financing and there can be no assurance that any such financing will be
available to WAC on commercially reasonable terms, or at all. Any inability to
obtain additional financing will have a material adverse effect on the
Predecessor and WAC, including possibly requiring the Predecessor or WAC to
significantly curtail or cease operations.
These factors raise substantial doubt about the ability of the Predecessor
to continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
2. PROPERTY AND EQUIPMENT
A summary of property and equipment as of December 3, 1997 is as follows:
<TABLE>
<S> <C>
Computers, software and equipment................................. $ 650,557
Less: Accumulated depreciation and amortization................... 424,782
---------
$ 225,775
---------
---------
</TABLE>
3. NOTES PAYABLE
<TABLE>
<CAPTION>
DECEMBER 3, 1997
- ----------------------------------------------------------------
<S> <C>
Bridge loan payable to stockholders............................. $1,650,000
Technology obligation........................................... 186,667
---------
1,836,667
Less: Current portion........................................... 70,000
---------
Long-term portion............................................... $1,766,667
---------
---------
</TABLE>
On December 13, 1996, the Predecessor received a Bridge Loan totaling
$1,000,000 from two preferred stockholders. Additional advances of $650,000 were
made under the Bridge Loan during the eleven-month period ended December 3, 1997
($500,000 in January 1997 and $50,000 in June 1997 were received from the same
preferred stockholders; and $100,000 was received in May 1997 from an affiliated
person of a stockholder). These advances under the Bridge Loan were granted in
return for convertible
F-25
<PAGE>
WORLDS INC.--PREDECESSOR
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. NOTES PAYABLE (CONTINUED)
promissory notes and options at $0.88 per share (Predecessor management's
estimate of fair value of common stock as of December 1996) on 500,000 shares of
the Predecessor's common stock held by a founder and officer of the Predecessor
as of December 31, 1996 (825,000 shares at December 3, 1997). Such options
(which had a nominal value at date of issuance) remain exercisable for 36
months, but terminate immediately upon the consummation of an initial public
offering of the Predecessor's capital stock or any consolidation or merger by
the Predecessor or any sale, conveyance or disposition of all or substantially
all of the assets of the Predecessor; such an event occurred on December 3, 1997
when the Predecessor consummated a merger (Note 10). The noteholders had the
option to convert the outstanding principal balance and unpaid accrued interest
into Predecessor's equity securities at the closing of Predecessor's next round
of equity financing, at the price per share of such equity securities. The loan
bears interest at a rate of 9% from the date of the advances. Accrued interest
is approximately $141,000 at December 3, 1997.
In June 1997, the Predecessor renegotiated the terms of the Bridge Loan to
convert it to a three year loan bearing interest at 7.5% and the option to
convert into common stock based on the conversion price of $4.375, $5.00 and
$5.625 in each of the three years following consummation of the merger of the
Predecessor into Worlds Inc. (formerly Worlds Acquisition Corp) (see Note 10).
The loan will not be payable until the earlier of maturity or conversion. The
holders of the loan will also receive warrants to acquire an aggregate of
100,000 shares of common stock at an exercise price equal to $5.00 per share.
There was no conversion benefit associated with the convertible promissory notes
at date of issuance nor at the date of renegotiation.
On January 3, 1995, the Predecessor purchased technology for $750,000 under
a license agreement with Kinetic Effects, Inc. ("Kinetic") and Simon Fraser
University of British Columbia ("SFU"). At December 31, 1996, the Predecessor
had an obligation to make monthly payments of $10,000 ($6,667 to SFU and $3,333
to Kinetic) through November 2000. The purchased technology was charged to
research and development expense in 1995. This obligation was renegotiated
downward in August 1997 to $186,667, with monthly payments to Kinetic of $3,333
over 56 months. Kinetic is an entity affiliated with a prior officer and current
shareholder of the Predecessor. In September 1997, the Predecessor renegotiated
the terms with SFU. In exchange for the removal of exclusivity rights on the
technology, $373,333 of the debt was forgiven and has been included within the
extraordinary item of $389,285 in the statement of operations for the period
ended December 3, 1997.
Approximate maturities of long-term debt over the next four years are as
follows:
<TABLE>
<S> <C>
1998............................................................ $ 70,000
1999............................................................ 40,000
2000............................................................ 1,690,000
2001............................................................ 36,667
</TABLE>
4. LEASE COMMITMENTS
The Predecessor has no lease commitments as of December 3, 1997.
Rent expense for office space, computers and office equipment was
approximately $312,000 for the period ended December 3, 1997 and $1,487,000 for
the year ended December 31, 1996.
F-26
<PAGE>
WORLDS INC.--PREDECESSOR
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. STOCKHOLDERS' DEFICIT
PREFERRED STOCK
Each share of Series A and Series B preferred stock is convertible, at the
option of the holder, into fully paid shares of common stock. The conversion
rate is based upon the original purchase price, subject to adjustments for stock
dividends, stock splits, and capital reorganizations and price based
antidilution, currently one-to-one.
Each share of Series A and Series B preferred stock automatically converts
to common stock upon the affirmative vote of the majority of the outstanding
preferred stock or the closing of an underwritten public offering of shares of
the Predecessor's common stock resulting in total proceeds of at least
$15,000,000. The holders of the preferred stock are entitled to one vote on an
"as if converted" basis.
Holders of Series A and Series B preferred stock are entitled to receive
dividends, prior and in preference to any declaration or payment of any
dividends on common stock, at the rate of $0.39 for Series A and $0.79 for
Series B per share per annum. Such dividends are not cumulative, except in the
event that the Predecessor does not enter into an initial public offering of at
least $15,000,000 in proceeds to the Predecessor on or before May 31, 1998, in
which case the dividends are cumulative effective May 31, 1998, and are payable
when and if declared by the Predecessor's Board of Directors in cash legally
available for distribution, or in stock, if no cash is legally payable. As of
December 3, 1997, no dividends have been declared.
In the event of liquidation, consolidation, merger, or winding up of the
Predecessor prior to conversion, holders of preferred stock are entitled to
receive, in preference to the holders of common stock, an amount equal to their
liquidation amount or a pro rata share of the remaining assets, based on their
ownership of the Predecessor. As of December 3, 1997, the aggregate liquidation
preference was approximately $16,657,000.
A Series A preferred stock investor also has a stock warrant which provides
the right to purchase shares of Series A preferred stock sufficient to bring its
holdings on a fully diluted basis to 21% of the Predecessor's shares. The
warrant expires in the event of a qualified public offering or when the holder
of preferred stock no longer chooses to exercise its existing antidilution
rights. The warrant is exercisable at fair market value at date of exercise. As
a result of the merger described in Note 10, such warrants were extinguished and
the preferred stock described above (as well as the Predecessor's common stock)
was exchanged for 1,999,996 shares of WAC.
STOCK OPTION PLAN
Prior to the mergers described in Note 10, the Predecessor had reserved
4,500,000 shares of common stock for issuance under the 1994 Amended and
Restated Stock Option Plan (the "Plan"), which authorized the granting of
incentive and nonstatutory stock options to employees and consultants of the
Predecessor. Under this Plan, the Predecessor's Board of Directors would grant
stock options at prices not less than 85% of fair value. The options were all
immediately exercisable and were subject to vesting at times and in increments
as specified by the Predecessor's Board of Directors. Options generally vested
over three years and expired 10 years from date of grant.
The Predecessor applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees", and related Interpretations in accounting for the Plan. Under APB
Opinion No. 25, because the exercise price
F-27
<PAGE>
WORLDS INC.--PREDECESSOR
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. STOCKHOLDERS' DEFICIT (CONTINUED)
of the Predecessor's stock options equals or exceeds the market price of the
underlying stock on the date of grant, no compensation cost is recognized.
Compensation or other expense is recorded based on intrinsic value (excess of
current price over exercise price on date of grant) for employees, and fair
value of the option awards for others.
FASB Statement No. 123, "Accounting for Stock-Based Compensation", requires
the Predecessor to provide pro forma information regarding net loss as if
compensation cost for the Predecessor's stock option plans had been determined
in accordance with the fair value based method prescribed in FASB Statement No.
123. The Predecessor estimates the fair value of each stock option at the grant
date by using the minimum value approach with the following weighted-average
assumptions used for grants in 1996 and 1997, respectively; no dividend yield
for any year; near-zero volatility for both years; risk-free interest rates of
6.6% for both years; and expected lives ranging from 1 month to 3 years.
Under the accounting provisions of FASB Statement No. 123, the Predecessor's
net loss would have been adjusted to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
DECEMBER 31, 1996 DECEMBER 3, 1997
----------------- ----------------
<S> <C> <C>
Net loss:
As reported........................................... $ (10,186,952) $ (2,265,776)
Pro forma............................................. (10,242,063) (2,328,421)
</TABLE>
The fair value of options granted in 1996 was $133,245; there were no
options granted in 1997.
The following table summarizes the stock option activity:
<TABLE>
<CAPTION>
OPTIONS OPTIONS OUTSTANDING
AVAILABLE -------------------------- WEIGHTED
FOR PRICE PER AVERAGE PRICE
GRANT SHARES SHARE PER SHARE
----------- ---------- -------------- -------------
<S> <C> <C> <C> <C>
Balance, January 1, 1996................................ 668,245 969,902 $ .01-.43 $ .379
Options authorized...................................... 1,000,000 -- -- --
Options granted......................................... (1,171,000) 1,171,000 .43-.88 .82
Option exercised........................................ -- (261,386) .20-.88 .43
Options canceled........................................ 489,704 (489,704) .20-.88 .55
----------- ---------- ------- -----
Balance, December 31, 1996.............................. 986,949 1,389,812 .20-.88 .68
Options granted......................................... -- -- -- --
Options exercised....................................... -- -- -- --
Options canceled........................................ -- -- -- --
----------- ---------- ------- -----
Balance, December 3, 1997............................... 986,949 1,389,812 .20-.88 .68
----------- ---------- ------- -----
----------- ---------- ------- -----
</TABLE>
As a result of the mergers described in Note 10, the Plan and all options
thereunder were terminated and a new stock option plan, as described in Note 10,
was adopted.
F-28
<PAGE>
WORLDS INC.--PREDECESSOR
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. RELATED PARTY REVENUE
For the year ended December 31, 1996, $1,276,780 of revenues from technology
development contracts were attributable to three preferred stockholders of
Predecessor. There was no related party revenue for the period ended December 3,
1997.
7. INCOME FROM SALE OF TECHNOLOGY
In March 1997, Predecessor sold certain of its internally developed computer
software programs for net proceeds of $260,100.
8. INCOME TAXES
From its inception, the Predecessor has generated losses for both financial
reporting and tax purposes. As of December 3, 1997, the Predecessor's net
operating losses for Federal income tax purposes were approximately $19 million,
and expire between the years 2009 and 2012. For state income tax purposes, as of
December 3, 1997, the Predecessor had net operating loss carryforwards of
approximately $14.8 million for the State of California which will expire 2002.
As of December 3, 1997, the combined Federal and state tax benefit of the net
operating loss carryforwards is approximately $7.3 million and the deferred tax
asset relating to accounting differences for depreciation, certain accrued
expenses and technology costs was approximately $300,000. This deferred tax
asset totaling $7.6 million has been completely offset by a valuation allowance
since management cannot determine that it is more likely than not that the
deferred tax asset can be realized. The use of such net operating loss
carryforwards will be subject to annual limits if the Predecessor has incurred
an "ownership change". In general, an ownership change occurs if, during any
three-year test period, the aggregate of all increases in percentage ownership
by stockholders is more than 50%. Upon completion of the merger discussed in
Note 10, such an "ownership change" occurred.
The provision for income taxes for the year ended December 31, 1996 and the
period ended December 3, 1997 consists of:
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 3,
1996 1997
------------ -------------
<S> <C> <C>
Foreign income taxes withheld (a).......................................... $ 105,000 $ --
State income taxes--current................................................ 10,000 5,000
------------ ------
$ 115,000 $ 5,000
------------ ------
------------ ------
</TABLE>
- ------------------------
(a) Foreign income taxes withheld relates to two preferred stockholders located
in Japan.
The Predecessor has $156,000 in research credits available to reduce future
Federal income taxes which expire between the years 2009 and 2011. Due to the
merger, this carryforward will be substantially reduced.
9. CONTINGENCIES
In 1996, the Predecessor incurred lawsuit settlement expenses totalling
$509,200, of which $154,000 is included in accrued liabilities at December 3,
1997. These settlement expenses relate principally to claims
F-29
<PAGE>
WORLDS INC.--PREDECESSOR
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. CONTINGENCIES (CONTINUED)
by former employees and are exclusive of legal fees included in general and
administrative expenses in the accompanying financial statements.
The Predecessor is currently a defendant in two lawsuits filed by a former
employee of Predecessor: Fraser v. Knowledge Adventure Worlds, Inc. d/b/a Worlds
Inc., et al., San Francisco Superior Court No. 974470 ("State Court Action");
and Fraser v. Worlds Inc., U.S. District Court, Northern District of California
No. C97-0277 CW ("Federal Action").
In the State Court Action filed in December 1995, Fraser alleged various
contract and tort claims for wrongful termination and sought damages ranging
from $500,000 to $2,000,000. Pursuant to mediation in July 1996, the parties
reached a tentative settlement. In February 1997, parties again reached a
tentative settlement, this time in connection with both the State Court and
Federal Actions. Pursuant to terms of the stipulated settlement, Fraser filed a
motion for entry of judgment. The Predecessor filed its opposition to this
motion and, at a hearing on December 4, 1997, the Court again ruled in favor of
the Predecessor and approved the Predecessor's proposed version of the
settlement agreement which, among other things, would terminate both the State
Court and Federal Actions. On December 18, 1997, Fraser filed a motion for
reconsideration and a motion to take discovery. The Court again ruled in favor
of the Predecessor and denied Fraser's motions at a hearing on January 22, 1998.
In the Federal Action, filed in January 1997, Fraser asserted claims for
damages of $200,000 in connection with the use of "Worlds" name on the World
Wide Web. On September 26, 1997, Fraser filed a motion requesting enforcement of
his version of the terms of the tentative settlement of February 1997. On
October 23, 1997, Fraser also moved for a temporary restraining order and a
preliminary injunction. The Predecessor opposed both of Fraser's motions and, on
October 31, the Court denied the October 23 motion. On November 7, 1997, the
Court also denied Fraser's motion of September 26, and ordered the parties to
participate in a settlement conference, scheduled for January 5, 1998. That
conference has now been continued to April 13, 1998.
Predecessor management and counsel believe that the maximum additional
liability for resolution of these two lawsuits would be approximately $150,000,
which amount has been included in accrued expenses at December 3, 1997.
During February 1998, the Predecessor was named as a defendant in a lawsuit
filed by a former employee of Predecessor seeking damages of approximately
$70,000 (plus interest and fees) relating to termination of an employment
contract. The lawsuit is in the pre-discovery phase. Management believes that
settlement, if any, would not have a material adverse effect on Predecessor's
financial position or results of operations.
10. MERGER
On December 3, 1997, the Predecessor was merged with and into Worlds Inc.
(formerly Worlds Acquisition Corp.) ("WAC") in a series of related transactions
which included the simultaneous merger with and into Academic Computer Systems,
Inc., a New Jersey corporation ("Academic") (the "Mergers") and a private
offering of WAC's securities (the "Private Placement"). All of the common and
preferred stock of the Predecessor were exchanged for 1,999,996 shares of WAC.
WAC was incorporated in Delaware on April 8, 1997 to engage in designing,
developing and marketing three-dimensional ("3D") music oriented Internet sites
on the World Wide Web. These web sites are anticipated to utilize 3D
F-30
<PAGE>
WORLDS INC.--PREDECESSOR
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. MERGER (CONTINUED)
technologies developed by the Predecessor. During the period ended December 3,
1997, WAC advanced the Predecessor $561,397 for working capital. Such advance is
noninterest bearing with no fixed repayment terms. Academic was an inactive
company with no operations. Academic voluntarily reported under the Securities
Exchange Act of 1934 "Exchange Act"). The combined entity that resulted from the
Mergers (the "Combined Entity") intends to continue reporting under the Exchange
Act. While no trading market existed for the securities of Academic, or
currently exists for the securities of the Combined Entity, the Combined Entity
intends to cause its common stock to be traded on the Bulletin Board.
As a result of the Mergers, the Combined Entity now has a Stock Option Plan
(the "Option Plan") as an incentive for, and to encourage share ownership by,
its officers, directors and other key employees and/ or consultants and
potential management of possible future acquired companies. The Option Plan
provides that options to purchase a maximum of 1,000,000 shares of common stock
(subject to adjustment in certain circumstances) may be granted under the Option
Plan. The Option Plan also allows for the granting of stock appreciation rights
("SARs") in tandem with, or independently of, stock options. Any SARs granted
will not be counted against the 1,000,000 limit. WAC granted 165,000 options to
a director and employees during 1997.
F-31
<PAGE>
WORLDS INC.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, 1997 JUNE 30, 1998
----------------- -------------
<S> <C> <C>
(UNAUDITED)
ASSETS
CURRENT:
Cash and cash equivalents..................................................... $ 3,541,829 $ 3,419,518
Trade receivables, less allowance for doubtful accounts of $140,318 and
$140,318.................................................................... 538 --
Prepaid expenses and other current assets..................................... 74,175 34,287
----------------- -------------
TOTAL CURRENT ASSETS........................................................ 3,616,542 3,453,805
PROPERTY AND EQUIPMENT, NET OF ACCUMULATED DEPRECIATION AND AMORTIZATION........ 209,452 115,869
----------------- -------------
$ 3,825,994 $ 3,569,674
----------------- -------------
----------------- -------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT:
Accounts payable.............................................................. $ 568,707 $ 303,074
Accrued expenses.............................................................. 592,250 634,834
Advanced customer billings and deferred revenue............................... 436,140 436,140
Current maturities of notes payable........................................... 269,333 314,560
----------------- -------------
TOTAL CURRENT LIABILITIES................................................... 1,866,430 1,688,608
LONG-TERM PORTION, NOTES PAYABLE................................................ 1,968,333 1,906,666
----------------- -------------
TOTAL LIABILITIES........................................................... 3,834,763 3,595,274
----------------- -------------
STOCKHOLDERS' DEFICIT (NOTES 2 AND 3):
Common stock, $.001 par value--shares authorized 30,000,000; issued 16,119,996
and 17,981,996.............................................................. 16,120 17,982
Additional paid-in capital.................................................... 6,661,582 8,402,020
Deficit accumulated during the development stage.............................. (6,686,471) (8,380,859)
----------------- -------------
(8,769) 39,143
Treasury stock, at cost, 113,465 shares -- (64,743)
----------------- -------------
TOTAL STOCKHOLDERS' DEFICIT................................................. (8,769) (25,600)
----------------- -------------
$ 3,825,994 $ 3,569,674
----------------- -------------
----------------- -------------
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
F-32
<PAGE>
WORLDS INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
CUMULATIVE,
PERIOD
PERIOD FROM FROM APRIL 8,
APRIL 8, 1997 1997 (INCEPTION)
(INCEPTION) TO THREE MONTHS ENDED SIX MONTHS ENDED TO
JUNE 30, 1997 JUNE 30, 1998(A) JUNE 30, 1998(A) JUNE 30, 1998 (A)
--------------- ------------------- ------------------- -----------------
<S> <C> <C> <C> <C>
NET REVENUES....................... $ -- $ 12,130 $ 16,132 $ 17,552
COSTS AND EXPENSES:
Cost of revenues................. -- (22,500) (25,101) (25,101)
Selling, general and
administrative................. (151,176) (759,185) (1,307,525) (1,982,555)
Research and development......... -- (302,516) (534,428) (534,428)
Acquired research and development
(Note 1)....................... -- -- -- (6,135,538)
--------------- ------------------- ------------------- -----------------
OPERATING LOSS................. (151,176) (1,072,071) (1,850,922) (8,660,070)
OTHER INCOME (EXPENSES):
Interest income.................. -- 35,054 76,992 90,585
Interest expense................. -- (35,656) (72,112) (88,804)
--------------- ------------------- ------------------- -----------------
LOSS BEFORE EXTRAORDINARY
ITEM......................... (151,176) (1,072,673) (1,846,042) (8,658,289)
EXTRAORDINARY ITEM--GAIN ON DEBT
SETTLEMENT....................... -- -- 151,654 277,430
--------------- ------------------- ------------------- -----------------
NET LOSS........................... $ (151,176) $ (1,072,673) $ (1,694,388) $ (8,380,859)
--------------- ------------------- ------------------- -----------------
--------------- ------------------- ------------------- -----------------
LOSS PER SHARE (BASIC AND DILUTED):
Loss before extraordinary item... $ (.02) $ (.06) $ (.11)
Extraordinary item............... -- -- .01
--------------- ------------------- -------------------
NET LOSS PER SHARE (BASIC AND
DILUTED)..................... $ (.02) $ (.06) $ (.10)
--------------- ------------------- -------------------
--------------- ------------------- -------------------
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING:
Basic and diluted................ 8,400,000 16,716,546 16,434,339
--------------- ------------------- -------------------
--------------- ------------------- -------------------
</TABLE>
- ------------------------
(a) Includes the results of Predecessor and Academic which were merged into the
Company on December 3, 1997.
See accompanying summary of accounting policies and notes to financial
statements.
F-33
<PAGE>
WORLDS INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
PERIOD FROM APRIL 8, 1997 (INCEPTION) TO JUNE 30, 1998
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
DEFICIT
ACCUMULATED
COMMON STOCK ADDITIONAL DURING THE TOTAL
-------------------- PAID-IN DEVELOPMENT TREASURY STOCKHOLDERS'
SHARES AMOUNT CAPITAL STAGE STOCK DEFICIT
--------- --------- ----------- ---------- --------- -----------
Issuance of common stock to
founding stockholders......... 8,400,000 $ 8,400 $ 195,600 $ -- $ -- $ 204,000
Sale of shares in private
offering memorandum and shares
issued to placement agent
(Note 3)...................... 4,810,000 4,810 3,689,866 -- -- 3,694,676
Issuance of shares to Academic
Computer Systems, Inc. (Note
2)............................ 910,000 910 557,116 -- -- 558,026
Issuance of shares pursuant to
merger with Predecessor (Note
2)............................ 1,999,996 2,000 1,998,000 -- -- 2,000,000
Capital contribution resulting
from forgiveness of debt to
shareholders of Predecessor... -- -- 221,000 -- -- 221,000
Net loss for the period April 8
to December 31, 1997.......... -- -- -- (6,686,471) -- (6,686,471)
--------- --------- ----------- ---------- --------- -----------
BALANCE, DECEMBER 31, 1997...... 16,119,996 16,120 6,661,582 (6,686,471) -- (8,769)
Sale of shares in private
offering memorandum (January
1998) (unaudited)............. 30,000 30 26,470 -- -- 26,500
Sale of shares in public
offering of common stock, net
(June 1998) (unaudited)....... 1,832,000 1,832 1,713,968 -- -- 1,715,800
Conversion of 113,465 shares to
certain stockholders (June
1998) (Note 2) (unaudited).... -- -- -- -- (64,743) (64,743)
Net loss for the six months
ended June 30, 1998
(unaudited)................... -- -- -- (1,694,388) -- (1,694,388)
--------- --------- ----------- ---------- --------- -----------
BALANCE, JUNE 30,1998
(UNAUDITED)................... 17,981,996 $ 17,982 $8,402,020 $(8,380,859) $ (64,743) $ (25,600)
--------- --------- ----------- ---------- --------- -----------
--------- --------- ----------- ---------- --------- -----------
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
F-34
<PAGE>
WORLDS INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
CUMULATIVE,
PERIOD FROM PERIOD
APRIL 8, 1997 FROM APRIL 8,
(INCEPTION) 1997
TO SIX MONTHS ENDED (INCEPTION) TO
JUNE 30, 1997 JUNE 30, 1998 JUNE 30, 1998
------------- ------------------- -----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................ (151,176) $ (1,694,388) $ (8,380,859)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization......................... -- 93,583 109,906
Gain on debt settlement............................... -- (151,654) (277,430)
Acquired research and development..................... -- -- 6,135,538
Changes in operating assets and liabilities, net of
effects from merger with Predecessor and Academic:
Trade receivables................................... -- 538 --
Prepaid expenses and other assets................... -- 39,888 133,604
Accounts payable and accrued expenses............... 93,276 (71,395) 142,966
------------- ------------------- -----------------
TOTAL ADJUSTMENTS................................. 93,276 (89,040) 6,244,584
------------- ------------------- -----------------
NET CASH USED IN OPERATING ACTIVITIES............. (57,900) (1,783,428) (2,136,275)
------------- ------------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Advance to Predecessor.................................. (100,000) -- --
------------- ------------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock to founding
stockholders.......................................... 204,000 -- 204,000
Proceeds from sale of common stock in private offering
memorandum............................................ -- 26,500 3,721,176
Proceeds from sale of common stock in public offering... -- 1,715,800 1,715,800
Payment of conversion price of shares to certain
stockholders.......................................... -- (64,743) (64,743)
Payments on note payable................................ -- (16,440) (20,440)
Loan from stockholder................................... 11,724 -- --
------------- ------------------- -----------------
NET CASH PROVIDED BY FINANCING ACTIVITIES......... 215,724 1,661,117 5,555,793
------------- ------------------- -----------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...... 57,824 (122,311) 3,419,518
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............ -- 3,541,829 --
------------- ------------------- -----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................. $ 57,824 $ 3,419,518 $ 3,419,518
------------- ------------------- -----------------
------------- ------------------- -----------------
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
F-35
<PAGE>
WORLDS INC.
(A DEVELOPMENT STAGE ENTERPRISE)
SUMMARY OF ACCOUNTING POLICIES
DEFINITIONS
The Company is the resulting entity of two contemporaneous mergers (the
"Mergers") of Worlds Inc., a Delaware corporation ("Predecessor"), with and into
Worlds Acquisition Corp., a Delaware corporation ("WAC"), and WAC with and into
Academic Computer Systems, Inc., a New Jersey corporation ("Academic"), which
changed its name to Worlds Inc. (see Note 2). While Academic was the legal
entity that survived the mergers, WAC was the accounting acquiror in both
mergers. The Company's fiscal year-end is December 31.
The term the "Company," as used herein, refers to the consolidated entity
resulting from the two contemporaneous mergers, as well the pre-merger
Predecessor, WAC and Academic; however, Predecessor, WAC and Academic are
hereinafter sometimes referred to separately as the context requires.
NATURE OF BUSINESS
WAC was incorporated on April 8, 1997 to design, develop and market
three-dimensional ("3D") music oriented Internet sites on the World Wide Web.
These web sites are anticipated to utilize 3D technologies developed by
Predecessor.
BASIS OF PRESENTATION
The accompanying financial statements are unaudited; however, in the opinion
of management, all adjustments necessary for a fair statement of financial
position and results for the stated periods have been included. These
adjustments are of a normal recurring nature. Selected information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted.
Results for interim periods are not necessarily indicative of the results to be
expected for an entire fiscal year. It is suggested that these condensed
financial statements be read in conjunction with the audited financial
statements and accompanying notes for the Company for the year ended December
31, 1997 and for the Predecessor for the period ended December 3, 1997.
The financial statements include the results of Predecessor and Academic
from December 4, 1997, the date of the Mergers (the "Merger Date").
The financial statements have been prepared in accordance with the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 7,
"Accounting, and Reporting by Development Stage Enterprises," which requires
development stage enterprises to employ the same accounting principles as
operating companies.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments, including cash and short-term
debt, approximated fair value as of June 30, 1998 because of the relatively
short maturity of the instruments. The carrying value of long-term debt,
including the current portion, approximates fair value as of June 30, 1998,
based upon estimates for similar debt issues.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and
F-36
<PAGE>
WORLDS INC.
(A DEVELOPMENT STAGE ENTERPRISE)
SUMMARY OF ACCOUNTING POLICIES
liabilities and disclosures 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 these estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents are comprised of highly liquid money market
instruments, which have original maturities of three months or less at the time
of purchase.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives of the assets, which
range from two to five years.
REVENUE RECOGNITION
Revenue from technology development and licensing contracts is recognized
upon the attainment of contractual milestones (approximating the
percentage-of-completion method). Cash received in advance of revenues earned is
recorded as deferred revenue.
SOFTWARE DEVELOPMENT COSTS
Software development costs are charged to expense when incurred until the
technological feasibility of the product has been established. After
technological feasibility has been established, any additional costs would be
capitalizable in accordance with the Financial Accounting Standards Board's
("FASB") SFAS No. 86 ("SFAS No. 86"). No such costs have been capitalized to
date.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred.
INCOME TAXES
The Company uses the liability method of accounting for income taxes in
accordance with SFAS No. 109, "Accounting for Income Taxes." Deferred income tax
assets and liabilities are recognized based on the temporary differences between
the financial statement and income tax bases of assets, liabilities and
carryforwards using enacted tax rates. Valuation allowances are established,
when necessary, to reduce deferred tax assets to the amount expected to be
realized.
LOSS PER SHARE
In 1997, the FASB's SFAS No. 128, "Earnings per Share," replaced the
calculation of primary and fully diluted earnings (loss) per share with basic
and diluted earnings (loss) per share. Unlike primary earnings per share, basic
earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. The loss per share amounts
have been presented to conform to SFAS No. 128 requirements. The common stock
equivalents which would arise from the exercise of stock options and warrants
are excluded from calculation of diluted loss per share since their effect is
anti-dilutive. Therefore, the amounts reported for basic and diluted loss per
share are the same.
F-37
<PAGE>
WORLDS INC.
(A DEVELOPMENT STAGE ENTERPRISE)
SUMMARY OF ACCOUNTING POLICIES
STOCK-BASED COMPENSATION
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). SFAS No. 123 encourages entities to adopt the
fair value method in place of the provisions of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"), for
all arrangements under which employees receive shares of stock or other equity
instruments of the employer or the employer incurs liabilities to employees in
amounts based on the price of its stock. The Company has not adopted the fair
value method encouraged by SFAS No. 123 and will continue to account for such
transactions in accordance with APB No. 25.
COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income", which establishes standards for reporting and display of
comprehensive income, its components and accumulated balances. Comprehensive
income is defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Adoption of the standard has
had no effect on financial statement disclosures since there were no items of
comprehensive income during the periods presented.
F-38
<PAGE>
WORLDS INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION PERTAINING TO THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS
UNAUDITED)
1. GOING CONCERN
As discussed in Note 3, the Company completed a private placement raising
gross proceeds of $4,415,000, consummated a merger agreement with a development
stage enterprise, Predecessor, and completed a public offering in June 1998
raising gross proceeds of $1,832,000. Predecessor had not generated significant
revenues from operations and had an accumulated deficit from inception to the
Merger Date of $21,236,139 and a capital deficit of $4,135,538. The acquisition
of Predecessor by the Company was accounted for as a purchase. Accordingly,
$6,135,538, the portion of the purchase allocable to in-process research and
development projects that had not reached technological feasibility and had no
probable alternative future uses, was expensed by the Company at the date of
merger.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company is in the development
stage and has had minimal revenues from operations since the series of merger
transactions. The Company anticipates that it currently has only a portion of
the funds necessary to complete product development and commercialization. There
can be no assurance that the Company will be able to obtain the substantial
additional capital resources necessary to pursue its business plan or that any
assumptions relating to its business plan will prove to be accurate. The Company
is pursuing sources of additional financing and there can be no assurance that
any such financing will be available to the Company on commercially reasonable
terms, or at all. Any inability to obtain additional financing will have a
material adverse effect on the Company, including possibly requiring the Company
to significantly curtail or cease operations.
These factors raise substantial doubt about the ability of the Company to
continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
2. THE MERGERS
and into WAC in a series of related transactions which included a
simultaneous capital transaction between the Company and Academic (the
"Mergers") and a private offering of WAC's securities (the "Private Placement").
In both the merger with Predecessor and the capital transaction with Academic,
WAC was the acquiror for accounting purposes.
The acquisition of Predecessor was accounted for as a purchase whereby all
of the common and preferred stock of Predecessor were exchanged for 1,999,996
shares of WAC. The shares issued to Predecessor common and preferred
shareholders were valued at $1.00 per share which represented the share value in
the private placement that occurred during this time period (see Note 3); a
purchase price of approximately $2,000,000. The exchange ratio was determined
after extensive negotiation between management of Predecessor and WAC.
Predecessor was a development stage company, had not generated significant
revenues from operations and had an accumulated deficit from inception to
December 3, 1997 of $21,236,139 and a capital deficit of $4,135,538. The assets
acquired of Predecessor (cash, prepaid expenses, property and equipment) were
recorded at fair market value which approximated book value at December 3, 1997,
and, as discussed in Note 1 above, since technological feasibility of the
various Predecessor technologies acquired had not been established, the excess
purchase price over Predecessor's capital deficit of $6,135,538 was expensed as
acquired research and development.
F-39
<PAGE>
WORLDS INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS
UNAUDITED)
2. THE MERGERS (CONTINUED)
Academic was an inactive company with no operations. The value assigned to
the 910,000 shares in the capital transaction with Academic on December 3, 1997
represented Academic's net tangible assets (primarily cash) of $558,026. During
June 1998, 113,465 shares of common stock were converted at $0.57 per share
($64,743) as a result of certain stockholders dissenting with respect to the
Academic/WAC capital transaction of December 3, 1997. Such reacquired shares
have been classified as treasury stock in the accompanying balance sheets.
Academic voluntarily reported under the Securities Exchange Act of 1934 (the
"Exchange Act").
The Company intends to continue reporting under the Exchange Act. While no
trading market existed for the securities of Academic, or currently exists for
the securities of the Company, the Company intends to cause its common stock to
be traded on the Bulletin Board.
3. THE PRIVATE PLACEMENT AND PUBLIC OFFERING
The Private Placement called for WAC to offer for sale a maximum of 50 units
(57 1/2 with the over-allotment), each consisting of 120,000 shares of WAC's
common stock (the "Units") at a price of $120,000 per Unit. In connection with
the Private Placement, the placement agent was to receive one warrant to
purchase one share of WAC's common stock at $1 per share for every $40 of gross
proceeds from the sale of the Units. On November 21, 1997, WAC sold 31.67 Units
with gross proceeds of $3,800,000 (3,800,000 shares) (the "Initial Private
Placement Closing") and the placement agent was issued 425,000 shares of common
stock. On December 31, 1997, the Company sold 4.88 Units with gross proceeds of
$585,000 (585,000 shares). On January 2, 1998 a further 30,000 shares were
issued with gross proceeds of $30,000. Cumulative net proceeds, after
commissions and expenses of the offering, aggregated $3,721,176.
WAC agreed to include the shares of common stock underlying the Units sold
in the Private Placement (the "Private Placement Shares") in a registration
statement to be filed with the Securities and Exchange Commission (the "SEC").
Such registration statement was declared effective on May 1, 1998. During June
1998, WAC sold 1,832,000 shares in a public offering of its stock and received
gross proceeds of $1,832,000. Net proceeds, after commissions of this offering,
aggregated $1,715,800.
4. AGREEMENT AND PLAN OF MERGER
On June 25, 1998, the Company entered into an agreement and plan of merger
and reorganization (the "Agreement") with Unity First Acquisition Corp., a
Delaware corporation ("Unity"), whereby Unity would acquire all of the
outstanding shares of the Company in exchange for shares of its own common
stock. The acquisition, if consummated, calls for each share of the Company's
stock being converted into .357 shares of Unity's common stock. At that point,
the Company would "reverse-merge" into Unity which would then change its name to
"Worlds Inc." The Agreement is, among other conditions, subject to approval by
both Unity and the Company's stockholders. The Company's current management will
continue as management following the transaction.
Unity is a "blank check" company with no operations, formed in May 1996 for
the sole and exclusive purpose of acquiring an operating business. Certain of
Unity's management and stockholders are stockholders of the Company. In the
aggregate, directly and indirectly, they own approximately 1.1 million shares of
the Company's common stock. Unity's unaudited financial statements as of April
30, 1998
F-40
<PAGE>
WORLDS INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS
UNAUDITED)
4. AGREEMENT AND PLAN OF MERGER (CONTINUED)
showed that Unity had approximately $6,360,000 in net worth, almost all of which
is in the form of cash or cash equivalents. On June 25, 1998, Unity had
outstanding 1,875,000 shares of common stock; 1,350,000 Class A warrants
exercisable at $5.50 per share; and 1,350,000 Class B warrants exercisable at
$7.50 per share. Unity also has 125,000 underwriter's warrants outstanding,
exercisable at a price of $6.60 per warrant to purchase up to a like number of
shares of common stock, and Class A and Class B warrants. Unity's common stock
is quoted on the Bulletin Board under the symbol "UFAC."
The Agreement contemplates that following the consummation of the
transaction, the officers, directors and principal stockholders of the Company
and Unity will lock up their shares for twelve months.
F-41
<PAGE>
WORLDS INC.--PREDECESSOR
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
CUMULATIVE, PERIOD
THREE MONTHS ENDED SIX MONTHS ENDED FROM INCEPTION TO
JUNE 30, 1997 JUNE 30, 1997 DECEMBER 3, 1997(A)
------------------- ---------------- -------------------
<S> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
NET REVENUES.......................................... $ 24,342 $ 64,327 $ 6,026,691
------------------- ---------------- -------------------
COSTS AND EXPENSES:
Cost of revenues.................................... 9,026 27,629 11,279,348
Selling, general and administrative................. 556,395 1,800,488 10,602,749
Research and development............................ 76,595 388,159 5,388,340
Lawsuit settlements................................. -- -- 509,200
------------------- ---------------- -------------------
TOTAL COSTS AND EXPENSES.......................... 642,016 2,216,276 27,779,637
------------------- ---------------- -------------------
OPERATING LOSS.................................... (617,674) (2,151,949) (21,752,946)
OTHER INCOME AND (EXPENSES):
Interest income..................................... 431 10,344 237,629
Interest expense.................................... (34,511) (71,339) (171,082)
Gain (loss) on disposal of property and equipment... (2,085) 4,070 (79,125)
Income from sale of technology...................... -- 260,100 260,100
------------------- ---------------- -------------------
LOSS BEFORE INCOME TAXES AND EXTRAORDINARY ITEM... (653,839) (1,948,774) (21,505,424)
INCOME TAXES.......................................... 2,500 (5,000) 120,000
------------------- ---------------- -------------------
LOSS BEFORE EXTRAORDINARY ITEM.................... (656,339) (1,953,774 (21,625,424)
EXTRAORDINARY ITEM--GAIN ON DEBT SETTLEMENT........... -- -- 389,285
------------------- ---------------- -------------------
NET LOSS.............................................. $ (656,339) $ (1,953,774) $ (21,236,139)
------------------- ---------------- -------------------
------------------- ---------------- -------------------
</TABLE>
- ------------------------
(a) Date of merger with Worlds Inc. (formerly Worlds Acquisition Corp.)
See accompanying summary of accounting policies and notes to financial
statements.
F-42
<PAGE>
WORLDS INC.--PREDECESSOR
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
CUMULATIVE, PERIOD
FROM INCEPTION TO
SIX MONTHS ENDED DECEMBER 3, 1997
JUNE 30, 1997 (A)
---------------- -------------------
<S> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................................ $ (1,953,774) $ (21,236,139)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization......................................... 120,357 721,097
(Gain) loss on disposal of property and equipment..................... (4,070) 79,125
Gain on debt settlement............................................... -- (389,284)
Compensation related to stock options................................. 6,801 761,453
Compensation related to common stock issuance......................... -- 58,525
Licensed technology expense........................................... -- 750,000
Changes in operating assets and liabilities:
Trade receivables................................................... 489,050 --
Prepaid expenses and other assets................................... 111,250 (167,891)
Accounts payable and accrued liabilities............................ (118,503) 1,856,619
Advanced customer billings and deferred revenue..................... -- 436,140
---------------- -------------------
NET CASH USED IN OPERATING ACTIVITIES............................. (1,348,889) (17,130,355)
---------------- -------------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Acquisition of property and equipment................................... (2,063) (999,302)
---------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock.................................. -- 116,857
Proceeds from issuance of preferred stock, net of issuance costs........ -- 16,163,766
Advance from Worlds Inc. (formerly Worlds Acquisition Corp.)............ 100,000 561,397
Payments on capital lease............................................... -- (116,018)
Payments on note payable................................................ (40,000) (190,000)
Proceeds from note payable.............................................. 650,000 1,650,000
---------------- -------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES......................... 710,000 18,186,002
---------------- -------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...................... (640,952) 56,345
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............................ 894,692 --
---------------- -------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................................. $ 253,740 $ 56,345
---------------- -------------------
---------------- -------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid........................................................... $ -- $ 23,916
Income taxes paid....................................................... 2,128 5,620
DISCLOSURES OF NONCASH FINANCING AND INVESTING ACTIVITIES:
In the six months ended June 30, 1997, as part of the restructuring of operations, the Predecessor disposed of
property and equipment with a net book value of $252,180, which included $138,439 of equipment under capital
leases. The related capital lease obligations, totaling $123,013, were assumed by the lessor and a party
which acquired certain assets used in the Predecessor's prior Seattle operations. The agreement with this
party also resulted in a reduction of trade payables totaling $87,226.
</TABLE>
- ------------------------
(a) Date of merger with Worlds Inc. (formerly Worlds Acquisition Corp.)
See accompanying summary of accounting policies and notes to financial
statements.
F-43
<PAGE>
WORLDS INC.--PREDECESSOR
(A DEVELOPMENT STAGE ENTERPRISE)
SUMMARY OF ACCOUNTING POLICIES
NATURE OF BUSINESS
Worlds Inc. (the "Predecessor") was incorporated under the laws of Delaware
on April 26, 1994. The Predecessor was formed to develop and commercialize 3D
multi-user tools and technologies for the Internet market. The Predecessor is in
the development stage and, as such, has not generated significant revenues from
operations.
BASIS OF PRESENTATION
The accompanying financial statements are unaudited; however, in the opinion
of management, all adjustments necessary for a fair statement of financial
position and results for the stated periods have been included. These
adjustments are of a normal recurring nature. Selected information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted.
Results for interim periods are not necessarily indicative of the results to be
expected for an entire fiscal year. It is suggested that these condensed
financial statements be read in conjunction with the audited financial
statements and accompanying notes for the Predecessor for the period ended
December 3, 1997.
The accompanying financial statements have been prepared assuming that the
Predecessor will continue as a going concern. The Predecessor is in the
development stage (see Note 1) and has suffered recurring losses from operations
since its inception that raises substantial doubt about its ability to continue
as a going concern. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty. As more fully described in
Note 2, on December 3, 1997, the Predecessor consummated a merger agreement with
Worlds Inc. (formerly Worlds Acquisition Corp.) ("WAC"), a company which had
completed a private placement offering of securities.
The financial statements have been prepared in accordance with the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 7,
"Accounting and Reporting by Development Stage Enterprises," which requires
development stage enterprises to employ the same accounting principles as
operating companies.
RESTRUCTURING OF OPERATIONS
Due to recurring losses, insufficient revenue, a working capital deficit and
a net stockholders' deficit, the Predecessor's management made significant
reductions in operations in February 1997 that are reflected in the
Predecessor's financial statements for the period ended December 3, 1997. In
March 1997, the Predecessor engaged an outside management firm to assist with
the downsizing of operations which has included a major reduction in employees
and a consolidation of all operations to one location in San Francisco.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures 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 these estimates.
F-44
<PAGE>
WORLDS INC.--PREDECESSOR
(A DEVELOPMENT STAGE ENTERPRISE)
SUMMARY OF ACCOUNTING POLICIES
REVENUE RECOGNITION
Revenue from technology development and licensing contracts is recognized
upon the attainment of contractual milestones (approximating the
percentage-of-completion method). Cash received in advance of revenues earned is
recorded as deferred revenue.
SOFTWARE DEVELOPMENT COSTS
Software development costs are charged to expense when incurred until the
technological feasibility of the product has been established. After
technological feasibility has been established, any additional costs would be
capitalizable in accordance with SFAS No. 86. No such costs have been
capitalized to date.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred.
INCOME TAXES
The Predecessor uses the liability method of accounting for income taxes in
accordance with SFAS No. 109, "Accounting for Income Taxes.". Deferred income
tax assets and liabilities are recognized based on the temporary differences
between the financial statement and income tax bases of assets, liabilities and
carryforwards using enacted tax rates. Valuation allowances are established,
when necessary, to reduce deferred tax assets to the amount expected to be
realized.
CONCENTRATION OF CREDIT RISK
The Predecessor derives revenues from corporate customers in a variety of
industries. For the periods ended June 30, 1997 and December 3, 1997, no
individual customer accounted for more than 10% of revenues.
NEW ACCOUNTING STANDARDS
Effective January 1, 1996, the Predecessor adopted the provisions of SFAS
No. 123, "Accounting for Stock-Based Compensation". Under this standard,
companies are encouraged, but not required, to adopt the fair value method of
accounting for employee stock-based transactions. Under the fair value method,
compensation cost is measured at the grant date based on the fair value of the
award and is recognized over the service period, which is usually the vesting
period. Companies are permitted to continue to account for employee stock-based
transactions under Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees," but are required to disclose pro
forma net income and earnings per share as if the fair value method has been
adopted. The Predecessor has elected to continue to account for stock-based
compensation under APB No. 25.
F-45
<PAGE>
WORLDS INC.--PREDECESSOR
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
1. GOING CONCERN
The accompanying financial statements have been prepared on a going-concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the financial
statements, the Predecessor, as of December 3, 1997, had incurred recurring
losses since inception totaling $21,236,139. As discussed in Note 2, on December
3, 1997, the Predecessor consummated a merger agreement with WAC, a company
which had completed a private placement offering of securities whereby
$4,415,000 of gross proceeds was raised.
The Predecessor anticipates, however, that it currently has only a portion
of the funds necessary to permit it to complete product development and
commercialization. There can be no assurance that the Predecessor will be able
to obtain the substantial additional capital resources necessary to permit the
Predecessor to pursue its business plan or that any assumptions relating to its
business plan will prove to be accurate. WAC is pursuing sources of additional
financing and there can be no assurance that any such financing will be
available to WAC on commercially reasonable terms, or at all. Any inability to
obtain additional financing will have a material adverse effect on the
Predecessor and WAC, including possibly requiring the Predecessor or WAC to
significantly curtail or cease operations.
These factors raise substantial doubt about the ability of the Predecessor
to continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
2. MERGER
On December 3, 1997, the Predecessor was merged with and into Worlds Inc.
(formerly Worlds Acquisition Corp.) ("WAC") in a series of related transactions
which included the simultaneous merger with and into Academic Computer Systems,
Inc., a New Jersey corporation ("Academic") (the "Mergers") and a private
offering of WAC's securities (the "Private Placement"). All of the common and
preferred stock of the Predecessor were exchanged for 1,999,996 shares of WAC.
WAC was incorporated in Delaware on April 8, 1997 to engage in designing,
developing and marketing three-dimensional ("3D") music oriented Internet sites
on the World Wide Web. These web sites are anticipated to utilize 3D
technologies developed by the Predecessor. Academic was an inactive company with
no operations. Academic voluntarily reported under the Securities Exchange Act
of 1934 ("Exchange Act"). The combined entity that resulted from the Mergers
(the "Combined Entity") intends to continue reporting under the Exchange Act.
While no trading market existed for the securities of Academic, or currently
exists for the securities of the Combined Entity, the Combined Entity intends to
cause its common stock to be traded on the Bulletin Board.
F-46
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Unity First Acquisition Corp:
We have audited the accompanying balance sheets of Unity First Acquisition
Corp. (a Delaware corporation in the development stage) as of July 31, 1997 and
1996, and the related statements of operations, changes in shareholders' equity
(deficit) and cash flows for the year ended July 31, 1997, for the period from
inception (May 30, 1996) to July 31, 1996, and for the period from inception
(May 30, 1996) to July 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards required that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 10 on June 25, 1998, the Company entered into an
Agreement and Plan of Merger and Reorganization with Worlds Inc. ("Worlds").
Worlds is in its development stage and has incurred substantial losses since its
inception. The audit report of its independent public accountants dated March
25, 1998, on its December 31, 1997 financial statements indicates that Worlds'
stockholders' deficit, minimal revenues, and the need for substantial additional
funds, raise substantial doubt about its ability to continue as a going concern.
Management of Worlds believes that it is dependent on the proceeds of Unity
resulting from the merger and other future financings in order to develop and
commercialize its proposed products. These and other risk factors are further
described in the risk factors section of the Form S-4 to be filed with the
Securities and Exchange Commission with regard to this proposed merger.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Unity First Acquisition
Corp. as of July 31, 1997 and 1996, and the results of its operations and its
cash flows for the year ended July 31, 1997, for the period from inception (May
30, 1996) to July 31, 1996, and for the period from inception (May 30, 1996) to
July 31, 1997, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
New York, New York
September 19, 1997 (except with respect to the
matter discussed in Note 10, as to which the
date is July 9, 1998)
F-47
<PAGE>
UNITY FIRST ACQUISITION CORP.
(A DEVELOPMENT STAGE ENTITY)
BALANCE SHEETS
<TABLE>
<CAPTION>
JULY 31,
------------------------
<S> <C> <C>
1997 1996
------------ ----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................................................. $ 266,533 $ 563
Restricted cash and investments....................................................... 6,198,488 --
------------ ----------
TOTAL CURRENT ASSETS................................................................ 6,465,021 563
DEFERRED REGISTRATION COSTS............................................................. -- 250,000
------------ ----------
TOTAL ASSETS........................................................................ $ 6,465,021 $ 250,563
------------ ----------
------------ ----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accrued expenses...................................................................... $ 67,634 $ 225,000
Income taxes payable.................................................................. 3,575 --
Advances from affiliate............................................................... -- 40,500
------------ ----------
TOTAL CURRENT LIABILITIES........................................................... 71,209 265,500
------------ ----------
COMMITMENTS AND CONTINGENCIES
Common stock, $.0001 par value, 249,875 shares subject to possible conversion, at
conversion value...................................................................... 1,239,380 --
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, $.01 par value, 5,000 shares authorized, no shares issued or
outstanding......................................................................... -- --
Common stock, $.0001 par value, 20,000,000 shares authorized, 1,625,125 and 625,000
shares issued and outstanding (excluding 249,875 shares subject to possible
conversion)......................................................................... 163 63
Additional paid-in capital............................................................ 5,162,632 --
Deficit accumulated during the development stage...................................... (8,363) (15,000)
------------ ----------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT)................................................ 5,154,432 (14,937)
------------ ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)................................ $ 6,465,021 $ 250,563
------------ ----------
------------ ----------
</TABLE>
See Accompanying Notes to Financial Statements
F-48
<PAGE>
UNITY FIRST ACQUISITION CORP.
(A DEVELOPMENT STAGE ENTITY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
CUMULATIVE
FOR THE FROM MAY 30, 1996 AMOUNTS
YEAR ENDED (DATE OF FROM INCEPTION
JULY 31, INCEPTION) TO
1997 TO JULY 31, 1996 JULY 31, 1997
------------ ----------------- ----------------
<S> <C> <C> <C>
REVENUE....................................................... $ -- $ -- $ --
------------ -------- -------
EXPENSES:
General and administrative.................................. 192,489 15,000 207,489
------------ -------- -------
OTHER INCOME:
Interest and dividends...................................... 202,701 -- 202,701
------------ -------- -------
OPERATING INCOME (LOSS)....................................... 10,212 (15,000) (4,788)
PROVISION FOR INCOME TAXES.................................... 3,575 -- 3,575
------------ -------- -------
NET INCOME (LOSS)............................................. $ 6,637 $ (15,000) $ (8,363)
------------ -------- -------
------------ -------- -------
NET INCOME (LOSS) PER COMMON SHARE............................ $ .01 $ (.02)
------------ --------
------------ --------
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING.......... 1,515,000 625,000
------------ --------
------------ --------
</TABLE>
See Accompanying notes to Financial Statements
F-49
<PAGE>
UNITY FIRST ACQUISITION CORP.
(A DEVELOPMENT STAGE ENTITY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD MAY 30, 1996
(DATE OF INCEPTION) THROUGH JULY 31, 1996
AND THE YEAR ENDED JULY 31, 1997
<TABLE>
<CAPTION>
DEFICIT
COMMON STOCK ADDITIONAL ACCUMULATED DURING
----------------------- PAID-IN THE DEVELOPMENT
SHARES PAR VALUE CAPITAL STAGE TOTAL
---------- ----------- ------------ ------------------- ------------
<S> <C> <C> <C> <C> <C>
Issuance of stock to original founders for cash,
at par value.................................. 625,000 $ 63 $ -- $ -- $ 63
Net loss for the period May 30, 1996 (date of
inception) through July 31, 1996.............. -- -- -- (15,000) (15,000)
---------- ----- ------------ ------------------- ------------
Balance, July 31, 1996.......................... 625,000 63 -- (15,000) (14,937)
Issuance of units to public..................... 1,250,000 100 5,162,632 -- 5,162,632
Net income for the year ended July 31, 1997..... -- -- -- 6,637 6,637
---------- ----- ------------ ------------------- ------------
Balance, July 31, 1997.......................... 1,875,000 $ 163 $ 5,162,632 $ (8,363) $ 5,154,432
---------- ----- ------------ ------------------- ------------
---------- ----- ------------ ------------------- ------------
</TABLE>
See Accompanying Notes to Financial Statements
F-50
<PAGE>
UNITY FIRST ACQUISITION CORP.
(A DEVELOPMENT STAGE ENTITY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
CUMULATIVE
FROM MAY 30, 1996 AMOUNTS
FOR THE (DATE OF FROM INCEPTION
YEAR ENDED INCEPTION) TO
JULY 31, 1997 TO JULY 31, 1996 JULY 31, 1997
----------------- ------------------ --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................ $ 6,637 $ (15,000) $ (8,363)
CHANGES IN CERTAIN ASSETS AND LIABILITIES:
Increase in accrued expenses............................. 92,634 -- 92,634
Increase in income taxes payable......................... 3,575 -- 3,575
----------------- -------- --------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES.... 102,846 (15,000) 87,846
----------------- -------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock................... 6,402,112 63 6,402,175
Advances from affiliate.................................. 55,417 40,500 95,917
Repayment to affiliate................................... (95,917) -- (95,917)
Deferred registration costs.............................. -- (25,000) (25,000)
----------------- -------- --------------
NET CASH PROVIDED BY FINANCING ACTIVITIES.................. 6,361,612 15,563 6,377,175
----------------- -------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Increase) in restricted cash and investments............ (6,198,488) -- (6,198,488)
----------------- -------- --------------
NET INCREASE IN CASH AND
CASH EQUIVALENTS......................................... 265,970 563 266,533
CASH AND CASH EQUIVALENTS,
beginning of period...................................... 563 -- --
----------------- -------- --------------
CASH AND CASH EQUIVALENTS,
end of period............................................ $ 266,533 $ 563 $ 266,533
----------------- -------- --------------
----------------- -------- --------------
</TABLE>
See Accompanying Notes to Financial Statements
F-51
<PAGE>
UNITY FIRST ACQUISITION CORP.
(A DEVELOPMENT STAGE ENTITY)
NOTES TO FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND OPERATIONS
Unity First Acquisition Corp. (the "Company") was incorporated in the State
of Delaware on May 30, 1996 to serve as a vehicle to effect a merger, exchange
of capital stock, asset acquisition or other similar business combination (a
"Business Combination"). The Company is currently in the development stage. All
activity of the Company to date relates to its formation, fund-raising, and
search to effect a Business Combination.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
UTILIZATION OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported 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.
NET INCOME (LOSS) PER COMMON SHARE
Net income (loss) per common share is computed based on the weighted average
number of common shares outstanding and common stock equivalents, if not
anti-dilutive.
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share". This
statement establishes standards for computing and presenting earnings per share
("EPS"), replacing the presentation of currently required primary EPS with a
presentation of Basic EPS. For entities with complex capital structures, the
statement requires the dual presentation of both Basic EPS and Diluted EPS on
the face of the statement of operations. Under this new standard, Basic EPS is
computed based on the weighted average number of shares actually outstanding
during the year. Diluted EPS includes the effect of potential dilution from the
exercise of outstanding dilutive stock options and warrants into common stock
using the treasury stock method. SFAS No. 128 is effective for financial
statements issued for periods ending after December 15, 1997, and early
application is not permitted. The Company does not expect the adoption of this
statement to have a material effect on its financial position or on the results
of operations.
NOTE 3--OFFERING OF SECURITIES
On November 12, 1996, the Company completed its initial public offering (the
"Offering") consisting of the sale of 1,250,000 units (the "Units"). Each Unit
consists of one share of the Company's Common Stock ("Common Stock"), $.0001 par
value, one Class A Redeemable Warrant (the "A Warrants") and one Class B
Redeemable Warrant (the "B Warrants"). Each A Warrant and B Warrant entitles the
holder to purchase from the Company one share of Common Stock at an exercise
price of $5.50 and $7.50, respectively, commencing on the later of a Business
Combination or November 12, 1997. The A Warrants and B Warrants are redeemable,
each as a class, in whole and not in part, at the option of the Company and with
the consent of the managing underwriter ("Underwriter") upon 30 days notice at
any time after the Warrants become exercisable, only in the event that the
reported high bid price of the Common Stock is at least $8.50 per share, with
respect to the Class A Warrants, and $10.50 per share, with respect to the Class
B Warrants for the 20 consecutive trading days immediately prior to notice of
redemption, at a price
F-52
<PAGE>
UNITY FIRST ACQUISITION CORP.
(A DEVELOPMENT STAGE ENTITY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--OFFERING OF SECURITIES (CONTINUED)
of $.05 per A Warrant or B Warrant. The Warrants are immediately separable and
transferable. In connection with the Offering, the Company granted the
Underwriter an option, exercisable within 45 business days from November 12,
1996, to purchase up to 187,500 additional Units at $6.00 per unit. This option,
which was solely for the purpose of covering over-allotments, was not exercised
by the Underwriter either in whole or in part prior to its expiration date. None
of the A and B Warrants have been exercised through July 31, 1997.
Net proceeds of the Offering to the Company including the purchase of
warrants by the Underwriter, discussed below, were $6,402,112, after deducting
related expenses. Ninety percent (90%) of the net proceeds are held in an
interest bearing Trust Fund until the earlier of (i) written notification by the
Company of its need for all or substantially all of the net proceeds for the
purpose of implementing or facilitating the implementation of a Business
Combination or (ii) the liquidation of the Company.
In the event that the Company does not effect a Business Combination within
eighteen months from the date of the Offering, the Company will be dissolved and
the Company will distribute to all Public Stockholders in proportion to their
respective equity interests in the Company, an aggregate sum equal to the
Company's book value, calculated as of the approval date of such proposal. In
this regard, the Company's Initial Stockholders, including all of the officers
and directors of the Company, have agreed to waive their respective rights to
participate in any such liquidation distribution.
All of the Company's Initial Stockholders, including all of the officers and
directors of the Company, have agreed to vote their respective shares of Common
Stock in accordance with the vote of the majority of all non-affiliated future
stockholders of the Company with respect to a Business Combination. In addition,
the Common Stock owned by all of the executive officers and directors of the
Company, their affiliates and by all persons owning 5% or more of the currently
outstanding shares of Common Stock was placed in escrow until the earlier of (i)
the occurrence of a Business Combination or (ii) 18 months from the date of the
Offering. During the escrow period, such stockholders are not able to sell or
otherwise transfer their respective shares of Common Stock, but will retain all
other rights as stockholders of the Company, including, without limitation, the
right to vote such shares of Common Stock.
In connection with the Offering, the Company sold to the Underwriter and its
designees, for $100, warrants (the "Underwriter's Warrants") to purchase up to
125,000 Units at an exercise price of $6.60 per Unit. The Underwriter's Warrants
will be exercisable for a period of five years commencing on November 12, 1996.
The Underwriter's Warrants are not redeemable and have not been exercised.
NOTE 4--RESTRICTED CASH AND INVESTMENTS
The Company, pursuant to the terms of its initial public offering ("the
Offering"), placed $6,007,500 as of November 19, 1996, in a trust account which
was primarily invested in a short-term U.S. Government Security. These funds are
subject to release upon the earlier of (i) written notification by the Company
of its need for all or substantially all of the net proceeds for the purpose of
implementing or facilitating the implementation of a Business Combination or
(ii) the liquidation of the Company.
NOTE 5--CAPITAL STOCK
The Company's Certificate of Incorporation authorizes the issuance of
20,000,000 shares of Common Stock. There are 14,862,500 authorized but unissued
shares of Common Stock available for issuance (after
F-53
<PAGE>
UNITY FIRST ACQUISITION CORP.
(A DEVELOPMENT STAGE ENTITY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--CAPITAL STOCK (CONTINUED)
appropriate reserves for the issuance of Common Stock in connection with the
Class A Redeemable Warrants and Class B Redeemable Warrants, the Underwriters'
UPOs, the executive officers and director Class A Warrants and Class B Warrants,
and the future grants under the Company's 1996 Stock Option Plan). The Company's
Board of Directors has the power to issue any or all of the future grants under
the Company's 1996 Stock Option Plan. The Company's Board of Directors has the
power to issue any or all of the authorized but unissued Common Stock without
stockholder approval.
The Company currently has no commitments to issue any shares of Common Stock
other than as described in Offering; however, the Company will, in all
likelihood, issue a substantial number of additional shares in connection with a
Business Combination. To the extent that additional shares of Common Stock are
issued, dilution to the interests of the Company's stockholders participating in
the Offering will occur.
The Board of Directors of the Company is empowered, without stockholder
approval, to issue up to 5,000 shares of "blank check" preferred stock (the
"Preferred Stock") with dividend, liquidation, conversion, voting or other
rights which could adversely affect the voting power or other rights of the
holders of the Company's Common Stock. To date, no shares of preferred stock
have been issued.
NOTE 6--RELATED PARTY TRANSACTIONS
The Chairman of the Board of Directors and the President of the Company are
principal shareholders, officers and directors of Unity Venture Capital
Associates Ltd. ("Unity") which owns shares in the Company. Beginning June 1,
1996, commensurate with the Company's activities primarily related to the
Offering, the Company agreed to pay Unity a monthly fee of $7,500 for general
and administrative services, including the use of office space in premises
occupied by Unity. At July 31, 1996, the Company owed $15,000 (included in
advances from affiliate on the balance sheet) to Unity for administrative
services.
Through July 31, 1996, the Company had obtained advances totaling $25,500
from Unity to cover expenses related to the Offering which were included in
advances from affiliate on the balance sheet at July 31, 1996. These advances
were repaid out of the proceeds of the Offering in 1997.
NOTE 7--STOCK OPTION PLAN
On May 30, 1996, the Company's Board of Directors approved a stock option
plan (the "Plan"). The Plan, which is subject to shareholder approval, provides
for issuance of up to 187,500 options (the "Options") to acquire shares of the
Company's Common Stock.
The Options are intended to qualify either as incentive stock options
("Incentive Stock Options") within the meaning of Section 422 of the Internal
Revenue Code of 1986 or as options which are not intended to meet the
requirements of such section ("Nonstatutory Stock Options"). The Options may be
granted under the Plan to persons who, in the case of Incentive Stock Options,
are key employees (including officers) of the Company, or, in the case of
Nonstatutory Stock Options, are key employees (including officers) and
nonemployee directors of the Company, except that Nonstatutory Stock Options may
not be granted to a holder of more than 10% of the total voting power of the
Company.
F-54
<PAGE>
UNITY FIRST ACQUISITION CORP.
(A DEVELOPMENT STAGE ENTITY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--STOCK OPTION PLAN (CONTINUED)
The exercise price of all Incentive Stock Options granted under the Plan
must be at least equal to the fair market value of such shares on the date of
grant or, in the case of Incentive Stock Options granted to the holder of 10% or
more of the Company's Common Stock, at least 110% of the fair market value of
such shares on the date of grant. The exercise price of all Nonstatutory Stock
Options granted under the Plan shall be determined by the Board of Directors of
the Company at the time of grant. The maximum exercise period for which the
Options may be granted is ten years from the date of grant (five years in the
case of Incentive Stock Options granted to an individual owning more than 10% of
the Company's Common Stock). The aggregate fair market value (determined at the
date of the option grant) of such shares with respect to which Incentive Stock
Options are exercisable for the first time by the holder of the option during
any calendar year shall not exceed $100,000.
The FASB issued Statement of Financial Accounting Standards No. 123,
"Accounting for Stock Based Compensation" ("SFAS 123"), which will require
companies either to reflect in their financial statements or reflect as
supplemental disclosure the impact on earnings and earnings per share of the
fair value of stock based compensation using certain pricing models for the
option component of stock option plans. The Company, as permitted, will account
for the issuance of stock options in accordance with APB No. 25 in its financial
statements. As of July 31, 1997, no options have been granted under the Plan.
Disclosure, as required by SFAS 123, will be made upon the issuance of options.
NOTE 8--INCOME TAXES
Income taxes are accounted for in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income taxes." Under this method,
deferred income taxes are determined based on differences between the tax bases
of assets and liabilities and their financial reporting amounts at each year
end, and are measured based on enacted tax rates and laws that will be in effect
when the differences are expected to reverse. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized.
NOTE 9--CONTINGENCY
The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act.
NOTE 10--SUBSEQUENT EVENT
On June 25, 1998, the Company entered into an Agreement and Plan of Merger
and Reorganization (the "Agreement") with Worlds Inc. ("Worlds"). Worlds is a
public company in its development stage and is involved in the design,
development and marketing of three-dimensional music oriented Internet sites on
the World Wide Web. Under the terms of the Agreement, each common share of
Worlds will be exchanged for 0.357 shares of Unity common stock. The total
number of shares of Unity common stock to be issued in the merger will be
approximately 6,379,065, which would represent approximately 77.3% of the
outstanding shares of Unity common stock immediately after the completion of the
merger. Unity will be the surviving corporation in the merger and will change
its name to Worlds at the effective time of the merger. The merger will be
treated as a capital transaction equivalent to the issuance of stock by Worlds
for Unity's net monetary assets of approximately $6,000,000, accompanied by a
recapitalization of Worlds.
F-55
<PAGE>
UNITY FIRST ACQUISITION CORP.
(A DEVELOPMENT STAGE ENTITY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--SUBSEQUENT EVENT (CONTINUED)
Worlds and its predecessor have incurred substantial losses since its
inception. The audit report of its independent public accountants dated March
25, 1998, on its December 31, 1997 financial statements indicates that Worlds'
stockholders' deficit, minimal revenues and the need for substantial additional
funds, raise substantial doubt about its ability to continue as a going concern.
Management of Worlds believes that it is dependent on the proceeds of Unity
resulting from the merger and other future financings in order to develop and
commercialize its proposed products. Additionally, Worlds' management believes
that Worlds may not be able to adequately protect proprietary information
relating to its technology. These and other risk factors are further described
in the risk factors section of the Form S-4 to be filed with the Securities and
Exchange Commission with regard to this proposed merger.
In the event that the aforementioned merger is not consummated by November
12, 1998, Unity's Certificate of Incorporation requires that Unity be liquidated
if the transaction contemplated herein is not completed. The accompanying
financial statements have been prepared as a going concern because the net
assets available for distribution approximated the then net book value as of
July 31, 1997.
F-56
<PAGE>
UNITY FIRST ACQUISITION CORP.
(A DEVELOPMENT STAGE ENTITY)
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
APRIL 30, JULY 31,
1998 1997
----------- -----------
<CAPTION>
(UNAUDITED)
<S> <C> <C>
Cash and cash equivalents........................................... $ 39,343 $ 266,533
Restricted cash and investments..................................... 6,415,845 6,198,488
----------- -----------
TOTAL ASSETS.................................................... $6,455,188 $6,465,021
----------- -----------
----------- -----------
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES:
Accrued expenses.................................................. $ 93,266 $ 67,634
Income taxes payable.............................................. 3,400 3,575
----------- -----------
TOTAL LIABILITIES............................................... 96,666 71,209
----------- -----------
COMMITMENTS AND CONTINGENCIES
Common stock, $.0001 par value, 249,875 shares subject to possible
conversion, at conversion value................................... 1,282,608 1,239,380
----------- -----------
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value, 5,000 shares authorized, no
sharesissued or outstanding....................................... -- --
Common stock, $.0001 par value, 20,000,000 shares authorized,
1,625,125 shares issued and outstanding (excluding 249,875 shares
subject to possible conversion)................................... 163 163
Additional paid-in capital.......................................... 5,119,404 5,162,632
Retained earnings (deficit) accumulated during the development
stage............................................................. (43,653) (8,363)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY...................................... 5,075,914 5,154,432
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY...................... $6,455,188 $6,465,021
----------- -----------
----------- -----------
</TABLE>
See Selected Notes to Financial Statements
F-57
<PAGE>
UNITY FIRST ACQUISITION CORP.
(A DEVELOPMENT STAGE ENTITY)
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE FOR THE
NINE MONTHS ENDED THREE MONTHS ENDED
APRIL 30, APRIL 30,
---------------------- ----------------------
1998 1997 1998 1997 CUMULATIVE
---------- ---------- ---------- ---------- AMOUNTS
FROM INCEPTION
--------------
<S> <C> <C> <C> <C> <C>
REVENUES...................................... $ -- $ -- $ -- $ -- $ --
---------- ---------- ---------- ---------- --------------
EXPENSES:
General and administrative.................. 236,265 136,421 126,165 57,714 443,754
---------- ---------- ---------- ---------- --------------
OTHER INCOME:
Interest and dividends...................... 222,268 150,454 72,674 82,756 424,969
---------- ---------- ---------- ---------- --------------
OPERATING (LOSS) INCOME....................... (13,997) 14,033 (53,491) 25,042 (18,785)
PROVISION FOR INCOME TAXES.................... 21,293 5,000 12,325 8,800 24,868
---------- ---------- ---------- ---------- --------------
NET (LOSS) INCOME............................. $ (35,290) $ 9,033 $ (65,816) $ 16,242 $ (43,653)
---------- ---------- ---------- ---------- --------------
---------- ---------- ---------- ---------- --------------
BASIC NET (LOSS) INCOME PER COMMON SHARE...... $ (.02) $ .01 $ (.04) $ .01
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING................................. 1,875,000 1,375,000 1,875,000 1,875,000
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
See Selected Notes to Financial Statements
F-58
<PAGE>
UNITY FIRST ACQUISITION CORP.
(A DEVELOPMENT STAGE ENTITY)
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED APRIL 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
RETAINED EARNINGS
(DEFICIT)
ACCUMULATED
COMMON STOCK ADDITIONAL DURING THE
------------------------- PAID-IN DEVELOPMENT
SHARES PAR VALUE CAPITAL STAGE TOTAL
------------ ----------- ------------ ----------------- ------------
<S> <C> <C> <C> <C> <C>
Balance,
August 1, 1997......................... 1,875,000 $ 163 $ 5,162,632 $ (8,363) $ 5,154,432
Net loss for the nine months ended April
30, 1998............................... -- -- -- (35,290) (35,290)
Increase in value attributable to common
shares subject to possible
conversion............................. -- -- (43,228) -- (43,228)
------------ ----- ------------ -------- ------------
Balance, April 30,1998................... 1,875,000 $ 163 $ 5,119,404 $ (43,653) $ 5,075,914
------------ ----- ------------ -------- ------------
------------ ----- ------------ -------- ------------
</TABLE>
See Selected Notes To Financial Statements
F-59
<PAGE>
UNITY FIRST ACQUISITION CORP.
(A DEVELOPMENT STAGE ENTITY)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE
NINE MONTHS
ENDED
APRIL 30, CUMULATIVE
-------------------------- AMOUNTS
1998 1997 FROM INCEPTION
----------- ------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income................................................... $ (35,290) $ 9,033 $ (43,653)
CHANGES IN CERTAIN ASSETS AND LIABILITIES: Increase in accrued
expenses............................................................ 25,632 67,068 118,237
(Decrease) increase in income taxes payable......................... (175) 5,000 3,429
----------- ------------- --------------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES................... (9,833) 81,101 78,013
----------- ------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock.............................. -- 6,402,112 6,402,175
Advances from affiliate............................................. -- 55,417 95,917
Repayment to affiliate.............................................. -- (95,917) (95,917)
Deferred registration costs......................................... -- -- (25,000)
----------- ------------- --------------
NET CASH PROVIDED BY FINANCING ACTIVITIES............................. -- 6,361,612 6,377,175
----------- ------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Increase) in restricted cash and investments....................... (217,357) (6,149,649) (6,415,845)
----------- ------------- --------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS.................. (227,190) 293,064 39,343
CASH AND CASH EQUIVALENTS, beginning of period........................ 266,533 563 --
----------- ------------- --------------
CASH AND CASH EQUIVALENTS, end of period.............................. $ 39,343 $ 293,627 $ 39,343
----------- ------------- --------------
----------- ------------- --------------
</TABLE>
See Selected Notes to Financial Statements
F-60
<PAGE>
UNITY FIRST ACQUISITION CORP.
(A DEVELOPMENT STAGE ENTITY)
SELECTED NOTES TO FINANCIAL STATEMENTS
NOTE 1--FINANCIAL STATEMENTS
The financial statements have been prepared by Unity First Acquisition Corp.
(the "Company"), without audit. In the opinion of management, all adjustments
(which include only normal recurring adjustments) necessary to present fairly
the financial position, results of operations and cash flows at April 30, 1998
and for all periods presented have been made. The results of operations for the
period ended April 30, 1998 are not necessarily indicative of the operating
results for a full year.
Certain information and footnote disclosures prepared in accordance with
general accepted accounting principles and normally included in the financial
statements have been condensed or omitted. It is suggested that these financial
statements be read in conjunction with the audited financial statements and
notes commencing on page F-48.
NOTE 2--ORGANIZATION AND OPERATIONS
The Company was incorporated in the State of Delaware on May 30, 1996 to
serve as a vehicle to effect a merger, exchange of capital stock, asset
acquisition or other similar business combination (a "Business Combination").
The Company is currently in the development stage. All activity of the Company
to date relates to its formation, fund-raising, and search to effect a Business
Combination.
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
UTILIZATION OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported 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.
NOTE 4--RESTRICTED CASH AND INVESTMENTS
The Company, pursuant to the terms of its initial public offering ("the
Offering"), placed $6,007,500 as of November 19, 1996, in a trust account which
was primarily invested in a short-term U.S. Government Security. These funds are
subject to release upon the earlier of (i) written notification by the Company
of its need for all or substantially all of the net proceeds for the purpose of
implementing or facilitating the implementation of a Business Combination or
(ii) the liquidation of the Company.
NOTE 5--PENDING ACQUISITION
On September 19, 1997, the Company entered into a letter of intent to
effectuate a Business Combination with Prism Systems, Inc. ("Prism"), a
Chicago-based computer systems integrator principally engaged in the development
and marketing of voter registration information management systems for public
sector use, in exchange for an approximately 80% interest in the Company. In
December 1997, the Company elected not to proceed with the proposed Business
Combination as a consequence of the inability of the parties to agree upon the
terms of a definitive Business Combination Agreement.
On January 19, 1998, the Company entered into a letter of intent to
effectuate a Business Combination with Boston Optical Fiber, Inc., a producer of
plastic optical fiber for use in computer networks, local
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UNITY FIRST ACQUISITION CORP.
(A DEVELOPMENT STAGE ENTITY)
SELECTED NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--PENDING ACQUISITION (CONTINUED)
access communications, office networks and industrial controls, as well as in
medical devices such as endoscopes and fiber optic probes, in exchange for an
approximately 62.5% equity interest in the Company. The Company elected not to
proceed with the proposed Business Combination as a consequence of the inability
of the partners to agree upon the terms of a definitive Business Combination
agreement.
On May 7, 1998, the Company entered into a letter of intent to effectuate a
Business Combination with Worlds Inc., a developer of three-dimensional ("3D")
Internet technology for different markets. The acquisition, if consummated,
calls for each share of Worlds Inc., common stock being converted into .357
shares of the Company's common stock.
Consummation of the proposed Business Combination is subject to, among other
conditions, the negotiation and execution of a definitive merger agreement and
approval by the Company's public stockholders. There can be no assurance that
the proposed Business Combination will be successfully consummated.
In the event that the aforementioned merger is not consummated by November
12, 1998, the Company's Certificate of Incorporation requires that the Company
be liquidated if the transaction contemplated herein is not completed, the
accompanying financial statements have been prepared as a going concern because
the net assets available for distribution approximated the then net book value
as of July 1997.
NOTE 6--RELATED PARTY TRANSACTIONS
For the period ended April 30, 1998, the Company incurred $67,500 of
management fees charged by Unity Venture Capital Associates, Ltd.
For the period ended April 30, 1998, the Company incurred $58,840 of legal
expenses charged by a law firm where a partner is a stockholder in the Company.
For the period ended April 30, 1998, the Company incurred $38,985 of
professional fees to an accounting firm where a partner is an Officer and
Director of the Company.
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EXHIBIT A
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION, dated as of June 25, 1998
(this "Agreement"), between UNITY FIRST ACQUISITION CORP., a Delaware
corporation ("Unity"), and WORLDS INC., a New Jersey corporation (the
"Company").
The Boards of Directors of Unity and the Company have approved the merger of
the Company with and into Unity pursuant to this Agreement (the "Merger") and
the transactions contemplated hereby upon the terms and subject to the
conditions set forth herein.
It is intended that the Merger shall qualify for federal income tax purposes
as a reorganization within the meaning of Section 368(a) of the Internal Revenue
Code of 1986, as amended.
Unity and the Company desire to make certain representations, warranties,
covenants and agreements in connection with the Merger.
NOW, THEREFORE, in consideration of the premises and the representations,
warranties, covenants and agreements contained herein, the parties hereto,
intending to be legally bound hereby, agree as follows:
ARTICLE I
THE MERGER
SECTION 1.1 THE MERGER. Upon the terms and subject to the conditions of
this Agreement, at the Effective Time (as defined in Section 1.2 below), the
Company shall be merged with and into Unity in accordance with the provisions of
Section 252 of the Delaware General Corporation Law (the "DGCL") and of Section
14A:10-7 of the New Jersey Business Corporation Act (the "NJBCA") with the
effect provided in Sections 259--261 of the DGCL and Section 14A:10-6 of the
NJBCA, and the separate existence of the Company shall thereupon cease. Unity
shall be the surviving corporation in the Merger (hereinafter sometimes referred
to as "Surviving Corporation") and shall continue to be governed by the laws of
the State of Delaware. Without limiting the generality of the foregoing, and
subject thereto, at the Effective Time of the Merger, (a) the Surviving
Corporation shall possess all assets and property of every description, and
every interest therein, wherever located, and the rights, privileges,
immunities, powers, franchises and authority, of a public as well as of a
private nature, of each of Unity and the Company, (b) all obligations belonging
to or due each of Unity and the Company shall be vested in, and become the
obligations of, the Surviving Corporation without further act or deed, (c) title
to any real estate or any interest therein vested in either of Unity and the
Company shall not revert or in any way be impaired by reason of the Merger, (d)
all rights of creditors and all liens upon any property of any of Unity and the
Company shall be preserved unimpaired, and (e) the Surviving Corporation shall
be liable for all of the obligations of each of Unity and the Company and any
claim existing, or action or proceeding pending, by or against either of Unity
and the Company may be prosecuted to judgment with right of appeal, as if the
Merger had not taken place.
SECTION 1.2 EFFECTIVE TIME OF THE MERGER. The Merger shall become
effective at such time (the "Effective Time") as (a) a Certificate of Merger, in
the form set forth as Exhibit I hereto, is filed with the Secretary of State of
the State of Delaware, and (b) a Certificate of Merger, in the form set forth as
Exhibit II hereto, is filed with the Secretary of State of the State of New
Jersey (collectively, the "Merger Filings"). Such filings shall be made
simultaneously with or as soon as practicable after the closing of the
transactions contemplated by this Agreement in accordance with Section 3.5.
SECTION 1.3 NAME CHANGE. At the Effective Time, Unity shall change its
name to "Worlds Inc."
SECTION 1.4 DISCLOSURE SCHEDULES. Simultaneously with the execution of
this Agreement, (a) the Company shall deliver a schedule relating to the Company
(the "Company Disclosure Schedule"), and (b) Unity shall deliver a schedule
relating to Unity (the "Unity Disclosure Schedule" and collectively, with
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the Company Disclosure Schedule, the "Disclosure Schedules") setting forth the
matters required to be set forth in the Disclosure Schedules as described
elsewhere in this Agreement. The Disclosure Schedules shall be deemed to be part
of this Agreement.
ARTICLE II
SURVIVING CORPORATION
SECTION 2.1 CERTIFICATE OF INCORPORATION. The Certificate of Incorporation
of Unity as in effect immediately prior to the Effective Time shall be the
Certificate of Incorporation of the Surviving Corporation after the Effective
Time, until duly amended in accordance with the terms thereof and of the DGCL.
SECTION 2.2 BY-LAWS. The By-laws of Unity as in effect immediately prior
to the Effective Time shall be the By-laws of the Surviving Corporation after
the Effective Time, and thereafter may be amended in accordance with their terms
and as provided by the Certificate of Incorporation of the Surviving Corporation
and the DGCL.
SECTION 2.3 DIRECTORS. The directors of the Company at the Effective Time
shall, from and after the Effective Time, be the directors of the Surviving
Corporation until their respective successors have been duly elected or
appointed and qualified or until death, resignation or removal in accordance
with the Certificate of Incorporation and By-laws, as applicable, of the
Surviving Corporation. The directors of Unity immediately prior to the Effective
Time shall each resign such position as of the Effective Time.
SECTION 2.4 OFFICERS. The officers of the Company at the Effective Time
shall, from and after the Effective Time, be the officers of the Surviving
Corporation until their respective successors have been duly elected or
appointed and qualified or until death, resignation or removal in accordance
with the Certificate of Incorporation and By-Laws, as applicable, of the
Surviving Corporation. The officers of Unity immediately prior to the Effective
Time shall each resign such position as of the Effective Time.
ARTICLE III
CONVERSION OF SHARES
SECTION 3.1 CONVERSION OF COMPANY SHARES IN THE MERGER. At the Effective
Time, by virtue of the Merger and without any action on the part of any holder
of any capital stock of the Company:
(a) each Common Share, $.001 par value, of the Company ("Company Common
Stock"), issued and outstanding at the Effective Time, subject to the terms
and conditions of this Agreement, shall be converted (except as provided in
Section 3.1(b)), without any further action, into the right to receive, and
become exchangeable for, 0.357 shares (the "Exchange Ratio") of Common
Stock, $.0001 par value, of Unity ("Unity Common Stock"), subject to the
payment of cash adjustments in lieu of the issuance of fractional shares as
provided in Section 3.3 of this Agreement; provided, that if, prior to the
Effective Time, Unity should split, reclassify or combine Unity Common
Stock, or pay or grant to all stockholders of Unity a stock dividend or
other stock distribution in Unity Common Stock or rights to acquire Unity
Common Stock, or otherwise change Unity Common Stock into any other
securities, then the Exchange Ratio will be appropriately adjusted to
reflect such split, reclassification, combination, stock dividend or other
distribution;
(b) each share of Company Common Stock, if any, owned by Unity or any
subsidiary of Unity or the Company immediately prior to the Effective Time
shall be cancelled and shall cease to exist from and after the Effective
Time; and
(c) All options (the "Company Options") outstanding, whether or not
exercisable and whether or not vested, at the Effective Time, and whether or
not granted pursuant to the Company's 1997 Stock Option Plan (the "Company
Stock Option Plan) shall remain outstanding following the
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Effective Time. At the Effective Time, the Company Options shall, by virtue
of the Merger and without any further action on the part of the Company or
the holders thereof, be assumed by Unity in such manner that Unity (i) is a
corporation "assuming a stock option in a transaction to which Section
424(a) applied" within the meaning of Section 424 of the Internal Revenue
Code of 1986, as amended (the "Code"), or (ii) to the extent that Section
424 of the Code does not apply to any such Company Options, would be such a
corporation were Section 424 of the Code applicable to such "Company
Options. From and after the Effective Time, all references to the Company in
the Company Stock Option Plan and the applicable stock option agreements
issued thereunder shall be deemed to refer to Unity. Each Company Option
assumed by Unity shall be exercisable upon the same terms and conditions as
under the Company Stock Option Plan and the applicable stock option
agreement issued thereunder, except that (A) each such Company Option shall
be exercisable for that whole number of shares of Unity Common Stock (to the
nearest whole share) into which the number of shares of Company Common Stock
subject to such Company Option immediately prior to the Effective Time would
be converted under Section 3.1 (a) and (B) the option price per share of
Unity Common Stock shall be an amount equal to the option price per share of
Company Common Stock subject to such Company Option in effect immediately
prior to the Effective Time divided by the Exchange Ratio (the option price
per share, as so determined, being rounded upward to the nearest full cent).
No payment shall be made for fractional shares.
(d) All warrants issued by the Company to purchase shares of Company
Common Stock (the "Company Warrants") outstanding, whether or not
exercisable and whether or not vested, at the Effective Time shall remain
outstanding following the Effective Time. At the Effective Time, the Company
Warrants shall, by virtue of the Merger and without any further action on
the part of the Company or the holders thereof, be assumed by Unity and each
Company Warrant assumed by Unity shall be exercisable upon the same terms
and conditions as under the applicable warrant agreements with respect to
such Company Warrants, except that (A) each such Company Warrant shall be
exercisable for that whole number of shares of Unity Common Stock (to the
nearest whole share) into which the number of shares of Company Common Stock
subject to such Company Warrant immediately prior to the Effective Time
would be converted under Section 3.1 (a), and (B) the exercise price per
share of Unity Common Stock shall be an amount equal to the exercise price
per share of Company Common Stock subject to such Company Warrant in effect
immediately prior to the Effective Time divided by the Exchange Ratio (the
exercise price per share, as so determined, being rounded upward to the
nearest full cent). From and after the Effective Time, all references to the
Company in the respective warrant agreements shall be deemed to refer to
Unity. No payment shall be made for fractional shares.
SECTION 3.2 EXCHANGE OF CERTIFICATES.
(a) From and after the Effective Time, each holder of an outstanding
certificate which immediately prior to the Effective Time represented shares of
Company Common Stock (the "Company Certificates") shall cease to have any right
as a stockholder of the Company and such holder's sole rights shall be to
receive in exchange for such holder's Company Certificates, upon surrender
thereof to an exchange agent selected by the Company (the "Exchange Agent"), a
certificate or certificates representing the number of whole shares of Unity
Common Stock which such holder is entitled to receive pursuant to Section 3.1
plus cash in lieu of fractional shares, as provided in Section 3.3 hereof.
Notwithstanding any other provision of this Agreement, (i) until holders of
Company Certificates theretofore representing shares of Company Common Stock
have surrendered such certificates for exchange as provided herein, (A) no
dividends shall be paid by the Company with respect to any shares represented by
such Company Certificates and (B) no payment for fractional shares shall be
made, provided, in each case, that upon surrender of such Company Certificates,
the surrendering holder shall receive all such dividends and payments for
fractional shares and (ii) without regard to when such Company Certificates are
surrendered for exchange as provided herein, no interest shall be paid on any
such dividend or payment for fractional shares. If any certificate for shares
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of Unity Common Stock is to be issued in a name other than that in which the
certificate for shares of Company Common Stock surrendered in exchange therefor
is registered, it shall be a condition of such exchange that the person
requesting such exchange shall pay any transfer or other taxes required by
reason of the issuance of certificates for such shares of Unity Common Stock in
a name other than that of the registered holder of the certificate surrendered,
or shall establish to the satisfaction of Unity that such tax has been paid or
is not applicable. No transfers of Company Common Stock shall be made on the
stock transfer books of the Company after the close of business on the day prior
to the date of the Effective Time.
(b) At or before the Effective Time, Unity shall make available to the
Exchange Agent a sufficient number of certificates representing shares of Unity
Common Stock required to effect the exchange referred to in Section 3.2(a).
(c) Promptly after the Effective Time, Unity shall cause the Exchange Agent
to mail to each holder of record of the Company Certificates (i) a form letter
of transmittal (which shall specify that delivery shall be effected, and risk of
loss and title to the Company Certificates shall pass, only upon actual delivery
of the Company Certificates to the Exchange Agent) and (ii) instructions for use
in effecting the surrender of the Company Certificates in exchange for
certificates representing shares of Unity Common Stock. Upon surrender of the
Company Certificates for cancellation to the Exchange Agent, together with a
duly executed letter of transmittal and such other documents as the Exchange
Agent shall reasonably require, the holder of such Company Certificates shall be
entitled to receive in exchange therefor one or more certificates representing
that number of whole shares of Unity Common Stock into which the shares of
Company Common Stock theretofore represented by the Company Certificates so
surrendered shall have been converted pursuant to the provisions of Section 3.1,
in addition to payment for any fractional share of Unity Common Stock, and the
Company Certificates so surrendered shall forthwith be cancelled. Until so
surrendered, the Company Certificates shall represent solely the right to
receive the number of whole shares of Unity Common Stock that shall be issued in
exchange for Company Common Stock and any cash in lieu of the fractional Unity
Common Stock as contemplated by Section 3.3. Notwithstanding the foregoing,
neither the Exchange Agent nor any party hereto shall be liable to a holder of
shares of Company Common Stock for any shares of Unity Common Stock delivered to
a public official as required by applicable abandoned property, escheat or
similar laws. The Exchange Agent shall not be entitled to vote or exercise any
rights of ownership with respect to Unity Common Stock held by it from time to
time hereunder.
SECTION 3.3 NO FRACTIONAL SHARES. Notwithstanding any other provision of
this Agreement, no certificates or scrip for fractional shares of Unity Common
Stock shall be issued in the Merger and no Unity Common Stock dividend,
reclassification, stock split or interest shall be paid or have effect with
respect to any fractional interest in a share of Unity Common Stock, and such
fractional interests shall not entitle the owner thereof to vote or to any other
rights of a security holder. In lieu of any such fractional shares, each holder
of Company Common Stock who would otherwise have been entitled to receive a
fraction of a share of Unity Common Stock upon surrender of the Company
Certificates for exchange pursuant to this Article III will be paid an amount in
cash therefor (without interest) equal to the average of the last reported sale
prices of Unity Common Stock on the National Association of Securities Dealers,
Inc. Electronic Bulletin Board (the "Bulletin Board") for each of the twenty
consecutive trading days ending with the third trading day prior to the Closing
Date (as defined in Section 3.5) multiplied by the fractional interest of such
stockholder in a share of Unity Common Stock. For purposes of determining
whether and to what extent a particular stockholder is entitled to receive cash
adjustments pursuant to this Section 3.3, shares of record held by such holder
and represented by two or more Company Certificates shall be aggregated.
SECTION 3.4 DISSENTING SHARES. Notwithstanding any provision of this
Agreement to the contrary, shares of Company Common Stock that are outstanding
immediately prior to the Effective Time and which are held by stockholders of
the Company who shall not have voted in favor of the Merger or
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consented thereto in writing and who shall have demanded properly in writing the
fair value for such shares of Company Common Stock in accordance with Section
14A:11-1 of the NJBCA (collectively, "Dissenting Stock") shall not be converted
into or represent the right to receive shares of Unity Common Stock. Such
stockholders shall be entitled to receive payment of the fair value of such
shares of Company Common Stock held by them in accordance with the provisions of
such Section 14A:11-1, except that all Dissenting Stock held by stockholders who
have failed to perfect or who effectively shall have withdrawn or lost their
rights to appraisal of such shares of Company Common Stock under such Section
14A:11-1 shall thereupon be deemed to have been converted into and to have
become exchangeable for, as of the Effective Time, the right to receive shares
of Unity Common Stock, without any interest thereon, upon surrender, in the
manner provided in Section 3.2, of the Company Certificates that evidence such
shares of Company Common Stock.
SECTION 3.5 CLOSING. The closing (the "Closing") of the transactions
contemplated by this Agreement shall take place at the offices of Cooperman
Levitt Winikoff Lester & Newman, P.C., 800 Third Avenue, New York, New York
10022, on the third business day following the date on which the last of the
conditions set forth in Article VII hereof is fulfilled or waived, or at such
other time and place as Unity and the Company shall agree (the date on which the
closing occurs being the "Closing Date").
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
OF THE COMPANY
The Company hereby represents and warrants to Unity as follows (subject in
each case to such exceptions as are set forth or cross-referenced in the
attached Company Disclosure Schedule in the labeled section corresponding to the
caption of the representation or warranty to which such exceptions relate):
SECTION 4.1 ORGANIZATION AND QUALIFICATION. The Company is a corporation
duly organized, validly existing and in good standing under the laws of the
State of New Jersey. The Company has all requisite corporate power to carry on
its business as it is now being conducted and is duly qualified to do business
as a foreign corporation and is in good standing in all jurisdictions set forth
in Section 4.1 of the Company Disclosure Schedule, and to the Company's
knowledge, such jurisdictions are the only ones in which the properties owned,
leased or operated by the Company or the nature of the business conducted by the
Company makes such qualification necessary, except where the failure to qualify
(individually or in the aggregate) will not have any Material Adverse Effect on
the Company. "Material Adverse Effect" means, with respect to the Company or
Unity (as applicable), a material adverse effect on the business, operations,
properties, assets, condition (financial or otherwise) or results of operations
of it or on its ability to consummate the transactions contemplated hereby. The
copies of the Certificate of Incorporation and By-laws of the Company, as
amended to date and delivered to Unity, are true and complete copies of these
documents as now in effect. Since December 4, 1997, the minute books of the
Company are accurate in all material respects.
SECTION 4.2 CAPITALIZATION. The authorized capital stock of the Company,
the classes of capital stock, the number of shares of capital stock of each
class or series which are issued and outstanding as of the date hereof, and the
par value thereof, are as set forth in Section 4.2 of the Company Disclosure
Schedule. All of such shares of capital stock that are issued and outstanding
are duly authorized, validly issued and outstanding, fully paid and
nonassessable, and were not issued in violation of the preemptive rights of any
person. Except as set forth in the Company Disclosure Schedule or as otherwise
disclosed therein and herein, there are no subscriptions, options, warrants,
rights or calls or other commitments or agreements to which the Company is a
party or by which it is bound, calling for any issuance, transfer, sale or other
disposition of any class of securities of the Company. Other than as set forth
in the Company Disclosure Schedule, there are no outstanding securities
convertible or exchangeable, currently or contingently, into Company Common
Stock or any other securities of the Company.
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SECTION 4.3 SUBSIDIARIES. There are no Company Subsidiaries. As used
herein, the term "Company Subsidiary" shall mean any corporation or other entity
of which the Company, directly or indirectly, controls or which the Company
owns, directly or indirectly, 50% or more of the stock or other voting
interests, the holders of which are, ordinarily or generally, in the absence of
contingencies (which contingencies have not occurred) or understandings (which
understandings have not yet been required to be performed) entitled to vote for
the election of a majority of the board of directors or any similar governing
body. Except as set forth in the Company Disclosure Schedule, the Company does
not own any capital stock in any other corporation or similar business entity
nor is the Company a partner in any partnership or joint venture.
SECTION 4.4 AUTHORITY; NON-CONTRAVENTION; APPROVALS.
(a) The Company has full corporate power and authority to enter into this
Agreement and, subject to the Company Stockholders' Approval (as defined in
Section 7.3 below), and the Required Statutory Approvals (as defined in Section
4.4(c) below), to consummate the transactions contemplated hereby. The Company's
execution and delivery of this Agreement, and its consummation of the
transactions contemplated hereby, have been duly authorized by its Board of
Directors and no other corporate proceedings on its part are necessary to
authorize its execution and delivery of this Agreement and its consummation of
the transactions contemplated hereby, except for the Company Stockholders'
Approval and the obtaining of the Required Statutory Approvals. This Agreement
has been duly and validly executed and delivered by the Company, and constitutes
its valid and binding agreement, enforceable against it in accordance with its
terms, except that such enforcement may be subject to (i) bankruptcy,
insolvency, reorganization, moratorium or other similar laws affecting or
relating to enforcement of creditors' rights generally and (ii) general
equitable principles (the "Bankruptcy Exception").
(b) The Company's execution and delivery of this Agreement does not, and its
consummation of the transactions contemplated hereby will not, violate, conflict
with or result in a breach of any provision of, or constitute a default (or an
event which, with notice or lapse of time or both, would constitute a default)
under, or result in the termination of, or accelerate the performance required
by, or result in a right of termination or acceleration under, or result in the
creation of any lien, security interest, charge or encumbrance upon any of its
properties or assets under any of the terms, conditions or provisions of (i) its
Certificate of Incorporation or By-Laws, (ii) subject to obtaining the Required
Statutory Approvals and the receipt of the Company Stockholders' Approval and
the Unity Stockholders' Approval (as defined in Section 7.3 below), any statute,
law, ordinance, rule, regulation, judgment, decree, order, injunction, writ,
permit or license of any court or governmental authority applicable to it or any
of its properties or assets, or (iii) any note, bond, mortgage, indenture, deed
of trust, license, franchise, permit, concession, contract, lease or other
instrument, obligation or agreement of any kind to which it is now a party or by
which it or any of its properties or assets may be bound, excluding from the
foregoing clauses (ii) and (iii), such violations, conflicts, breaches,
defaults, terminations, accelerations or creations of liens, security interests,
charges or encumbrances that would not, in the aggregate, have a Material
Adverse Effect on the Company.
(c) Except for (i) the filing of the Proxy Statement/Prospectus (as defined
in Section 4.9 below) with the Securities and Exchange Commission ("SEC")
pursuant to the Securities Act of 1933, as amended (the Securities Act"), and
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), (ii) the
declaration of the effectiveness thereof by the SEC and filings with various
state blue sky authorities, (iii) the making of the Merger Filings with the
Secretary of State of the State of Delaware, the Recorder of the County of New
Castle, Delaware, and the Secretary of State of the State of New Jersey in
connection with the Merger, and (iv) filing of a Current Report on Form 8-K with
respect to its entry into this Agreement (the filings and approvals referred to
in clauses (i) through (iv) are collectively referred to as the "Required
Statutory Approvals"), no declaration, filing or registration with, or notice
to, or authorization, consent or approval of, any governmental or regulatory
body or authority is necessary for the
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Company's execution and delivery of this Agreement or its consummation of the
transactions contemplated hereby, other than such declarations, filings,
registrations, notices, authorizations, consents or approvals which, if not made
or obtained, as the case may be, would not, in the aggregate, have a Material
Adverse Effect on the Company.
SECTION 4.5 CONTRACTS; NO DEFAULT.
(a) Section 4.5(a) of the Company Disclosure Schedule consists of a true and
complete list of all contracts, agreements, commitments and other instruments
(whether oral or written) to which the Company is a party that (i) involve a
receipt or an expenditure by the Company or require the performance of services
or delivery of goods to, by, through, on behalf of or for the benefit of the
Company, which in each case, relates to a contract, agreement, commitment or
instrument that either (A) requires payments in excess of $25,000 per year and
receipts in excess of $25,000 per year or (B) is not terminable by the Company
on notice of thirty (30) days or less without penalty or the Company being
liable for damages of $25,000 or more, or (ii) involve an obligation for the
performance of services or delivery of goods by the Company that cannot, or in
reasonable probability will not, be performed within one year from the date
hereof.
(b) All of the contracts, agreements, commitments and other instruments
described in Section 4.5(a) of the Company Disclosure Schedule (individually, a
"Contract" and collectively, the "Contracts") are valid and binding upon the
Company, and to the knowledge of the Company, the other parties thereto, and are
in full force and effect and enforceable in accordance with their terms, subject
to the Bankruptcy Exception and neither the Company, nor to the knowledge of the
Company, any other party to any Contract, has materially breached any provision
of, nor has any event occurred which, with the lapse of time or action by a
third party, could result in a material default under, the terms thereof. To the
knowledge of the Company, no stockholder of the Company has received any payment
in violation of law from any contracting party in connection with or as an
inducement for causing the Company to enter into any Contract.
SECTION 4.6 LITIGATION. Except as set forth in Schedule 4.6 of the Company
Disclosure Schedule, there is no (i) claim, action, suit or proceeding pending
or, to the Company's knowledge, threatened against or directly relating to the
Company before any court or governmental or regulatory authority or body or
arbitration tribunal, or (ii) outstanding judgment, order, writ, injunction or
decree, or application, request or motion therefor, of any court, governmental
agency or arbitration tribunal in a proceeding to which the Company or any of
its assets was or is a party except, in the case of clauses (i) and (ii) above,
such as would not, individually or in the aggregate, either materially impair or
preclude the Company's ability to consummate the Merger or the other
transactions contemplated hereby or have a Material Adverse Effect on the
Company.
SECTION 4.7 TAXES. The Company has duly filed with the appropriate
governmental agencies all material franchise, income and all other material Tax
(as hereinafter defined) returns and reports (Tax returns and reports are
hereinafter collectively referred to as "Tax Returns") other than Tax Returns
which the failure to file would have no Material Adverse Effect on the Company.
All such Returns were, when filed, and to the Company's knowledge are, accurate
and completed in all material respects and were prepared in conformity with
applicable laws and regulations. The Company has paid or will pay in full or has
adequately reserved against all Taxes otherwise assessed against it through the
Closing Date. The Company is not a party to any pending action or proceeding by
any governmental authority for the assessment of any Tax, and to the Company's
knowledge, no claim for assessment or collection of any Tax has been asserted
against the Company that has not been paid. There are no Tax liens upon the
assets of the Company (other than the lien of personal property taxes not yet
due and payable). There is no valid basis, to the Company's knowledge, for any
assessment, deficiency, notice, 30-day letter or similar intention to assess any
Tax to be issued to the Company by any governmental authority. "Tax" or "Taxes"
shall mean all federal, state, local and foreign taxes, duties, levies, charges
and assessments of any nature, including
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social security payments and deductibles relating to wages, salaries and
benefits and payments to subcontractors (to the extent required under applicable
Tax law), and also including all interest, penalties and additions imposed with
respect to such amounts.
SECTION 4.8 EMPLOYEE BENEFIT PLANS; ERISA. Except as disclosed in the
Company's SEC Reports (as hereinafter defined), the Company has no employee
benefit plans as defined in Section 3(3) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA").
SECTION 4.9 NO VIOLATION OF LAW. Except as set forth in Section 4.9 of the
Company Disclosure Schedule, the Company is not in violation of and has not been
given notice or been charged with any violation of, any law, statute, order,
rule, regulation, ordinance or judgment (including, without limitation, any
applicable environmental law, ordinance or regulation) of any governmental or
regulatory body or authority, except for violations which, in the aggregate, do
not have, and would not reasonably be expected to have, a Material Adverse
Effect on the Company. The Company has not received any written notice that any
investigation or review with respect to it by any governmental or regulatory
body or authority is pending or threatened, other than, in each case, those the
outcome of which, as far as reasonably can be foreseen, would not reasonably be
expected to have a Material Adverse Effect on the Company. The Company has all
permits, licenses, franchises, variances, exemptions, orders and other
governmental authorizations, consents and approvals necessary to conduct its
business as presently conducted, except for those, the absence of which, alone
or in the aggregate, would not have a Material Adverse Effect on the Company
(collectively, "Permits"). The Company has duly and timely filed all reports and
other information required to be filed with any governmental or regulatory
authority in connection with its Permits, and is not in violation of the terms
of any of its Permits, except for such omissions or delays in filings, reports
or violations which, alone or in the aggregate, would not have a Material
Adverse Effect on the Company. Section 4.9 of the Company Disclosure Schedule
contains a list of Permits.
SECTION 4.10 THE COMPANY SEC REPORTS. The Company Common Stock was
registered under Section 12 of the Exchange Act on Form 8-A. Except as set forth
in the Company Disclosure Schedule, since its inception, the Company has filed
all reports, registration statements and other documents, together with any
amendments thereto, required to be filed under the Securities Act and the
Exchange Act, including but not limited to reports on Form 10-K or 10-KSB and
Form 10-QSB, and the Company will file all such reports, registration statements
and other documents required to be filed by it from the date of this Agreement
to the Closing Date (all such reports, registration statements and documents,
including its Form 8-A, filed or to be filed with the SEC, including the
Company's initial registration statement on Form SB-2 declared effective in May
1998 (the "SB-2") relating to the Company Common Stock, with the exception of
the Proxy Statement, are collectively referred to as "the Company's SEC
Reports"). As of their respective dates, the Company's SEC Reports complied or
will comply in all material respects with all rules and regulations promulgated
by the SEC and did not or will not contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
in order to make the statements therein, in light of the circumstances under
which they were made, not misleading. The Company has provided to Unity a true
and complete copy of all of the Company's SEC Reports filed on or prior to the
date hereof, and will promptly provide to Unity a true and complete copy of any
such reports filed after the date hereof and prior to the Closing Date.
SECTION 4.11 INSURANCE. The Company is covered by insurance policies, or
renewals thereof, as identified and described in Section 4.11 of the Company
Disclosure Schedule. The Company has not received notice from any insurer or
agent of such insurer that material improvements or expenditures will have to be
made in order to continue such insurance and, so far as known to the Company, no
such improvements or expenditures are required (other than premium payments). To
the Company's knowledge, there is no material liability under any insurance
policy in the nature of a retroactive rate adjustment or loss sharing or similar
arrangement except as set forth on the Company Disclosure Schedule.
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SECTION 4.12 PROPERTIES. Except as set forth in Section 4.12 of the
Company Disclosure Schedule, the Company has good and marketable title to all of
the assets and properties which it purports to own as reflected on the most
recent balance sheet comprising a portion of the Company Financial Statements
(as defined in Section 4.17) , or thereafter acquired (except assets and
properties sold or otherwise disposed of since the date of such balance sheet in
the ordinary course of business). The Company has a valid leasehold interest in
all properties of which it is the lessee and each such lease is valid, binding
and enforceable against the Company, and, to the knowledge of the Company, the
other parties thereto in accordance with its terms, subject to the Bankruptcy
Exception. The Company nor, to the Company's knowledge, the other parties
thereto are in default in the performance of any material provision thereunder.
Neither the whole nor any material portion of the assets of the Company is
subject to any governmental decree or order to be sold or is being condemned,
expropriated or otherwise taken by any public authority with or without payment
of compensation therefor, nor, to the Company's knowledge, has any such
condemnation, expropriation or taking been proposed. Except as set forth in the
Company Disclosure Schedule, none of the material assets of the Company is
subject to any restriction which would prevent continuation of the use currently
made thereof or materially adversely affect the value thereof.
SECTION 4.13 CONDITION OF ASSETS. The material equipment, fixtures and
other personal property of the Company are in good operating condition and
repair (ordinary wear and tear excepted) for the conduct of its business as
presently being conducted.
SECTION 4.14 REGISTRATION STATEMENT AND PROXY STATEMENT. None of the
information to be supplied by the Company for inclusion in (a) the Registration
Statement on Form S-4 to be filed under the Securities Act with the SEC by Unity
in connection with the Merger for the purpose of registering the shares of Unity
Common Stock to be issued in the Merger (the "Registration Statement") or (b)
the proxy or information statement to be distributed in connection with (i) the
Company's meeting of stockholders or (ii) Unity's meeting of stockholders, in
either case to vote upon this Agreement and the transactions contemplated hereby
(collectively, the "Proxy Statement" and, together with the prospectus included
in the Registration Statement, the "Proxy Statement/Prospectus") will, in the
case of the Proxy Statement/ Prospectus or any amendments thereof or supplements
thereto, at the time of the mailing of the Proxy Statement/ Prospectus and any
amendments or supplements thereto, and at the time of the meetings of each of
the stockholders of the Company and of Unity to be held in connection with the
transactions contemplated by this Agreement, or, in the case of the Registration
Statement, as amended or supplemented, at the time it becomes effective and at
the time of such meetings, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they are made, not misleading.
SECTION 4.15 LABOR MATTERS. The Company is not a party to any union
contract or other collective bargaining agreement, other than those set forth in
Section 4.15 of the Company Disclosure Schedule. The Company is in compliance in
all material respects with all applicable laws respecting employment and
employment practices, terms and conditions of employment and wages and hours,
and the Company is not engaged in any unfair labor practice. There is no labor
strike, slowdown or stoppage pending (or, to the knowledge of the Company, any
labor strike or stoppage threatened) against or affecting the Company. No
petition for certification has been filed and is pending before the National
Labor Relations Board with respect to any employees of the Company who are not
currently organized.
SECTION 4.16 EMPLOYEES. Except as set forth in Section 4.16 of the Company
Disclosure Schedule, each employee of the Company with access to proprietary
information regarding the Company has entered into a confidentiality/assignment
of inventions agreement with the Company. To the Company's knowledge, no key
employee or group of employees has any plans to terminate employment with the
Company. Except for the Company's current executive officers, the Company is not
a party to any employment, management services, consultation or other contract
or agreement with any past or present officer, director or employee or, to the
Company's knowledge, any entity affiliated with any past or present officer,
director or employee with obligations exceeding $25,000 other than those set
forth in Section 4.16
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of the Company Disclosure Schedule, and other than those agreements executed by
all employees, generally.
SECTION 4.17 FINANCIAL STATEMENTS. The financial statements of the Company
(collectively, the "Company Financial Statements") included in the Company's SEC
Reports present fairly, in all material respects, the financial position and
results of operations of the Company (and its predecessor) as of the respective
dates, years and periods indicated, prepared in accordance with GAAP
consistently applied, and in accordance with Regulation S-X, promulgated by the
SEC and, in particular, Rules 1-02 and 3-05 thereunder (subject, in the case of
unaudited interim period financial statements, to normal and recurring year-end
adjustments which, individually or collectively, are not material). Without
limiting the generality of the foregoing, (i) except as set forth in Section
4.17 of the Company Disclosure Schedule, as of the date of the most recent
balance sheet comprising a portion of the Company Financial Statements, there
was no material debt, liability or obligation of any nature not reflected or
reserved against in the Company Financial Statements or in the notes thereto
required to be so reflected or reserved in accordance with GAAP; and (ii) there
are no assets of the Company, the value of which (in the reasonable judgment of
the Company) is materially overstated in the Company Financial Statements.
Except as disclosed therein or in Section 4.17 of the Company Disclosure
Schedule or as incurred in the ordinary course of business since March 31, 1998,
the Company has no known material contingent liabilities (including liabilities
for Taxes). Except as disclosed in the Company Disclosure Schedule, the Company
is not a party to any contract or agreement for the forward purchase or sale of
any foreign currency and has not invested in any "derivatives."
SECTION 4.18 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as set forth in
Section 4.18 of the Company Disclosure Schedule, since March 31, 1998 there has
not been:
(a) any material adverse change in the financial condition, operations,
properties, assets, liabilities or business of the Company;
(b) any material damage, destruction or loss of any material properties
of the Company, whether or not covered by insurance;
(c) any material change in the manner in which the business of the
Company has been conducted;
(d) any material change in the treatment and protection of trade secrets
or other confidential information of the Company; and
(e) any occurrence not included in paragraphs (a) through (d) of this
Section 4.18 which has resulted, or which the Company has reason to believe,
could reasonably be expected to result, in a Material Adverse Effect on the
Company.
SECTION 4.19 INTELLECTUAL PROPERTY; SOFTWARE. (a) Section 4.19(a) of the
Company Disclosure Schedule sets forth a complete and correct list in all
material respects of all patents, trademarks, tradenames, service marks, service
names, brand names and copyright registrations, and applications therefor,
applicable to or used in the business of the Company, together with a complete
list of all licenses granted by or to the Company with respect to any of the
above. All such patents, trademarks, tradenames, service marks, service names,
brand names and copyrights are owned by the Company, free and clear of all
liens, claims, security interests and encumbrances of any nature whatsoever, or
are used by the Company pursuant to valid licenses. Except as set forth in
Section 4.19(a) of the Company Disclosure Schedule, the Company is not currently
in receipt of any notice of any violation or infringement of, and the Company is
not knowingly violating or infringing in any material respect, the rights of
others in any patent, unpatented invention, trademark, tradename, service mark,
copyright, trade secret, know-how, design, process or other intangible asset.
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(b) (i) Except as set forth on Schedule 4.19(b)(i) of the Company Disclosure
Schedule, the Company, has title to all material computer software owned by the
Company (other than "off-the-shelf" software not customized for its use ("Owned
Software")) free and clear of all liens, claims, security interests and
encumbrances whatsoever or, including claims or rights of employees, agents,
consultants, customers, licensees or other parties involved in the development,
creation, documentation, marketing, maintenance, enhancement or licensing of
such computer software. Except as set forth in Section 4.19(b)(i) or (ii) of the
Company Disclosure Schedule, the Owned Software is not dependent on any Licensed
Software (as defined in subsection (ii) below) in order to operate fully in the
manner in which it is intended. The source code of any Owned Software has not
been published or knowingly disclosed to any other parties, except as set forth
on Section 4.19(b)(i) of the Company Disclosure Schedule, and except pursuant to
contracts requiring such other parties to keep the source code of any Owned
Software confidential. As of the date hereof, to the Company's knowledge, no
such other party has breached any such obligation of confidentiality.
(ii) Section 4.19(b)(ii) of the Company Disclosure Schedule also sets forth
a list of the agreements which require the payment of license fees, rents,
royalties or other charges by the Company with respect to all material software
(other than "off-the-shelf" software that has not been customized for its use)
under which the Company is a licensee, lessee or otherwise has obtained the
right to use software and the Company pays a royalty for the use of such
software (the "Licensed Software"). The Company, as applicable, has the right
and license to use, sublicense, modify and copy Licensed Software, free and
clear of any limitations or encumbrances, except as may be set forth in Section
4.19(b)(ii) of the Company Disclosure Schedule or in the agreements referenced
therein. The Company is in material compliance with all provisions of each
license, lease or other similar agreement pursuant to which it has rights to use
the Licensed Software. Except as disclosed on Section 4.19(b)(ii) of the Company
Disclosure Schedule, none of the Licensed Software has been incorporated into or
made a part of any Owned Software or any other Licensed Software. The Company
has not published or knowingly disclosed any Licensed Software to any other
party except, in the case of Licensed Software which the Company leases or
markets to others, in accordance with and as permitted by any license, lease or
similar agreement relating to the Licensed Software and except pursuant to
contracts requiring such other parties to keep the Licensed Software
confidential. As of the date hereof, to the Company's knowledge, no party to
whom the Company has disclosed Licensed Software has breached such obligation of
confidentiality.
(iii) The Owned Software and Licensed Software constitute all software used
in the business of the Company (collectively, the "Company Software"). Subject
to obtaining the Required Approvals, the transactions contemplated herein will
not cause a breach or default under any license, leases or similar agreements
relating to the Company Software or impair the ability of Unity and the Company
to use the Company Software subsequent to the Effective Time in the same manner
as the Company Software is currently used by the Company. Except as set forth in
Section 4.19(a), the Company is not knowingly infringing in any material respect
any intellectual property rights of any other person or entity with respect to
the Company Software, and, to the Company's knowledge no other person or entity
is infringing any intellectual property rights of the Company with respect to
the Company Software.
SECTION 4.20 BUSINESS LOCATIONS. The Company owns or leases no real
property in any state or country except as set forth in Section 4.20 of the
Company Disclosure Schedule. The Company has no executive offices or places of
business except as otherwise set forth on the Company Disclosure Schedule.
SECTION 4.21 COMPENSATION OF DIRECTORS, OFFICERS AND EMPLOYEES. There is
set forth in Section 4.21 of the Company Disclosure Schedule a true and complete
list showing (a) the names of all directors and officers of the Company; (b) the
names of all salaried persons whose aggregate compensation for purposes of tax
reporting from the Company in the fiscal year ended December 31, 1997 was, or in
the year ending December 31, 1998 is expected to be $50,000 or more per year,
together with a statement of the full amount expected to be paid to each such
person for services in all capacities to be rendered in the year ending December
31, 1998, separately including the amounts paid or payable, or expected to be
paid or
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payable, under bonus or incentive arrangements, if any; and (c) the names and
titles of all salespersons whose aggregate compensation for purposes of tax
reporting from the Company in the fiscal year ended December 31, 1997 was, or in
the year ending December 31, 1998 is expected to be, $50,000 or more per year,
together with a statement of the base salary, the commission and any amount or
amounts under bonus or other incentive arrangements, expected to be paid to each
such person in the fiscal year ending December 31, 1998.
SECTION 4.22 BOOKS, RECORDS AND ACCOUNTS. The Company's books, records and
accounts fairly and accurately reflect in all material respects transactions and
dispositions of assets by the Company, and the system of internal accounting
controls of the Company is sufficient to assure that: (a) transactions are
executed in accordance with management's authorization; (b) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with GAAP, and to maintain accountability for assets; (c) access to
assets is permitted only in accordance with management's authorization; and (d)
the recorded accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
SECTION 4.23 BROKERS AND FINDERS. The Company has not employed any
investment banker, broker, finder, consultant or intermediary in connection with
the transactions contemplated by this Agreement which would be entitled to any
investment banking, brokerage, finder's or similar fee or commission in
connection with this Agreement or the transactions contemplated hereby.
SECTION 4.24 NO OMISSIONS OR UNTRUE STATEMENTS. No representation or
warranty made by the Company to Unity in this Agreement, the Company Disclosure
Schedule or in any certificate of a Company officer required to be delivered to
Unity pursuant to the terms of this Agreement contains or will contain any
untrue statement of a material fact, or omits or will omit to state a material
fact necessary to make the statements contained herein or therein in light of
the circumstances in which made not misleading as of the date hereof and as of
the Closing Date.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF UNITY
Unity hereby represents and warrants to the Company as follows (subject in
each case to such exceptions as are set forth or cross-referenced in the
attached Unity Disclosure Schedule in the labeled section corresponding to the
caption of the representation or warranty to which such exceptions relate):
SECTION 5.1 ORGANIZATION AND QUALIFICATION. Unity is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware. Unity has all requisite corporate power to carry on its business as it
is now being conducted and is duly qualified to do business as a foreign
corporation and is in good standing in all jurisdictions set forth in Section
5.1 of the Unity Disclosure Schedule, and to Unity's knowledge, such
jurisdictions are the only ones in which the properties owned, leased or
operated by the Unity or the nature of the business conducted by Unity makes
such qualification necessary, except where the failure to qualify (individually
or in the aggregate) will not have any Material Adverse Effect on Unity. The
copies of the Certificate of Incorporation and By-laws of Unity, as amended to
date and delivered to Company, are true and complete copies of these documents
as now in effect. The minute books of Unity are accurate in all material
respects. Unity does not own any capital stock or other voting interests in any
corporation or other entity.
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SECTION 5.2 CAPITALIZATION. The authorized capital stock of Unity consists
of 20,000,000 Shares of Unity Common Stock, of which 1,875,000 shares are issued
and outstanding, and 5,000 preferred shares, $.01 par value, none of which are
outstanding. In addition, there are authorized, issued and outstanding 1,250,000
Class A Common Stock Purchase Warrants (the "Class A Warrants") and 1,250,000
Class B Common Stock Purchase Warrants (the "Class B Warrants" and collectively,
with the Class A Warrants, the "Public Warrants") providing for the issuance,
upon exercise, of like number of shares of Unity Common Stock, which warrants
are exercisable at $5.50 and $7.50 per warrant, respectively, 100,000 Class A
and 100,000 Class B non-redeemable common stock purchase warrants providing for
the issuance, upon exercise, of like numbers of Unity Common Stock, which
warrants are exercisable at $5.50 and $7.50 per warrant, respectively
(collectively, the "Private Warrants"), as well as non-redeemable warrants to
purchase 125,000 units, exercisable at $6.60 per unit, each unit consisting of
one share of Unity Common Stock and one Class A and one Class B common stock
purchase warrant (collectively, the "Representative's Unit Warrants"). All of
the outstanding securities of Unity are duly authorized, validly issued, fully
paid and non-assessable, and were not issued in violation of the preemptive
rights of any person. The Unity Common Stock to be issued upon effectiveness of
the Merger, when issued in accordance with the terms of this Agreement, shall be
duly authorized, validly issued, fully paid and on-assessable. All of the
outstanding securities of Unity including the Unity Common Stock, the Public
Warrants, the Private Warrants and the Representative's Unit Warrants, were
issued in compliance with all applicable securities laws. No shares of capital
stock are held in the treasury of Unity. Other than as stated in this Section
5.2, there are no outstanding subscriptions, options, warrants, calls or rights
of any kind issued or granted by, or binding upon Unity, to purchase or
otherwise acquire any shares of capital stock of Unity or other securities of
Unity. Except as stated in this Section 5.2, there are no outstanding securities
convertible or exchangeable, actually or contingently, into shares of Unity
Common Stock or other securities of Unity.
SECTION 5.3 AUTHORITY; NON-CONTRAVENTION; APPROVALS.
(a) Unity has full corporate power and authority to enter into this
Agreement and, subject to the Unity Stockholders' Approval, and the Required
Statutory Approvals, to consummate the transactions contemplated hereby. Unity's
execution and delivery of this Agreement, and its consummation of the
transactions contemplated hereby, have been duly authorized by its Board of
Directors and no other corporate proceedings on its part are necessary to
authorize its execution and delivery of this Agreement and its consummation of
the transactions contemplated hereby, except for the Unity Stockholders'
Approval, and the obtaining of the Required Statutory Approvals. This Agreement
has been duly and validly executed and delivered by it, and constitutes its
valid and binding agreement, enforceable against it in accordance with its
terms, except that such enforcement may be subject to the Bankruptcy Exception.
(b) Unity's execution and delivery of this Agreement does not, and its
consummation of the transactions contemplated hereby will not, violate, conflict
with or result in a breach of any provision of, or constitute a default (or an
event which, with notice or lapse of time or both, would constitute a default)
under, or result in the termination of, or accelerate the performance required
by, or result in a right of termination or acceleration under, or result in the
creation of any lien, security interest, charge or encumbrance upon any of its
properties or assets under any of the terms, conditions or provisions of (i) its
Certificate of Incorporation or By-Laws, (ii) subject to obtaining the Required
Statutory Approvals and the receipt of the Company Stockholders' Approval and
the Unity Stockholders' Approval, any statute, law, ordinance, rule, regulation,
judgment, decree, order, injunction, writ, permit or license of any court or
governmental authority applicable to it or any of its properties or assets, or
(iii) any note, bond, mortgage, indenture, deed of trust, license, franchise,
permit, concession, contract, lease or other instrument, obligation or agreement
of any kind to which it is now a party or by which it or any of its properties
or assets may be bound, excluding from the foregoing clauses (ii) and (iii),
such violations, conflicts, breaches, defaults, terminations, accelerations or
creations of liens, security interests, charges or encumbrances that would not,
in the aggregate, have a Material Adverse Effect on Unity.
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(c) Except for (i) the filing of the Registration Statement and Proxy
Statement/Prospectus with the SEC pursuant to the Securities Act and the
Exchange Act, (ii) the declaration of the effectiveness thereof by the SEC and
filings with various state blue sky authorities, and (iii) the making of the
"Required Statutory Approvals", no declaration, filing or registration with, or
notice to, or authorization, consent or approval of, any governmental or
regulatory body or authority is necessary for Unity's execution and delivery of
this Agreement or its consummation of the transactions contemplated hereby,
other than such declarations, filings, registrations, notices, authorizations,
consents or approvals which, if not made or obtained, as the case may be, would
not, in the aggregate, have a Material Adverse Effect on Unity.
SECTION 5.4 CONTRACTS LISTED; NO DEFAULT. All material contracts,
agreements, licenses, leases, easements, permits, rights of way, commitments,
and understandings, written or oral connected with or relating in any respect to
the present operations of Unity (except employment or other agreements
terminable at will) are, with the exception of this Agreement, described in
Unity's SEC Reports (as defined in Section 5.13) and listed as exhibits thereto
(the "Unity Contracts"). To Unity's knowledge, the Unity Contracts are valid,
binding and enforceable by Unity against the other parties thereto in accordance
with their terms, subject to the Bankruptcy Exception. Neither Unity nor, to
Unity's knowledge, any of the other parties thereto is in material default or
breach of any provision of the Unity Contracts.
SECTION 5.5 LITIGATION. Except as set forth in Schedule 5.5 of Unity
Disclosure Schedule there is no (i) claim, action, suit or proceeding pending
or, to Unity's knowledge, threatened against or directly relating to Unity
before any court or governmental or regulatory authority or body or arbitration
tribunal, or (ii) outstanding judgment, order, writ, injunction or decree, or
application, request or motion therefor, of any court, governmental agency or
arbitration tribunal in a proceeding to which Unity or any of its assets was or
is a party except, in the case of clauses (i) and (ii) above, such as would not,
individually or in the aggregate, either materially impair or preclude Unity's
ability to consummate the Merger or the other transactions contemplated hereby
or have a Material Adverse Effect on Unity.
SECTION 5.6 TAXES. Unity has duly filed all Tax Returns required to be
filed by it other than Tax Returns which the failure to file would have no
Material Adverse Effect on Unity. All such Tax Returns were, when filed, and to
Unity's knowledge are, accurate and completed in all material respects and were
prepared in conformity with applicable laws and regulations. Unity has paid or
will pay in full or has adequately reserved against all Taxes otherwise assessed
against it through the Closing Date. Unity is not a party to any pending action
or proceeding by any governmental authority for the assessment of any Tax, and,
to Unity's knowledge, no claim for assessment or collection of any Tax has been
asserted against Unity that has not been paid. There are no Tax liens upon the
assets of Unity (other than the lien of personal property taxes not yet due and
payable). There is no valid basis, to Unity's knowledge, for any assessment,
deficiency, notice, 30-day letter or similar intention to assess any Tax to be
issued to Unity by any governmental authority.
SECTION 5.7 EMPLOYEE PLANS. Except as disclosed in Unity's SEC Reports,
Unity has no employee benefit plans as defined in Section 3(3) of ERISA.
SECTION 5.8 NO VIOLATION OF LAW. Except as set forth in Section 5.8 of
Unity Disclosure Schedule, Unity is not in violation of and has not been given
notice or been charged with any violation of, any law, statute, order, rule,
regulation, ordinance or judgment (including, without limitation, any applicable
environmental law, ordinance or regulation) of any governmental or regulatory
body or authority, except for violations which, in the aggregate, do not have,
and would not reasonably be expected to have, a Material Adverse Effect on
Unity. Unity has not received any written notice that any investigation or
review with respect to it by any governmental or regulatory body or authority is
pending or threatened, other than, in each case, those the outcome of which, as
far as reasonably can be foreseen, would not reasonably be expected to have a
Material Adverse Effect on Unity. Unity has all permits, licenses, franchises,
variances, exemptions, orders and other governmental authorizations, consents
and approvals necessary to conduct its business as presently conducted, except
for those, the absence of which, alone or in
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the aggregate, would not have a Material Adverse Effect on Unity (collectively,
"Permits"). Unity (a) has duly and timely filed all reports and other
information required to be filed with any governmental or regulatory authority
in connection with its Permits, and (b) is not in violation of the terms of any
of its Permits, except for such omissions or delays in filings, reports or
violations which, alone or in the aggregate, would not have a Material Adverse
Effect on Unity. Section 5.8 of Unity Disclosure Schedule contains a list of
Permits.
SECTION 5.9 PROPERTIES. Except as set forth in Section 5.9 of Unity
Disclosure Schedule, Unity has good and marketable title to all of the assets
and properties which it purports to own as reflected on the most recent balance
sheet comprising a portion of Unity Financial Statements (as defined in Section
5.12) or thereafter acquired (except assets and properties sold or otherwise
disposed of since the date of such balance sheet in the ordinary course of
business). Unity has a valid leasehold interest in all properties of which it is
the lessee and each such lease is valid, binding and enforceable against Unity,
and, to the knowledge of Unity, the other parties thereto in accordance with its
terms, subject to the Bankruptcy Exception. Unity nor, to Unity's knowledge, the
other parties thereto are in default in the performance of any material
provision thereunder. Neither the whole nor any material portion of the assets
of Unity is subject to any governmental decree or order to be sold or is being
condemned, expropriated or otherwise taken by any public authority with or
without payment of compensation therefor, nor, to the knowledge of Unity, has
any such condemnation, expropriation or taking been proposed. Except as set
forth in Unity Disclosure Schedule, none of the material assets of Unity is
subject to any restriction which would prevent continuation of the use currently
made thereof or materially adversely affect the value thereof.
SECTION 5.10 REGISTRATION STATEMENT AND PROXY STATEMENT. None of the
information to be supplied by Unity for inclusion in the Registration Statement
or the Proxy Statement/Prospectus will, in the case of the Proxy
Statement/Prospectus or any amendments thereof or supplements thereto, at the
time of the mailing of the Proxy Statement/Prospectus and any amendments or
supplements thereto, and at the time of the meetings of each of the stockholders
of the Company and of Unity to be held in connection with the transactions
contemplated by this Agreement, or, in the case of the Registration Statement,
as amended or supplemented, at the time it becomes effective and at the time of
such meetings, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they are made,
not misleading.
SECTION 5.11 BUSINESS. Unity, since its formation, has engaged in no
business other than to seek to serve as a vehicle for the acquisition of an
operating business, and, except for this Agreement, is not a party to any
contract or agreement for the acquisition of an operating business. Unity has no
employees.
SECTION 5.12 FINANCIAL STATEMENTS. The financial state-ments of Unity
(collectively, the Unity Financial Statements") included in Unity's SEC Reports
(as defined in Section 5.13) present fairly, in all material respects, the
financial position and results of operations of Unity as of the respective dates
years and periods indicated, prepared in accordance with GAAP and in accordance
with Regulation S-X of the SEC (subject, in the case of unaudited interim period
financial statements, to normal and recurring year-end adjustments which,
individually or collectively, are not material). Without limiting the generality
of the foregoing, (i) except as set forth in Section 5.12 of the Unity
Disclosure Schedule, there is no basis for any assertion against Unity as of the
date of the most recent balance sheet comprising a portion of the Unity
Financial Statements of any material debt, liability or obligation of any nature
not fully reflected or reserved against in the Unity Financial Statements or in
the notes thereto; and (ii) there are no assets of Unity, the value of which (in
the reasonable judgment of Unity) is materially overstated in the Unity
Financial Statements. Except as disclosed therein or in the Unity Disclosure
Schedule or as incurred in the ordinary course of business since April 30, 1998,
Unity has no known material contingent liabilities (including liabilities for
taxes). Unity is not a party to any contract or agreement for the forward
purchase or sale of any foreign currency.
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SECTION 5.13 UNITY'S SEC REPORTS. The Unity Common Stock was registered
under Section 12 of the Exchange Act on Form 8-A. Except as set forth in Section
5.13 of the Unity Disclosure Schedule, since its inception, Unity has filed all
reports, registration statements and other documents, together with any
amendments thereto, required to be filed under the Securities Act and the
Exchange Act, including but not limited to reports on Form 10-K and Form 10-Q,
and Unity will file all such reports, registration statements and other
documents required to be filed by it from the date of this Agreement to the
Closing Date (all such reports, registration statements and documents, including
its Form 8-A, filed or to be filed with the SEC, including Unity's initial
registration statement relating to the Unity Common Stock, Public Warrants,
Private Warrants and the Representative's Unit Warrants, with the exception of
the Registration Statement and the Proxy Statement, are collectively referred to
as "Unity's SEC Reports"). As of their respective dates, Unity's SEC Reports
complied or will comply in all material respects with all rules and regulations
promulgated by the SEC and did not or will not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading. Unity has provided to the Company a
true and complete copy of all of Unity's SEC Reports filed on or prior to the
date hereof, and will promptly provide to the Company a true and complete copy
of any such reports filed after the date hereof and prior to the Closing Date.
SECTION 5.14 BULLETIN BOARD. Each of the Unity Common Stock, Class A
Warrants and Class B Warrants are quoted on the Bulletin Board under the
respective symbols "UFAC", "UFACW" and "UFACZ," and Unity is in compliance in
all respects with all rules and regulations of the National Association of
Securities Dealers, Inc. applicable to Unity and the inclusion for quotation of
such securities on the Bulletin Board.
SECTION 5.15 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as set forth in
Section 5.15 of Unity Disclosure Schedule, since April 30, 1998 there has not
been:
(a) any material adverse change in the financial condition, operations,
properties, assets, liabilities or business of Unity;
(b) any material damage, destruction or loss of any material properties
of Unity;
(c) any material change in the manner in which the business of Unity,
has been conducted;
(d) any material change in the treatment and protection of trade secrets
or other confidential information of Unity; and
(e) any occurrence not included in paragraphs (a) through (d) of this
Section which has resulted, or which Unity has reason to believe, could
reasonably be expected to result, in a Material Adverse Effect on Unity.
SECTION 5.16 BOOKS, RECORDS AND ACCOUNTS. Unity's books, records and
accounts fairly and accurately reflect in all material respects transactions and
dispositions of assets by Unity, and the system of internal accounting controls
of Unity is sufficient to assure that: (a) transactions are executed in
accordance with management's authorization; (b) transactions are recorded as
necessary to permit preparation of financial statements in conformity with GAAP,
and to maintain accountability for assets; (c) access to assets is permitted
only in accordance with management's authorization; and (d) the recorded
accountability for assets is compared with the existing assets at reasonable
intervals and appropriate action is taken with respect to any differences.
SECTION 5.17 BROKERS AND FINDERS. Except for the fees and expenses payable
to Gilford Securities Corp. or another recognized investment banking firm (as
contemplated by Section 8.3(d) hereof), which fees and expenses will be paid by
Unity (subject to the limitation contained in Section 8.2(h)), Unity has not
employed any investment banker, broker, finder, consultant or intermediary in
connection with the
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transactions contemplated by this Agreement which would be entitled to any
investment banking, brokerage, finder's or similar fee or commission in
connection with this Agreement or the transactions contemplated hereby.
SECTION 5.18 NO OMISSIONS OR UNTRUE STATEMENTS. No representation or
warranty made by Unity to the Company in this Agreement, the Unity Disclosure
Schedule or in any certificate of a Unity officer required to be delivered to
the Company pursuant to the terms of this Agreement contains or will contain any
untrue statement of a material fact, or omits or will omit to state a material
fact necessary to make the statements contained herein or therein in light of
the circumstances in which made not misleading as of the date hereof and as of
the Closing Date.
ARTICLE VI
CONDUCT OF BUSINESS PENDING THE MERGER
SECTION 6.1 CONDUCT OF BUSINESS PRIOR TO EFFECTIVE TIME. Each of Unity and
the Company hereby covenants and agrees as follows, from and after the date of
this Agreement and until the Effective Time, except as otherwise specifically
consented to in writing by the other party:
(a) It shall conduct its business in the ordinary and usual course of
business and consistent with past practice;
(b) It shall not (i) split, combine or reclassify its outstanding
capital stock or declare, set aside or pay any dividend or distribution
payable in cash, stock, property or otherwise, (ii) spin-off any assets or
businesses, (iii) engage in any transaction for the purpose of effecting a
recapitalization, or (iv) engage in any transaction or series of related
transactions which has a similar effect to any of the foregoing;
(c) It shall not issue, sell, pledge or dispose of, or agree to issue,
sell pledge or dispose of, any additional shares of, or any options,
warrants or rights of any kind to acquire any shares of its capital stock of
any class or any debt or equity securities convertible into or exchangeable
for such capital stock or amend or modify the terms and conditions of any of
the foregoing, provided, however that it (i) may issue shares upon exercise
of outstanding options, warrants or stock purchase rights and (ii) (in the
case of the Company) grant options, warrants and stock purchase rights, and
issue shares upon exercises thereof, in accordance with past practices in
numbers and exercise prices consistent therewith;
(d) It shall not (i) redeem, purchase, acquire or offer to purchase or
acquire any shares of its capital stock, other than as required by the
governing terms of such securities, (ii) take any action (either before or
after the Effective Time) which would jeopardize the treatment of the Merger
as a "reorganization" within the meaning of Section 368(a) of the Code,
(iii) take or fail to take any action which action or failure to take action
would cause it or its stockholders (except to the extent that any
stockholders receive cash in lieu of fractional shares) to recognize gain or
loss for federal income tax purposes as a result of the consummation of the
Merger, (iv) make any acquisition of any material assets (except in the
ordinary course of business) or businesses, (v) sell any material assets
(except in the ordinary course of business) or businesses, or (vi) enter
into any contract, agreement, commitment or arrangement to do any of the
foregoing;
(e) It shall use reasonable efforts to preserve intact its business
organization and goodwill, keep available the services of its present
officers and key employees, and preserve the goodwill and business
relationships with suppliers, distributors, customers, and others having
business relationships with it, and not engage in any action, directly or
indirectly, with the intent to impact adversely the transactions
contemplated by this Agreement;
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(f) It shall confer on a regular basis with one or more representatives
of the other to report on material operational matters and the general
status of ongoing operations; and
(g) It shall file with the SEC all forms, statements, reports and
documents (including all exhibits, amendments and supplements thereto)
required to be filed by it pursuant to the Exchange Act.
SECTION 6.2 NO SOLICITATION.
(a) The Company agrees that, prior to the Effective Time or the termination
or abandonment of this Agreement, the Company shall not give authorization or
permission to any of its directors, officers, employees, agents or
representatives to, and each shall use all reasonable efforts to see that such
persons do not, directly or indirectly, solicit, initiate, facilitate or
encourage (including by way of furnishing or disclosing information) any merger,
consolidation, other business combination involving the Company, acquisition of
all or any substantial portion of the assets or capital stock of the Company or
of the assets of any division of the Company, or inquiries or proposals
concerning or which may reasonably be expected to lead to, any of the foregoing
(a "Company Acquisition Transaction") or negotiate, explore or otherwise
knowingly communicate in any way with any third party (other than Unity or its
affiliates) with respect to any Company Acquisition Transaction or enter into
any agreement, arrangement or understanding requiring it to abandon, terminate
or fail to consummate the Merger or any other transactions expressly
contemplated by this Agreement, or contemplated to be a material part thereof.
The Company shall advise Unity in writing of any bona fide inquiries or
proposals relating to any Company Acquisition Transaction, within one business
day following the Company's receipt of any such inquiry or proposal. The Company
shall also promptly advise any person seeking a Company Acquisition Transaction
that it is bound by the provisions of this Section.
(b) Unity agrees that, prior to the Effective Time or the termination or
abandonment of this Agreement, Unity shall not give authorization or permission
to any of its directors, officers, employees, agents or representatives to, and
each shall use all reasonable efforts to see that such persons do not, directly
or indirectly, solicit, initiate, facilitate or encourage (including by way of
furnishing or disclosing information) any merger, consolidation, other business
combination involving Unity, acquisition of all or any substantial portion of
the assets or capital stock of Unity or of the assets of any division of Unity,
or inquiries or proposals or which may reasonably be expected to lead to, any of
the foregoing (a "Company Acquisition Transaction") or negotiate, explore or
otherwise knowingly communicate in any way with any third party (other than the
Company or its affiliates) with respect to any Unity Acquisition Transaction or
enter into any agreement, arrangement or understanding requiring it to abandon,
terminate or fail to consummate the Merger or any other transactions expressly
contemplated by this Agreement, or contemplated to be a material part thereof.
Unity shall advise the Company in writing of any bona fide inquiries or
proposals relating to a Unity Acquisition Transaction, within one business day
following Unity's receipt of any such inquiry or proposal. Unity shall also
promptly advise any person seeking a Unity Acquisition Transaction that it is
bound by the provisions of this Section.
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ARTICLE VII
ADDITIONAL AGREEMENTS
SECTION 7.1 ACCESS TO INFORMATION. Each of Unity and the Company shall
afford to the other and the other's accountants, counsel, financial advisors and
other representatives reasonable access during normal business hours throughout
the period prior to the Effective Time to all properties, books, contracts,
commitments and records (including, but not limited to, Tax Returns) of it and,
during such period, shall furnish promptly (a) a copy of each report, schedule
and other document filed or received by it during such period pursuant to the
requirements of federal or state securities laws or filed by it during such
period with the SEC in connection with the transactions contemplated by this
Agreement or which may have a material effect on its business, properties or
personnel and (b) such other information concerning its business, properties and
personnel as the other shall reasonably request; provided, however, that, no
investigation pursuant to this Section 7.1 shall affect any representation or
warranty made herein or the conditions to the obligations of the respective
parties to consummate the Merger. All non-public documents and information
furnished to Unity or to the Company, as the case may be, in connection with the
transactions contemplated by this Agreement shall be deemed to have been
received, and shall be held by the recipient, in confidence, except that Unity
and the Company may disclose such information as may be necessary in connection
with seeking the Unity Required Statutory Approvals, the Unity Stockholders'
Approval, the Company Required Statutory Approvals and the Company Stockholders'
Approval. The Company shall promptly advise Unity, and Unity shall promptly
advise the Company, in writing, of any change or the occurrence of any event
after the date of this Agreement having, or which, insofar as can reasonably be
foreseen, in the future may have, any Material Adverse Effect on the Company or
Unity, as applicable.
SECTION 7.2 REGISTRATION STATEMENT AND PROXY STATEMENT/PROSPECTUS. Unity
and the Company shall prepare and file with the SEC as soon as is reasonably
practicable after the date hereof the Registration Statement and Proxy
Statement/Prospectus and shall use all reasonable efforts to have the
Registration Statement declared effective by the SEC as promptly as practicable.
Unity shall also take any action required to be taken under applicable state
blue sky or securities laws in connection with the issuance of Unity Common
Stock. Unity and the Company shall promptly furnish to each other all
information, and take such other actions, as may reasonably be requested in
connection with any action by any of them in connection with the preceding
sentence and shall cooperate with one another and use their respective best
efforts to facilitate the expeditious consummation of the transaction
contemplated by this Agreement. The Registration Statement shall contain an
updated prospectus covering the Public Warrants, the Private Warrants and the
Representative's Unit Warrants and the like number of shares of Unity Common
Stock issuable upon exercises thereof (the "Unity Underlying Stock"), as well as
a resale prospectus covering all shares of Unity Common Stock that are
beneficially owned by the current officers and directors of Unity and their
respective affiliates (collectively, the "Unity Affiliates' Stock"). If the
rules and regulations of the SEC shall not permit the utilization of the
Registration Statement for this purpose, Unity and the Company shall prepare and
file with the SEC contemporaneously with the filing of the Registration
Statement and the Proxy Statement/Prospectus a registration statement on Form
S-3 covering the Public Warrants, the Private Warrants, the Representative's
Unit Warrants, the Unity Underlying Stock and the Unity Affiliates' Stock (the
"Companion Registration Statement") and shall use all reasonable efforts to have
the Companion Registration Statement declared effective by the SEC as promptly
as practicable but in no event later than the Effective Time.
SECTION 7.3 STOCKHOLDERS' APPROVAL. The Company shall use its best efforts
to obtain stockholder approval and adoption (the "Company Stockholders'
Approval") of this Agreement and the transactions contemplated hereby as soon as
practicable following the date upon which the Registration Statement is declared
effective by the SEC. Subject to the fiduciary duties of the Board of Directors
of the Company under applicable law, the Company shall, through its Board of
Directors, recommend to the holders of
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Company Common Stock approval of this Agreement and the transactions
contemplated by this Agreement. Unity shall use its best efforts to obtain
stockholder approval and adoption (the "Unity Stockholders' Approval") of this
Agreement and the transactions contemplated hereby as soon as practicable
following the date upon which the Registration Statement is declared effective
by the SEC. Subject to the fiduciary duties of the Board of Directors of Unity
under applicable law, Unity shall, through its Board of Directors, recommend to
the holders of Unity Common Stock approval of this Agreement and the
transactions contemplated by this Agreement.
SECTION 7.4 BULLETIN BOARD. Unity and the Company shall each use its best
efforts to effect, at or before the Effective Time, authorization for quotation
on the Bulletin Board of the shares of Unity Common Stock.
SECTION 7.5 AGREEMENT TO COOPERATE. Subject to the terms and conditions
herein provided, each of the parties hereto shall cooperate and use their
respective best efforts to take, or cause to be taken, all action and to do, or
cause to be done, all things necessary, proper or advisable under applicable
laws and regulations to consummate and make effective the transactions
contemplated by this Agreement, including using its reasonable efforts to obtain
all necessary or appropriate waivers, consents and approvals and SEC "no-action"
letters, to effect all necessary registrations, filings and submissions and to
lift any injunction or other legal bar to the Merger (and, in such case, to
proceed with the Merger as expeditiously as possible), subject, however, to
obtaining the Required Statutory Approvals, the Company Stockholders' Approval
and the Unity Stockholders' Approval; and provided that nothing in this Section
7.5 shall affect any responsibility or obligation specifically allocated to any
party in this Agreement.
SECTION 7.6 PUBLIC STATEMENTS. The parties shall consult with each other
prior to issuing any press release or any written public statement with respect
to this Agreement or the transactions contemplated hereby and shall not issue
any such press release or written public statement prior to such consultation,
except that prior review and approval shall not be required if, in the
reasonable judgment of the party seeking to issue such release or public
statement based upon the advice of counsel, prior review and approval would
prevent the timely dissemination of such release or statement in violation of
applicable law, rule, regulation or policy of the Bulletin Board.
SECTION 7.7 CORRECTIONS TO THE PROXY STATEMENT/PROSPECTUS AND REGISTRATION
STATEMENT. Prior to the Effective Time, each of the Company and Unity shall
correct promptly any information provided by it to be used specifically in the
Registration Statement, Proxy Statement/Prospectus and, if applicable, Companion
Registration Statement that shall have become false or misleading in any
material respect and shall take all steps necessary to file with the SEC and
have declared effective or cleared by the SEC any amendment or supplement to the
Registration Statement, Proxy Statement/Prospectus or Companion Registration
Statement, as applicable, so as to correct the same and to cause appropriate
dissemination thereof to the stockholders of the Company and/or stockholders of
Unity, in each case to the extent required by applicable law.
SECTION 7.8 DISCLOSURE SUPPLEMENTS. From time to time prior to the
Effective Time, and in any event immediately prior to the Effective Time, each
of Unity and the Company shall promptly supplement or amend its Disclosure
Schedule with respect to any matter hereafter arising that, if existing,
occurring, or known at the date of this Agreement, would have been required to
be set forth or described in such Disclosure Schedule or that is necessary to
correct any information in such Disclosure Schedule that is or has become
inaccurate. Notwithstanding the foregoing, if any such supplement or amendment
discloses a Material Adverse Effect, the conditions to the other party's
obligations to consummate the Merger set forth in Article VIII hereof shall be
deemed not to have been satisfied.
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ARTICLE VIII
CONDITIONS
SECTION 8.1 CONDITIONS TO EACH PARTY'S OBLIGATIONS TO EFFECT THE
MERGER. The respective obligation of each party to effect the Merger shall be
subject to the fulfillment at or prior to the Closing Date of the following
conditions:
(a) The Company shall have obtained the Company Stockholders' Approval;
(b) Unity shall have obtained the Unity Stockholders' Approval;
(c) The Registration Statement (and Companion Registration Statement, if
applicable) shall have become effective in accordance with the provisions of
the Securities Act, and no stop order suspending such effectiveness shall
have been issued and remain in effect;
(d) No preliminary or permanent injunction or other order or decree by
any federal or state court which prevents the consummation of the Merger
shall have been issued and remain in effect (each party agreeing to use its
reasonable efforts to have any such injunction, order or decree lifted);
(e) No action shall have been taken, and no statute, rule or regulation
shall have been enacted, by any state or federal government or governmental
agency in the United States which would prevent the consummation of the
Merger, and
(f) All governmental and third party consents, orders and approvals
legally required for the consummation of the Merger and the transactions
contemplated hereby (including without limitation all Required Statutory
Approvals) shall have been obtained and be in effect at the Effective Time
without any material limitations or conditions.
(g) As of the Closing Date, all "blue sky" filings as may be required in
order for the offer, issuance and sale of all of the shares of Unity Common
Stock to be issued pursuant to Section 3.1 to be in full compliance with all
applicable state securities laws and regulations shall have been made and
shall be in effect and not subject to any suspension, revocation, or stop
order, as may be required in order for the offer, issuance and sale of all
such securities to be legally permitted under all such laws and regulations.
SECTION 8.2 CONDITIONS TO OBLIGATIONS OF THE COMPANY TO EFFECT THE
MERGER. Unless waived by the Company, the obligation of the Company to effect
the Merger shall also be subject to the fulfillment at or prior to the Closing
Date of the following additional conditions:
(a) Unity shall have performed in all material respects its agreements
contained in this Agreement required to be performed on or prior to the
Closing Date and the representations and warranties of Unity contained in
this Agreement shall be true and correct in all material respects on and as
of (i) the date made and (ii) the Closing Date (except in the case of
representations and warranties expressly made solely with reference to a
particular date); and the Company shall have received a certificate of the
President of Unity to that effect;
(b) The Company shall have received an opinion from Cooperman Levitt
Winikoff Lester & Newman, P.C. ("Cooperman Levitt"), counsel to Unity, dated
the Closing Date, substantially in the form set forth in Exhibit III hereto;
(c) The Company shall have received "comfort" letters from Arthur
Andersen LLP, independent public accountants for Unity, dated the date of
the Proxy Statement/Prospectus, the effective date of the Registration
Statement and the Closing Date (or such other date reasonably acceptable to
the Company) with respect to certain financial statements and other
financial information included in the Registration Statement in customary
form;
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(d) The Company shall have received an opinion of Heller Horowitz &
Feit, counsel to the Company, or of tax counsel to the Company, dated the
Effective Time, to the effect that (i) the Merger will be treated for
federal income tax purposes as a reorganization within the meaning of
Section 368(a) of the Code; (ii) each of Unity and the Company will be a
party to the reorganization within the meaning of Section 368(b) of the
Code; (iii) no gain or loss will be recognized by the Company as a result of
the Merger; and (iv) no gain or loss will be recognized by a stockholder of
the Company as a result of the Merger with respect to Company Common Stock
converted solely into Unity Common Stock;
(e) Since the date of this Agreement there shall not have been any
Material Adverse Effect with respect to Unity, the likelihood of which was
not previously disclosed to the Company by the Unity;
(f) The Company shall have received from Unity an executed original of a
certificate substantially in the form of the attached Exhibit IV;
(g) Unity shall have furnished to the Company such additional
certificates, opinions and other documents as the Company may have
reasonably requested as to any of the conditions set forth in this Section
8.2;
(h) At the Effective Time, Unity will have at least an aggregate of
$6,000,000 in cash or cash equivalents before giving effect to (i) any
payment or accrual in excess of $50,000 on account of the fees and expenses
of the investment banking firm referenced in Section 8.3(d), but after
giving effect to the payment or accrual on or prior to the Effective Time of
all expenses incurred by Unity, including, but not limited to, the fees and
expenses of Unity's attorneys and accountants, in connection with the
transactions contemplated by this Agreement, and (ii) any payments required
to be paid to Unity's stockholders exercising their rights, contained in
Unity's Certificate of Incorporation, as amended, to requested conversion of
their respective shares of Unity Common Stock into cash (the "CashOut
Option") should the Merger be consummated.
(i) The holders of no greater than 20% in interest of Unity Common Stock
held by non-affiliated stockholders of Unity shall exercise the CashOut
Option;
(j) The Company shall have received a separate letter agreement,
addressed to Unity, signed by each officer, director and principal
stockholder of Unity to the effect set forth in Schedule 8.2(j) hereto;
(k) All proceedings in connection with the Merger and the other
transactions contemplated by this Agreement and all agreements, instruments,
certificates, and other documents delivered to the Company by or on behalf
of Unity pursuant to this Agreement shall be reasonably satisfactory to the
Company and its counsel.
SECTION 8.3 CONDITIONS TO OBLIGATIONS OF UNITY TO EFFECT THE
MERGER. Unless waived by Unity, the obligations of Unity to effect the Merger
shall also be subject to the fulfillment at or prior to the Closing Date of the
additional following conditions:
(a) The Company shall have performed in all material respects its
agreements contained in this Agreement required to be performed on or prior
to the Closing Date and the representations and warranties of the Company
contained in this Agreement shall be true and correct in all material
respects on and as of (i) the date made and (ii) the Closing Date (except in
the case of representations and warranties expressly made solely with
reference to a particular date); and Unity shall have received a Certificate
of the President and Chief Executive Officer or of a Vice President of the
Company to that effect;
(b) Unity shall have received an opinion from Heller, Horowitz & Feit,
P.C., dated the Closing Date, substantially in the form set forth in Exhibit
V hereto;
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(c) Unity shall have received "comfort" letters from BDO Seidman, LLP,
independent certified public accountants for the Company, dated the date of
the Proxy Statement/Prospectus, the effective date of the Registration
Statement and the Closing Date (or such other date reasonably acceptable to
Unity) with respect to certain financial statements and other financial
information included in the Registration Statement in customary form;
(d) Unity shall have received an opinion of Gilford Securities Corp. or
another recognized investment banking firm, dated as of the Closing Date,
that the Exchange Ratio is fair, from a financial point of view, to Unity's
public stockholders;
(e) Unity shall have received an opinion of Cooperman Levitt, dated the
Effective Time, to the effect that (i) the Merger will be treated for
federal income tax purposes as a reorganization within the meaning of
Section 368(a) of the Code; (ii) each of Unity and the Company will be a
party to the reorganization within the meaning of Section 368(b) of the
Code; (iii) no gain or loss will be recognized by Unity as a result of the
Merger; and (iv) no gain or loss will be recognized by a stockholder of
Unity as a result of the Merger;
(f) The Company shall have entered into one or more agreements with
nationally recognized entertainment or pre-recorded music companies which
call for the development and commercial exploitation of the Company's 3D
Internet technology.
(g) The Company shall have furnished to Unity such additional
certificates, opinions and other documents as Unity may have reasonably
requested as to any of the conditions set forth in this Section 8.3;
(h) Since the date of this Agreement there shall not have been any
Material Adverse Effect with respect to the Company, the likelihood of which
was not previously disclosed to the Unity by the Company;
(i) Unity shall have received from the Company an executed original of a
certificate substantially in the form of the attached Exhibit VI;
(j) Unity shall have received a separate letter agreement signed by each
officer, director, principal stockholder and consultant to the Company and
each trust (if any) holding shares of Company Common Stock for the benefit
of the children of any of said persons to the effect set forth in Schedule
8.3(j) hereto;
(k) All proceedings in connection with the Merger and the other
transactions contemplated by this Agreement and all agreements, instruments,
certificates, and other documents delivered to Unity by or on behalf of the
Company pursuant to this Agreement shall be reasonably satisfactory to Unity
and its counsel.
ARTICLE IX
TERMINATION, AMENDMENT AND WAIVER
SECTION 9.1 TERMINATION. This Agreement may be terminated at any time
prior to the Closing Date, whether before or after approval by the stockholders
of the Company and/or Unity:
(a) by mutual consent in writing of Unity and the Company;
(b) unilaterally upon written notice by Unity to the Company upon the
occurrence of a Material Adverse Effect with respect to the Company, the
likelihood of which was not previously disclosed to Unity in writing by the
Company prior to the date of this Agreement, (a "Company Adverse Change");
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(c) unilaterally upon written notice by the Company to Unity upon the
occurrence of a Material Adverse Effect with respect to Unity, the
likelihood of which was not previously disclosed to the Company in writing
by Unity prior to the date of this Agreement, (a "Unity Adverse Change");
(d) unilaterally upon written notice by Unity to the Company in the
event of the Company's material breach when made of any material
representation or warranty of the Company contained in this Agreement, or
the Company's willful failure to comply with or satisfy any material
covenant or condition of Company contained in this Agreement, or if the
Company fails to obtain the Company Stockholders' Approval;
(e) unilaterally upon written notice by the Company to Unity in the
event of Unity's material breach when made of any material representation or
warranty contained in this Agreement, or Unity's willful failure to comply
with or satisfy any material covenant or condition of Unity contained in
this Agreement, or if Unity fails to obtain the Unity Stockholders'
Approval;
(f) unilaterally upon written notice by either Unity or the Company to
the other if the Merger is not consummated for any reason not specified or
referred to in the preceding provisions of this Section 9.1 by the close of
business on September 30, 1998.
SECTION 9.2 EFFECT OF TERMINATION. In the event of termination of this
Agreement by either Unity or the Company, as provided in Section 9.1, this
Agreement shall forthwith become void and there shall be no further obligation
on the part of either the Company or Unity (except as set forth in the
penultimate sentence of Section 7.1 (with respect to confidential and non-public
information), and Sections 9.5, which shall survive such termination). Nothing
in this Section 9.2 shall relieve any party from liability for any breach of
this Agreement.
SECTION 9.3 AMENDMENT. This Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties hereto and in
compliance with applicable law.
SECTION 9.4 WAIVER. At any time prior to the Effective Time, the parties
hereto may (i) extend the time for the performance of any of the obligations or
other acts of the other parties hereto, (ii) waive any inaccuracies in the
representations and warranties contained herein or in any document delivered
pursuant thereto and (iii) waive compliance with any of the agreements or
conditions contained herein. Any agreement on the part of a party hereto to any
such extension or waiver shall be valid only if set forth in an instrument in
writing signed on behalf of such party.
SECTION 9.5 EXPENSES. Whether or not the Merger is consummated, all costs
and expenses incurred in connection with this Agreement and the transactions
contemplated hereby shall be paid by the party incurring such costs and
expenses.
ARTICLE X
GENERAL PROVISIONS
SECTION 10.1 NON-SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The
respective representations, warranties, obligations, agreements, and promises of
the parties contained in this Agreement and in any schedule, certificate, or
other document delivered pursuant to this Agreement, other than those that by
their terms are to be performed or otherwise are to apply after the Effective
Time, shall terminate as of, and shall not survive, the Effective Time.
SECTION 10.2 NOTICES. All notices and other communications hereunder shall
be in writing and shall be deemed given if delivered personally (effective upon
delivery), mailed by registered or certified mail (return receipt requested)
(effective three business days after mailing), sent by a reputable overnight
courier service for next business day delivery (effective the next business day)
or sent via facsimile
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(effective upon receipt of the telecopy in complete, readable form) to the
parties at the following addresses (or at such other address for a party as
shall be specified by like notice):
(a) If to Unity to:
Unity First Acquisition Corp.
245 Fifth Avenue
New York, New York 10016
Attention: Lawrence Burstein, President
FAX: (212) 582-3293
with a copy to:
Cooperman Levitt Winikoff Lester & Newman, P.C.
800 Third Avenue
New York, New York 10022
Attention: Ira I. Roxland, Esq.
FAX: (212) 755-2839
(b) If to the Company, to:
Worlds Inc.
15 Union Wharf
Boston, Massachusetts 02109
Attention: Thomas Kidrin, President
FAX: (617) 722-9944
with a copy to:
Heller Horowitz & Feit
292 Madison Avenue
New York, New York 10017
Attention: Irving Rothstein, Esq.
FAX: (212) 696-9459
SECTION 10.3 INTERPRETATION. The headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
SECTION 10.4 MISCELLANEOUS. This Agreement (including the documents and
instruments referred to herein) (i) constitutes the entire agreement and
supersedes all other prior agreements and understandings, both written and oral,
among the parties, or any of them, with respect to the subject matter hereof
(including without limitation that certain letter of intent dated May , 1998
between Unity and the Company; (ii) shall not be assigned by operation of law or
otherwise, and any attempt to do so shall be void; and (iii) shall be governed
in all respects, including validity, interpretation and effect, by the laws of
the State of New York (without giving effect to the provisions thereof relating
to conflicts of law).
SECTION 10.5 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of which
shall constitute one and the same agreement. In pleading or proving this
Agreement, it shall not be necessary to produce or account for more than one
fully executed original.
SECTION 10.6 PARTIES IN INTEREST. This Agreement shall be binding upon and
inure solely to the benefit of each party hereto, and nothing in this Agreement,
express or implied, is intended to confer upon any other person any rights or
remedies of any nature whatsoever under or by reason of this Agreement.
SECTION 10.7 CAPTIONS. The captions of sections and subsections of this
Agreement are for reference only, and shall not affect the interpretation or
construction of this Agreement.
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IN WITNESS WHEREOF, Unity and the Company have caused this Agreement to be
signed by their respective officers thereunto duly authorized as of the date
first written above.
<TABLE>
<S> <C> <C>
UNITY FIRST ACQUISITION CORP.
BY: /S/ LAWRENCE BURSTEIN
-----------------------------------------
Name: Lawrence Burstein
Title: President
WORLDS INC.
By: /s/ THOMAS KIDRIN
-----------------------------------------
Name: Thomas Kidrin
Title: President
</TABLE>
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EXHIBIT B
July 23, 1998
Unity First Acquisition Corp.
245 Fifth Avenue, Suite 1500
New York, NY 10015
You have requested our opinion as investment bankers as to the fairness,
from a financial point of view, to the public shareholders of Unity First
Acquisition Corp. ("Unity" or the "Company"), of the Consideration (as
hereinafter defined) to be paid in the Transaction (as hereinafter defined) with
Worlds, Inc. ("Worlds"). For the purpose of this opinion, the "Transaction"
means the transaction described below pursuant to that certain Agreement and
Plan of Merger and Reorganization between the Company and Worlds dated as of
June 25, 1998 (the "Agreement").
As more specifically set forth in the Agreement and subject to certain terms
and conditions thereof and pursuant thereto, the Company will exchange
approximately 0.374 shares of its common stock for each share of Worlds common
stock (the "Exchange Ratio"). As a result of the Transaction, the name of the
Company will be changed to Worlds, Inc. and Worlds will merge with and into
Unity. The former shareholders of Worlds will own approximately 77.3% of the
outstanding common stock of the merged entity.
In the ordinary course of its services, Gilford Securities Incorporated
("Gilford") is regularly engaged in the valuation and pricing of businesses and
their securities and in advising corporate securities issuers on related
matters.
In arriving at our opinion, Gilford has, among other things:
1. Reviewed the Company's financial statements for the period from
inception, May 30, 1996, through April 30, 1998, certain publicly
available filings with the Securities and Exchange Commission and
certain other relevant financial and operating data of the Company;
2. Reviewed the financial statements of Worlds (for the period April 8,
1997 [inception] through March 31, 1998) and its predecessor (for the
period April 26, 1994 [inception] through December 3, 1997), certain
publicly available filings with the Securities and Exchange Commission
and certain other relevant financial and operating data of Worlds;
3. Held meetings and discussions with management and senior personnel of
the Company, and Worlds, respectively, to discuss the business,
operations, historical financial results and future prospects of the
Company and Worlds, respectively including their analysis of the
strategic and operating benefits anticipated from the Transaction;
4. Reviewed financial projections furnished to us by the management of the
Company and Worlds, including among other things, the capital structure,
sales, net income, cash flow, capital requirements and other data of the
Company and Worlds as we deemed relevant;
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5. Reviewed the results of our analyses of the Company and Worlds in
comparison with other similar publicly trade companies;
6. Reviewed the historical prices and trading activity of the securities of
the Company from November 21, 1996 to June 24, 1998 and compared those
trading histories with those of other companies which we deemed
relevant; and
7. Analyzed the potential pro forma financial effects of the Transaction as
it relates to the Company and Worlds.
On July 22, 1998, the closing price of the common stock of the Company in
the last transaction reported by the Nasdaq Bulletin Board was $4.875 per share.
In arriving at our opinion, we have not made, obtained or assumed any
responsibility for any independent evaluation of any such properties and
facilities or of the assets and liabilities (contingent or otherwise) of the
Company or Worlds, nor have we made any independent evaluation of the prospects,
ongoing viability or any solvency analysis of the Company or Worlds. In
rendering our opinion, we relied upon the Company's and World's respective
managements with respect to the accuracy and completeness of the financial and
other information furnished to us as described above and have not assumed any
responsibility for independent verification of such information. We have assumed
that the financial projections prepared and provided to us by the respective
managements of the Company and Worlds represent the best current judgment of
these managements as to the future financial condition and results of operations
of the Company and Worlds, respectively, and assumed that the projections have
been reasonably prepared based upon such current judgment. We further relied
upon assurances of the managements of both Unity and Worlds that they are not
aware of any fact that would make the information they provided to us incomplete
or misleading.
We have also taken into account our assessment of general economic, market,
and financial conditions and our experience in similar transactions, as well as
our experience in securities valuation in general. Our opinion necessarily is
based upon regulatory, economic, market and other conditions as they exist on,
and the information made available to us as of, the date hereof. Subsequent
developments may affect this opinion, and we do not have any obligation to
update, revise or reaffirm this opinion. With respect to all legal matters
relating to the Company, Worlds and the Transaction, we have relied on the
advice of legal counsel to the Company and to Worlds, as applicable. With
respect to tax treatment relating to the Transaction, we have relied, with your
permission, on the advice of tax experts to the Company.
This opinion does not constitute a recommendation of the Transaction over
any other alternative transactions which may be available to the Company and
does not address the underlying business decision of the Board of Directors of
the Company to proceed with or effect the Transaction. This opinion shall not
constitute a recommendation to any security holder to vote in favor of the
Transaction. We are not expressing any opinion as to what the value of the
surviving company's common stock actually will be following the Transaction, or
the price at which such common stock will trade prior or subsequent to the
Transaction. This opinion and the contents hereof may not be published,
disseminated, referred to, summarized, described or otherwise used, nor shall
any public reference to Gilford be made, without our prior written consent,
provided that this opinion and the contents hereof may be included in its
entirety in any registration statement or proxy statement with respect to the
Transaction, provided further that any description of or reference to Gilford or
summary of this opinion and the contents hereof will be in a form reasonably
acceptable to Gilford and its counsel. Furthermore, our consent to such
inclusion of our opinion shall in no way be deemed an admission or
acknowledgment by Gilford that we are within the class of persons whose consent
is required by Section 7 of the Securities Act of 1933, as amended, or the rules
and regulations promulgated thereunder.
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We have acted as financial advisor to the Board of Directors of the Company
in connection with the Transaction and will receive a fee for rendering this
opinion, and an additional fee is payable upon approval of the Transaction.
On the basis of our review and analysis, as described above, it is our
opinion as investment bankers that, as of the date hereof, the Exchange Ratio is
fair, from a financial point of view, to the public shareholders of Unity.
Very truly yours,
Gilford Securities Incorporated
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EXHIBIT C
SECTION 262 OF THE GENERAL CORPORATION LAW OF THE STATE OF DELAWARE
SECTION262 APPRAISAL RIGHTS
(a) Any stockholder of a corporation of this State who holds shares of stock
on the date of the making of a demand pursuant to subsection (d) of this section
with respect to such shares, who continuously holds such shares through the
effective date of the merger or consolidation, who has otherwise complied with
subsection (d) of this section and who has neither voted in favor of the merger
or consolidation nor consented thereto in writing pursuant to Section228 of this
title shall be entitled to an appraisal by the Court of Chancery of the fair
value of his shares of stock under the circumstances described in subsections
(b) and (c) of this section. As used in this section, the word "stockholder"
means a holder of record of stock in a stock corporation and also a member of
record of a non-stock corporation; the words "stock" and "share" mean and
include what is ordinarily meant by those words and also membership or
membership interest of a member of a non-stock corporation.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to Section251, Section252, Section254, Section257, Section258,
Section263 or Section264 of this title:
(1) Provided, however, that no appraisal rights under this section shall
be available for the shares of any class or series of stock which, at the
record date fixed to determine the stockholders entitled to receive notice
of and to vote at the meeting of stockholders to act upon the agreement of
merger or consolidation, were either (i) listed on a national securities
exchange or designated as a national market system security on an
inter-dealer quotation system by the National Association of Securities
Dealers, Inc. or (ii) held of record by more than 2,000 stockholders; and
further provided that no appraisal rights shall be available for any shares
of stock of the constituent corporation surviving a merger if the merger did
not require for its approval the vote of the stockholders of the surviving
corporation as provided in subsection (f) of Section251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required by
the terms of an agreement of merger or consolidation pursuant to
SectionSection251, 252, 254, 257, 258, 263 and 264 of this title to accept
for such stock anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation;
b. Shares of stock of any other corporation which at the effective
date of the merger or consolidation will be either listed on a national
securities exchange or designated as a national market system security on
an inter-dealer quotation system by the National Association of
Securities Dealers, Inc. or held of record by more than 2,000
stockholders;
c. Cash in lieu of fractional shares of the corporations described in
the foregoing subparagraphs a. and b. of this paragraph; or
d. Any combination of the shares of stock and cash in lieu of
fractional shares described in the foregoing subparagraphs a., b. and c.
of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under Section253 of this title is not owned by
the parent corporation immediately prior to the merger, appraisal rights
shall be available for the shares of the subsidiary Delaware corporation.
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(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting,
shall notify each of its stockholders who was such on the record date for
such meeting with respect to shares for which appraisal rights are available
pursuant to subsection (b) or (c) hereof that appraisal rights are available
for any or all of the shares of the constituent corporations, and shall
include in such notice a copy of this section. Each stockholder electing to
demand the appraisal of his shares shall deliver to the corporation, before
the taking of the vote on the merger or consolidation, a written demand for
appraisal of his shares. Such demand will be sufficient if it reasonably
informs the corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of his shares. A proxy
or vote against the merger or consolidation shall not constitute such a
demand. A stockholder electing to take such action must do so by a separate
written demand as herein provided. Within 10 days after the effective date
of such merger or consolidation, the surviving or resulting corporation
shall notify each stockholder of each constituent corporation who has
complied with this subsection and has not voted in favor of or consented to
the merger or consolidation of the date that the merger or consolidation has
become effective; or
(2) If the merger or consolidation was approved pursuant to Section228
or 253 of this title, the surviving or resulting corporation, either before
the effective date of the merger or consolidation within 10 days thereafter,
shall notify each of the stockholders entitled to appraisal rights of tile
effective date of the merger or consolidation and that appraisal rights are
available for any or all of the shares of the constituent corporation, and
shall include in such notice a copy of this section. The notice shall be
sent by certified or registered mail, return receipt requested, addressed to
tile stockholder at his address as it appears on the records of the
corporation. Any stockholder entitled to appraisal rights may, within 20
days after the date of mailing of the notice, demand in writing from the
surviving or resulting corporation the appraisal of his shares. Such demand
will be sufficient if it reasonably informs the corporation of the identity
of the stockholder and that the stockholder intends thereby to demand the
appraisal of his shares.
(e) Within 120 days after the effective date of the merger or consolidation,
the surviving or resulting corporation or any stockholder who has complied with
subsections (a) and (d) hereof and who is otherwise entitled to appraisal
rights, may file a petition in the Court of Chancery demanding a determination
of the value of the stock of all such stockholders. Notwithstanding the
foregoing, at any time within 60 days after the effective date of the merger or
consolidation, any stockholder shall have the right to withdraw his demand for
appraisal and to accept the terms offered upon the merger or consolidation.
Within 120 days after the effective date of the merger or consolidation, any
stockholder who has complied with the requirements of subsections (a) and (d)
hereof, upon written request, shall be entitled to receive from the corporation
surviving the merger or resulting from the consolidation a statement setting
forth the aggregate number of shares not voted in favor of the merger or
consolidation and with respect to which demands for appraisal have been received
and the aggregate number of holders of such shares. Such written statement shall
be mailed to the stockholder within 10 days after his written request for such a
statement is received by the surviving or resulting corporation or within 10
days after expiration of the period for delivery of demands for appraisal under
subsection (d) hereof, whichever is later.
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(f) Upon the filing of any such petition by a stockholder, service of a copy
thereof shall be made upon the surviving or resulting corporation, which shall
within 20 days after such service file in the office of the Register in Chancery
in which the petition was filed a duly verified list containing the names and
addresses of all stockholders who have demanded payment for their shares and
with whom agreements its to the value of their shares have not been reached by
the surviving or resulting corporation. If the petition shall be filed by the
surviving or resulting corporation, the petition shall be accompanied by such a
duly verified list. The Register in Chancery, if so ordered by the Court, shall
give notice of the time and place fixed for the hearing of such petition by
registered or certified mail to the surviving or resulting corporation and to
the stockholders shown on the list at the addresses therein stated. Such notice
shall also be given by 1 or more publications at least 1 week before the day of
the hearing, in a newspaper, of general circulation published in the City of
Wilmington, Delaware or such publication as the Court deems advisable. The forms
of the notices by mail and by publication shall be approved by the Court, and
the costs thereof shall be borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount deter-mined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted his
certificates of stock to the Register in Chancery, if such is required, may
participate fully in all proceedings until it is finally determined that he is
not entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective
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date of the merger or consolidation); provided, however, that if no petition for
an appraisal shall be filed within the time provided in subsection (e) of this
section, or if such stockholder shall deliver to the surviving or resulting
corporation a written withdrawal of his demand for an appraisal and an
acceptance of the merger or consolidation, either within 60 days after the
effective date of the merger or consolidation as provided in subsection (e) of
this section or thereafter with the written approval of the corporation, then
the right of such stockholder to an appraisal shall cease. Notwithstanding the
foregoing, no appraisal proceeding in the Court of Chancery shall be dismissed
as to any stockholder without the approval of the Court, and such approval may
be conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the shares
of such objecting stockholders would have been converted had they assented to
the merger or consolidation shall have the status of authorized and unissued
shares of the surviving or resulting corporation.
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EXHIBIT D
SECTION 14A:11 OF THE NEW JERSEY BUSINESS CORPORATION ACT
14A:11-1 RIGHT OF SHAREHOLDERS TO DISSENT
1) Any shareholder of a domestic corporation shall have the right to dissent
from any of the following corporate actions
(a) Any plan of merger or consolidation to which the corporation is a
party, provided that, unless the certificate of incorporation otherwise
provides
(i) a shareholder shall not have the right to dissent from any plan
of merger or consolidation with respect to shares
(A) of a class or series which is listed on a national securities
exchange or is held of record by not less than 1,000 holders on the
record date fixed to determine the shareholders entitled to vote upon
the plan of merger or consolidation; or
(B) for which, pursuant to the plan of merger or consolidation,
he will receive (x) cash, (y) shares, obligations or other securities
which, upon consummation of the merger or consolidation, will either
be listed on a national securities exchange or held of record by not
less than 1,000 holders, or (z) cash and such securities;
(ii) a shareholder of a surviving corporation shall not have the
right to dissent from a plan of merger, if the merger did not require for
its approval the vote of such shareholders as provided in section
14A:10-3(4), 14A:10-7(2) or 14A:10-7(4); or
(b) Any sale, lease, exchange or other disposition of all or
substantially all of the assets of a corporation not in the usual or regular
course of business as conducted by such corporation, other than a transfer
pursuant to subsection (4) of N.J.S. 14A:10-11, provided that, unless the
certificate of incorporation otherwise provides, the shareholder shall not
have the right to dissent
(i) with respect to shares of a class or series which, at the record
date fixed to determine the shareholders entitled to vote upon such
transaction, is listed on a national securities exchange or is held of
record by not less than 1,000 holders; or
(ii) from a transaction pursuant to a plan of dissolution of the
corporation which provides for distribution of substantially all of its
net assets to shareholders in accordance with their respective interests
within one year after the date of such transaction, where such
transaction is wholly for
(A) cash; or
(B) shares, obligations or other securities which, upon
consummation of the plan of dissolution will either be listed on a
national securities exchange or held of record by not less than 1,000
holders; or
(C) cash and such securities; or
(iii) from a sale pursuant to an order of a court having
jurisdiction.
(2) Any shareholder of a domestic corporation shall have the right to
dissent with respect to any shares owned by him which are to be acquired
pursuant to section 14A:10-9.
(3) A shareholder may not dissent as to less than all of the shares owned
beneficially by him and with respect to which a right of dissent exists. A
nominee or fiduciary may not dissent on behalf of any beneficial owner as to
less than all of the shares of such owner with respect to which the right of
dissent exists.
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(4) A corporation may provide in its certificate of incorporation that
holders of all its shares, or of a particular class or series thereof, shall
have the right to dissent from specified corporate actions in addition to those
enumerated in subsection 14A:11-1(1), in which case the exercise of such right
of dissent shall be governed by the provisions of this Chapter.
14A:11-2 NOTICE OF DISSENT; DEMAND FOR PAYMENT; ENDORSEMENT OF CERTIFICATES
(1) Whenever a vote is to be taken, either at a meeting of shareholders or
upon written consents in lieu of a meeting pursuant to section 14A:5-6, upon a
proposed corporate action from which a shareholder may dissent under section
14A:11-1, any shareholder electing to dissent from such action shall file with
the corporation before the taking of the vote of the shareholders on such
corporate action, or within the time specified in paragraph 14A:5-6(2)(b) or
14A:5-6(2)(c), as the case may be, if no meeting of shareholders is to be held,
a written notice of such dissent stating that he intends to demand payment from
his shares if the action is taken.
(2) Within 10 days after the date on which such corporate action takes
effect, the corporation, or, in the case of a merger or consolidation, the
surviving or new corporation, shall give written notice of the effective date of
such corporate action, by certified mail to each shareholder who filed written
notice of dissent pursuant to subsection 14A:11-2(1), except any who voted for
or consented in writing to the proposed action.
(3) Within 20 days after the mailing of such notice, any shareholder to whom
the corporation was required to give such notice and who has filed a written
notice of dissent pursuant to this section may make written demand on the
corporation, or, in the case of a merger or consolidation, on the surviving or
new corporation, for the payment of the fair value of his shares.
(4) Whenever a corporation is to be merged pursuant to section 14A:10-5.1 or
subsection 14A:10-7(4) and shareholder approval is not required under subsection
14A:10-5.1(5) and 14A:10-5.1(6), a shareholder who has the right to dissent
pursuant to section 14A:11-1 may, not later than 20 days after a copy or summary
of the plan of such merger and the statement required by subsection
14A:10-5.1(2) is mailed to such shareholder, make written demand on the
corporation or on the surviving corporation, for the payment of the fair value
of his shares.
(5) Whenever all the shares, or all the shares of a class or series, are to
be acquired by another corporation pursuant to section 14A:10-9, a shareholder
of the corporation whose shares are to be acquired may, not later than 20 days
after the mailing of notice by the acquiring corporation pursuant to paragraph
14A:10-9(3)(b), make written demand on the acquiring corporation for the payment
of the fair value of his shares.
(6) Not later than 20 days after demanding payment for his shares pursuant
to this section, the shareholder shall submit the certificate or certificates
representing his shares to the corporation upon which such demand has been made
for notation thereon that such demand has been made, whereupon such certificate
or certificates shall be returned to him. If shares represented by a certificate
on which notation has been made shall be transferred, each new certificate
issued therefor shall bear similar notation, together with the name of the
original dissenting holder of such shares, and a transferee of such shares shall
acquire by such transfer no rights in the corporation other than those which the
original dissenting shareholder had after making a demand for payment of the
fair value thereof.
(7) Every notice or other communication required to be given or made by a
corporation to any shareholder pursuant to this Chapter shall inform such
shareholder of all dates prior to which action must be taken by such shareholder
in order to perfect his rights as a dissenting shareholder under this Chapter.
D-2
<PAGE>
14A:11-3. "DISSENTING SHAREHOLDER" DEFINED; DATE FOR DETERMINATION OF FAIR VALUE
(1) A shareholder who has made demand for the payment of his shares in the
manner prescribed by subsection 14A:11-2(3), 14A:11-2(4) or 14A:11-2(5) is
hereafter in this Chapter referred to as a "dissenting shareholder."
(2) Upon making such demand, the dissenting shareholder shall cease to have
any of the rights of a shareholder except the right to be paid the fair value of
his shares and any other rights of a dissenting shareholder under this Chapter.
(3) "Fair value" as used in this Chapter shall be determined
(a) As of the day prior to the day of the meeting of shareholders at
which the proposed action was approved or as of the day prior to the day
specified by the corporation for the tabulation of consents to such action
if no meeting of shareholders was held; or
(b) In the case of a merger pursuant to section 14A:10-5.1 or subsection
14A:10-7(4) in which shareholder approval is not required, as of the day
prior to the day on which the board of directors approved the plan of
merger; or
(c) In the case of an acquisition of all the shares or all the shares of
a class or series by another corporation pursuant to section 14A:10-9, as of
the day prior to the day on which the board of directors of the acquiring
corporation authorized the acquisition, or, if a shareholder vote was taken
pursuant to section 14A:10-12, as of the day provided in paragraph
14A:11-3(3)(a).
In all cases, "fair value" shall exclude any appreciation or depreciation
resulting from the proposed action.
14A:11-4. TERMINATION OF RIGHT OF SHAREHOLDER TO BE PAID THE FAIR VALUE OF HIS
SHARES
(1) The right of a dissenting shareholder to be paid the fair value of his
shares under this Chapter shall cease if
(a) he has failed to present his certificates for notation as provided
by subsection 14A:11-2(6), unless a court having jurisdiction, for good and
sufficient cause shown, shall otherwise direct;
(b) his demand for payment is withdrawn with the written consent of the
corporation;
(c) the fair value of the shares is not agreed upon as provided in this
Chapter and no action for the determination of fair value by the Superior
Court is commenced within the time provided in this Chapter;
(d) the Superior Court determines that the shareholder is not entitled
to payment for his shares;
(e) the proposed corporate action is abandoned or rescinded; or
(f) a court having jurisdiction permanently enjoins or sets aside the
corporate action.
(2) In any case provided for in subsection 14A:11-4(1), the rights of the
dissenting shareholder as a shareholder shall be reinstated as of the date of
the making of a demand for payment pursuant to subsections 14A:11-2(3),
14A:11-2(4) or 14A:11-2(5) without prejudice to any corporate action which has
taken place during the interim period. In such event, he shall be entitled to
any intervening preemptive rights and the right to payment of any intervening
dividend or other distribution, or, if any such rights have expired or any such
dividend or distribution other than in cash has been completed, in lieu thereof,
at the election of the board, the fair value thereof in cash as of the time of
such expiration or completion.
D-3
<PAGE>
14A:11-5. RIGHTS OF DISSENTING SHAREHOLDER
(1) A dissenting shareholder may not withdraw his demand for payment of the
fair value of his shares without the written consent of the corporation.
(2) The enforcement by a dissenting shareholder of his right to receive
payment for his shares shall exclude the enforcement by such dissenting
shareholder of any other right to which he might otherwise be entitled by virtue
of share ownership, except as provided in subsection 14A:11-4(2) and except that
this subsection shall not exclude the right of such dissenting shareholder to
bring or maintain an appropriate action to obtain relief on the ground that such
corporate action will be or is ultra vires, unlawful or fraudulent as to such
dissenting shareholder.
14A:11-6. DETERMINATION OF FAIR VALUE BY AGREEMENT.
(1) Not later than 10 days after the expiration of the period within which
shareholders may make written demand to be paid the fair value of their shares,
the corporation upon which such demand has been made pursuant to subsections
14A:11-2(3), 14A:11-2(4) or 14A:11-2(5) shall mail to each dissenting
shareholder the balance sheet and the surplus statement of the corporation whose
shares he holds, as of the latest available date which shall not be earlier than
12 months prior to the making of such offer and a profit and loss statement or
statements for not less than a 12-month period ended on the date of such balance
sheet or, if the corporation was not in existence for such 12-month period, for
the portion thereof during which it was in existence. The corporation may
accompany such mailing with a written offer to pay each dissenting shareholder
for his shares at a specified price deemed by such corporation to be the fair
value thereof. Such offer shall be made at the same price per share to all
dissenting shareholders of the same class, or, if divided into series, of the
same series.
(2) If, not later than 30 days after the expiration of the 10-day period
limited by subsection 14A:11-6(1), the fair value of the shares is agreed upon
between any dissenting shareholder and the corporation, payment therefor shall
be made upon surrender of the certificate or certificates representing such
shares.
14A:11-7. PROCEDURE ON FAILURE TO AGREE UPON FAIR VALUE; COMMENCEMENT OF ACTION
TO DETERMINE FAIR VALUE.
(1) If the fair value of the shares is not agreed upon within the 30-day
period limited by subsection 14A:11-6(2), the dissenting shareholder may serve
upon the corporation upon which such demand has been made pursuant to
subsections 14A:11-2(3), 14A:11-2(4) or 14A:11-2(5) a written demand that it
commence an action in the Superior Court for the determination of the fair value
of the shares. Such demand shall be served not later than 30-days after the
expiration of the 30-day period so limited and such action shall be commenced by
the corporation not later than 30 days after receipt by the corporation of such
demand, but nothing herein shall prevent the corporation from commencing such
action at any earlier time.
(2) If a corporation fails to commence the action as provided in subsection
14A:11-7(1), a dissenting shareholder may do so in the name of the corporation,
not later than 60 days after the expiration of the time limited by subsection
14A:11-7(1) in which the corporation may commence such an action.
14A:11-8. ACTION TO DETERMINE FAIR VALUE; JURISDICTION OF COURT; APPOINTMENT OF
APPRAISER.
In any action to determine the fair value of shares pursuant to this
Chapter:
(a) The Superior Court shall have jurisdiction and may proceed in the
action in a summary manner or otherwise;
D-4
<PAGE>
(b) All dissenting shareholders, wherever residing, except those who
have agreed with the corporation upon the price to be paid for their shares,
shall be made parties thereto as an action against their shares quasi in
rem;
(c) The court in its discretion may appoint an appraiser to receive
evidence and report to the court on the question of fair value, who shall
have such power and authority as shall be specified in the order of his
appointment; and
(d) The court shall render judgment against the corporation and in favor
of each shareholder who is a party to the action for the amount of the fair
value of his shares.
14A:11-9. JUDGMENT IN ACTION TO DETERMINE FAIR VALUE.
(1) A judgment for the payment of the fair value of shares shall be payable
upon surrender to the corporation of the certificate or certificates
representing such shares.
(2) The judgment shall include an allowance for interest at such rate as the
court finds to be equitable, from the date of the dissenting shareholder's
demand for payment under subsections 14A:11-2(3), 14A:11-2(4) or 14A:11-2(5) to
the day of payment. If the court finds that the refusal of any dissenting
shareholder to accept any offer of payment, made by the corporation under
section 14A:11-6, was arbitrary, vexatious or otherwise not in good faith, no
interest shall be allowed to him.
14A:11-10. COSTS AND EXPENSES OF ACTION.
The costs and expenses of bringing an action pursuant to section 14A:11-8
shall be determined by the court and shall be apportioned and assessed as the
court may find equitable upon the parties or any of them. Such expenses shall
include reasonable compensation for and reasonable expenses of the appraiser, if
any, but shall exclude the fees and expenses of counsel for and experts employed
by any party; but if the court finds that the offer of payment made by the
corporation under section 14A:11-6 was not made in good faith, or if no such
offer was made, the court in its discretion may award to any dissenting
shareholder who is a party to the action reasonable fees and expenses of his
counsel and of any experts employed by the dissenting shareholder.
14A:11-11. DISPOSITION OF SHARES ACQUIRED BY CORPORATION.
(1) The shares of a dissenting shareholder in a transaction described in
subsection 14A:11-1(1) shall become reacquired by the corporation which issued
them or by the surviving corporation, as the case may be, upon the payment of
the fair value of shares.
(2) (Deleted by amendment, P.L. 1995, c. 279.)
(3) In an acquisition of shares pursuant to section 14A:10-9 or section
14A:10-13, the shares of a dissenting shareholder shall become the property of
the acquiring corporation upon the payment by the acquiring corporation of the
fair value of such shares. Such payment may be made, with the consent of the
acquiring corporation, by the corporation which issued the shares, in which case
the shares so paid for shall become reacquired by the corporation which issued
them and shall be canceled.
D-5
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article Sixth of the Restated Certificate of Incorporation of Unity First
Acquisition Corp. (the "Registrant") provides with respect to the
indemnification of directors and officers that the Registrant shall indemnify to
the fullest extent permitted by Sections 102(b)(7) and 145 of the Delaware
General Corporation Law, as amended from time to time, each person that such
Sections grant the Registrant the power to indemnify. Article Sixth of the
Restated Certificate of Incorporation of the Registrant also provides that no
director shall be liable to the Registrant or any of its stockholders for
monetary damages for breach of fiduciary duty as a director, except with respect
to (1) a breach of the director's duty of loyalty to the Registrant or its
stockholders, (2) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (3) liability under
Section 174 of the Delaware General Corporation Law or (4) a transaction from
which the director derived an improper personal benefit, it being the intention
of the foregoing provision to eliminate the liability of the Registrant's
directors to the Registrant or its stockholders to the fullest extent permitted
by Section 102(b)(7) of Delaware General Corporation Law, as amended from time
to time.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES.
(a) Exhibits
(I) UNITY FIRST ACQUISITION CORP.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
2.1 Agreement and Plan of Merger dated as of June 25, 1998, between Registrant and Worlds Inc. (included as
Exhibit A to the Prospectus which forms a part of this Registration Statement (the "Prospectus"))
3.1 Restated Certificate of Incorporation (1)
3.2 By-Laws (1)
4.1 Form of certificate evidencing shares of Common Stock (1)
4.2 Form of certificate evidencing Class A Redeemable Warrants (1)
4.3 Form of certificate evidencing Class B Redeemable Warrants (1)
4.4 Warrant Agreement dated as of November 12, 1996 between Registrant and GKN Securities Corp. and Gaines,
Berland, Inc. (1)
4.5 Redeemable Warrant Agreement dated as of November 12, 1996 between Registrant and American Stock
Transfer & Trust Company (1)
5.1 Opinion of Cooperman Levitt Winikoff Lester & Newman, P.C. (2)
8.1 Opinion of Cooperman Levitt Winikoff Lester & Newman, P.C. with respect to certain Federal income tax
aspects attendant to the Merger (2)
10.1 1996 Stock Option Plan (1)
23.1 Consent of Arthur Andersen LLP (2)
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
23.2 Consent of Cooperman Levitt Winikoff Lester & Newman, P.C. (included in Exhibits 5.1 and 8.1) (2)
23.3 Consent of Gilford Securities Incorporated (6)
24.1 Power of Attorney (included on the Signature Page of Part II of this Registration Statement) (6)
99.1 Fairness Opinion of Gilford Securities Incorporated (included as Exhibit B to the Prospectus)
99.2 Form of Proxy (2)
</TABLE>
(II) WORLDS INC.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
2.2 Agreement and Plan of Merger dated as of June 25, 1998, between Registrant and Worlds Inc. (included as
Exhibit A to the Prospectus)
3.3 Certificate of Incorporation (3)
3.4 Certificate of Merger (4)
3.5 By-laws (4)
8.2 Opinion of Heller, Horowitz & Feit, P.C. with respect to certain Federal income tax aspects attendent to
the Merger (2)
10.2 Merger Agreement between Worlds Acquisition Corp. and Academic Computer Systems (5)
23.4 Consents of BDO Seidman, LLP (2)
23.5 Consent of Heller, Horowitz & Feit, P.C. (included in Exhibit 8.2) (2)
23.6 Consent of Michael J. Scharf (6)
23.7 Consent of Thomas Kidrin (6)
23.8 Consent of Kenneth A. Locker (6)
99.3 Form of Proxy (2)
</TABLE>
- ------------------------
(1) Incorporated by reference to an Exhibit filed as part of Registrant's
Registration Statement on Form S-1 (File No. 333-11165).
(2) Filed by Amendment to this Registration Statement.
(3) Incorporated by reference to an Exhibit filed as part of Worlds'
Registration Statement on Form S-1 (File No. 2-31876).
(4) Incorporated by reference to an Exhibit filed as part of Worlds'
Registration Statement on Form SB-2 (File No. 333-49453).
(5) Incorporated by reference to an Exhibit filed as part of Worlds' Current
Report on Form 8-K, dated December 3, 1997.
(6) Previously filed
II-2
<PAGE>
(b) Financial Statement Schedules
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or not applicable, and therefore have been omitted.
(c) Item 4(b) Information
Reference is made to (I) Unity First Acquisition Corp.--Exhibit 99.1 to this
Registration Statement.
ITEM 22. UNDERTAKINGS.
(a) Registrant hereby undertakes as follows:
(1) that prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this Registration
Statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), Registrant undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items
of the applicable form; and
(2) that every prospectus (i) that is filed pursuant to paragraph (1)
immediately preceding, or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Securities Act of 1933, as amended (the "Securities
Act"), and is used in connection with an offering of securities subject to
Rule 415, will be filed as a part of an amendment to the Registration
Statement and will not be used until such amendment is effective, and that,
for purposes of determining any liability under the Securities Act, 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.
(b) Insofar as indemnification for liabilities arising under the Securities
Act 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 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 questions 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.
(c) The Registrant hereby undertakes to supply by means of a post-effective
amendment all information concerning a transaction, and the company being
acquired involved therein, that was not the subject of and included in the
Registration Statement when it became effective.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement or amendment thereto to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of New
York, State of New York, on the 3rd day of September, 1998.
UNITY FIRST ACQUISITION CORP.
By: /s/ LAWRENCE BURSTEIN
-----------------------------------------
Lawrence Burstein
PRESIDENT
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement or amendment thereto has been signed below by the
following persons in the capacities and on the dates indicated:
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
President and Director
/s/ LAWRENCE BURSTEIN (Principal Executive,
- ------------------------------ Financial and Accounting September 3, 1998
Lawrence Burstein Officer)
* Secretary and Director
- ------------------------------ September 3, 1998
Norman Leben
* Director
- ------------------------------ September 3, 1998
John Cattier
Director
- ------------------------------
Barry Ridings
- ------------------------
* Lawrence Burstein, pursuant to Powers of Attorney (executed by each of the
officers and directors listed above and indicated as signing above, and
filed with the Securities and Exchange Commission), by signing his name
hereto does hereby sign and execute this amendment to the Registration
Statement on behalf of each of the persons referenced above.
September 3, 1998
/s/ Lawrence Burstein
----------------------------------
Lawrence Burstein
II-4
<PAGE>
(I) Unity First Acquisition Corp.
Exhibit 5.1
[LETTERHEAD OF COOPERMAN LEVITT WINIKOFF LESTER & NEWMAN, P.C.]
September 3, 1998
Unity First Acquisition Corp.
245 Fifth Avenue, Suite 1500
New York, New York 10016
Re: Registration Statement on Form S-4
Under the Securities Act of 1933
File No. 333-59863
----------------------------------
Ladies and Gentlemen:
In our capacity as counsel to Unity First Acquisition Corp., a Delaware
corporation (the "Company"), we have been asked to render this opinion in
connection with a Registration Statement on Form S-4, as amended, heretofore
filed by the Company with the Securities and Exchange Commission under the
Securities Act of 1933, as amended (the "Registration Statement"), covering (i)
6,379,065 shares of Common Stock, $.0001 par value, of the Company (the "Unity
Merger Stock") to be issued to stockholders of Worlds Inc., a New Jersey
corporation ("Worlds"), in connection with the merger of Worlds with and into
the Company (the "Merger") pursuant to the terms of that certain Agreement and
Plan of Merger and Reorganization, dated as of June 25, 1998 (the "Merger
Agreement"), between the Company and Worlds; (ii) 410,375 shares of Common
Stock, $.0001 par value, of the Company (the "Warrant Stock") issuable upon
exercise of warrants, which will be issued in connection with the Merger; (iii)
470,000 shares of Common Stock, $.0001 par value, of the Company (the "Option
Stock") issuable upon exercise of options, which will be issued in connection
with the Merger; and (iv) 147,017 shares of Common Stock, $.0001 par value, of
the Company (the "Conversion Stock") issuable upon conversion of certain
promissory notes (the "Promissory Notes"), which will be issued in connection
with the Merger.
In that connection, we have examined the Restated Certificate of
Incorporation and the By-Laws of the Company, the Registration Statement, the
Merger Agreement, corporate proceedings of the Company relating to the issuance
of, respectively, the Unity Merger Stock, the Warrant Stock, the Option Stock
and the Conversion Stock, and such other instruments and documents as we have
deemed relevant under the circumstances.
In making the aforesaid examinations, we have assumed the genuineness of
all signatures and the conformity to original documents of all copies furnished
to us as original or photostatic copies.
<PAGE>
Unity First Acquisition Corp.
September 3, 1998
Page 2
We have also assumed that the corporate records furnished to us by the Company
include all corporate proceedings taken by the Company to date.
Based upon and subject to the foregoing, we are of the opinion that:
(1) The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of Delaware.
(2) The Unity Merger Stock has been duly and validly authorized and, when
issued upon the Effective Time as provided in the Merger Agreement,
will be duly and validly issued, fully paid and non-assessable.
(3) The Warrant Stock and the Option Stock have been duly and validly
authorized and, when issued and paid for as described in the
Registration Statement, will be duly and validly issued, fully paid
and non-assessable.
(4) The Conversion Stock has been duly and validly authorized and, when
issued upon conversion of the Promissory Notes of the Company as
described in the Registration Statement, will be duly and validly
issued, fully paid and non-assessable.
We hereby consent to the use of our opinions as herein set forth as an
exhibit to the Registration Statement and to the use of our name under the
caption "Legal Matters" in the Joint Proxy Statement/Prospectus forming a part
of the Registration Statement.
Very truly yours,
COOPERMAN LEVITT WINIKOFF
LESTER & NEWMAN, P.C.
By: /s/ Ira Roxland
-------------------------------
A Member of the Firm
<PAGE>
(I) Unity First Acquisition Corp.
Exhibit 8.1
[LETTERHEAD OF COOPERMAN LEVITT WINIKOFF LESTER & NEWMAN, P.C.]
September 3, 1998
Unity First Acquisition Corp.
245 Fifth Avenue, Suite 1500
New York, New York 10016
Ladies and Gentlemen:
We have acted as counsel to Unity First Acquisition Corp., a Delaware
corporation (the "Company"), in connection with that certain Agreement and Plan
of Merger and Reorganization, dated as of June 25, 1998 (the "Merger
Agreement"), between the Company and Worlds Inc., a New Jersey corporation
("Worlds"), providing for, among other things, the merger of Worlds with and
into the Company (the "Merger"). Upon the Effective Time (as defined in the
Merger Agreement), the shareholders of Worlds will receive a maximum of
6,379,065 shares of Common Stock, $.0001 par value, of the Company.
In our capacity as your counsel, we have examined originals, or copies
identified to our satisfaction as being true copies, of the Merger Agreement,
all relevant corporate proceedings of the Company relating to the approval and
adoption of the Merger Agreement by the Board of Directors of the Company, the
Internal Revenue Code of 1986, as amended to date (the "Code"), the published
rules and regulations of the Internal Revenue Service (the "IRS") promulgated
thereunder (collectively the "Regulations"), and such other statutes, rules,
regulations, publicly available interpretive releases and opinions of the IRS
and other relevant governmental agencies and authorities and such other records,
documents or instruments as in our judgment are necessary or appropriate to
enable us to render the opinions expressed below.
In making the aforesaid examinations, we have assumed the genuineness
of all signatures, the authenticity of all documents submitted to us as
originals and the conformity to original documents of documents submitted to us
as certified or photostatic copies.
In addition, to the extent that matters of fact are involved in the
conclusions expressed in the opinions hereinafter set forth, such opinions, to
the extent we have deemed proper, are based as to factual matters upon inquiries
of officers of the Company and the representations and warranties of each of the
Company and Worlds contained in the Merger Agreement.
<PAGE>
Unity First Acquisition Corp.
September 3, 1998
Page 2
Based upon and subject to the foregoing, we are of the opinion that:
(1) The Merger will be a "tax-free reorganization" for federal income
tax purposes under Section 368(a)(1)(A) of the Code.
(2) The Company will not recognize any gain or loss in the Merger.
(3) The several holders of the issued and outstanding shares of
Common Stock, $.0001 par value, of the Company will not recognize
any gain or loss in the Merger.
The opinions expressed herein are limited to the Federal income tax
consequences of the Merger based upon the Code and the Regulations, as both are
in effect upon the date hereof. We express no opinion as to the tax consequences
of the Merger under the laws of the State of Delaware or of any other
governmental or quasi-governmental taxing authority, whether domestic or foreign
in nature.
We hereby consent to the use of our opinions as herein set forth as an
exhibit to the Registration Statement on Form S-4 of the Company (File No.
333-59863), as amended (the "Registration Statement"), and to the use of our
name under the captions "The Merger - Certain Tax Consequences of the Merger"
and "Experts" in the Joint Proxy Statement/Prospectus forming a part of the
Registration Statement.
Very truly yours,
COOPERMAN LEVITT WINIKOFF
LESTER & NEWMAN, P.C.
By: /s/ Ira Roxland
--------------------------
A Member of the Firm
<PAGE>
(II) Worlds Inc.
Exhibit 8.2
[HELLER, HOROWITZ & FEIT, P.C.]
Worlds Inc.
15 Union Wharf
Boston, Massachusetts 02109
Gentlemen:
We have acted as counsel to Worlds Inc., a New Jersey corporation (the
"Company"), in connection with that certain Agreement and Plan of Merger and
Reorganization, dated as of June 25, 1998 (the "Merger Agreement"), between the
Company and Unity First Acquisition Corp., a Delaware corporation ("Unity"),
providing for, among other things, the merger of the Company with and into Unity
(the "Merger"). Upon the Effective Time (as defined in the Merger Agreement),
the Company's stockholders will receive approximately 6,379,065 shares of Common
Stock, $.0001 par value, of Unity.
In our capacity as your counsel, we have examined originals, or copies
identified to our satisfaction as being true copies, of the Merger Agreement,
all relevant corporation proceedings of the Company relating to the approval and
adoption of the Merger Agreement by the Board of Directors of the Company, the
Internal Revenue Code of 1986, as amended to date (the "Code"), the published
rules and regulations of the Internal Revenue Service (the "IRS") promulgated
thereunder (collectively, the "Regulations"), and such other statutes, rules,
regulations, publicly available interpretive releases and opinions of the IRS
and other relevant governmental agencies and authorities and such other records,
documents or other instruments as in our judgment are necessary or appropriate
to enable us to render the opinions expressed below.
In making the aforesaid examinations, we have assumed the genuineness
of all signatures, the authenticity of all documents submitted to us as
originals and the conformity to original documents of documents submitted to us
as certified or photostatic copies.
In addition, to the extent that matters of fact are involved in the
conclusions expressed in the opinions hereinafter set forth, such opinions, to
the extent we have deemed proper, are based as to factual matters upon inquiries
of officers of the Company and the representations and warranties of each of the
Company and Unity contained in the Merger Agreement.
Based upon and subject to the foregoing, we are of the opinion that:
(1) The Company will not recognize any gain or loss in the Merger.
(2) The several holders of the issued and outstanding shares of
Common Stock, $.001 par value, of the Company will not recognize
any gain or loss in the Merger, except for tax payable because of
cash received instead of fractional shares.
The opinion expressed herein are limited to the Federal income tax
consequences of the Merger based upon the Code and the Regulations, as both are
in effect upon the date hereof. We express no opinion as to the tax
consequences of the Merger under the laws of the States of New Jersey or
Delaware or of any other governmental or quasi-governmental taxing authority,
whether domestic or foreign in nature.
We hereby consent to the use of our opinions as herein set forth as an
exhibit to the Registration Statement on Form S-4 of the Company (File No.
333-59863), as amended (the
<PAGE>
"Registration Statement"), and to the use of our name under the captions "The
Merger - Certain Tax Consequences of the Merger" and "Experts" in the Proxy
Statement and Prospectus forming a part of the Registration Statement.
Very truly yours,
/s/ Heller, Horowitz & Feit, P.C.
HELLER, HOROWITZ & FEIT, P.C.
<PAGE>
(I) UNITY FIRST ACQUISITION CORP.
EXHIBIT 23.1
CONSENT OF INDEPENDENT
PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made a part of this
Form S-4.
ARTHUR ANDERSEN LLP
New York, New York
September 3, 1998
<PAGE>
(II) WORLDS INC.
EXHIBIT 23.4(A)
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
Worlds Inc. (formerly Worlds Acquisition Corp.)
Boston, Massachusetts
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement our report dated March 25, 1998, relating to the
financial statements of Worlds Inc. (a development stage enterprise) which is
contained in that Prospectus, for the period April 8, 1997 (inception) to
December 31, 1997. Our report contains an explanatory paragraph regarding the
Company's ability to continue as a going concern.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
BDO Seidman, LLP
New York, New York
September 3, 1998
<PAGE>
(II) WORLDS INC.
EXHIBIT 23.4(B)
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
Worlds Inc.- Predecessor
San Francisco, California
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement our report dated March 25, 1998, relating to the
financial statements of Worlds Inc.--Predecessor (a development stage
enterprise) which is contained in that Prospectus, as of December 3, 1997 and
the related statements of operations, stockholders' deficit and cash flows for
the year ended December 31, 1996, period ended December 3, 1997 and for the
period from inception (April 26, 1994 to December 3, 1997. Our report contains
an explanatory paragraph regarding the Company's ability to continue as a going
concern.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
BDO Seidman, LLP
San Francisco, California
September 3, 1998
<PAGE>
(1) UNITY FIRST ACQUISITION CORP.
EXHIBIT 99.2
UNITY FIRST ACQUISITION CORP.
245 FIFTH AVENUE
NEW YORK, NEW YORK 10016
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Lawrence Burstein and Norman Leben as
Proxies, each with the power to appoint his substitute, and hereby authorizes
them, and each of them, to represent and vote, as designated below, all the
shares of Common Stock of Unity First Acquisition Corp. ("Unity") held of record
by the undersigned on September , 1998 at the Special Meeting of Shareholders
to be held on , October , 1998, or any adjournment thereof.
1. To consider and vote upon a proposal to approve and adopt a certain
Agreement and Plan of Merger and Reorganization, dated as of June 25, 1998,
between Unity and Worlds Inc., a New Jersey corporation ("Worlds"), providing
for, among other things, the merger of Worlds with and into Unity, and the
issuance by Unity of approximately 6,379,065 shares of its common stock to
Worlds' shareholders, all upon the terms and conditions described therein.
/ / FOR / / AGAINST / / ABSTAIN
2. To approve an adjournment or postponement of the Special Meeting, if
necessary, to permit further solicitation of proxies in the event that there are
not sufficient votes at the Special Meeting to approve Proposal 1, above.
/ / FOR / / AGAINST / / ABSTAIN
3. To transact any other business incidental to the Special Meeting that may
properly come before such meeting or any adjournment or postponement thereof.
(CONTINUED ON REVERSE SIDE)
<PAGE>
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED BY
THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED
FOR PROPOSALS 1 AND 2. A VOTE TO "ABSTAIN" WILL NOT BE COUNTED TOWARDS THE
REQUISITE AFFIRMATIVE VOTE TO APPROVE PROPOSAL 1.
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE
ENCLOSED ENVELOPE.
Please sign exactly as name
appears below.
When shares are held by joint
tenants, both should sign. When
signing as attorney, executor,
administrator, trustee or
guardian, please give full title
as such. If a corporation, please
sign in full corporate name by the
President or other authorized
officer. If a partnership, please
sign in partnership name by
authorized person.
__________________________________
Signature
__________________________________
Signature if held jointly
Dated:__________ , 1998
<PAGE>
(II) WORLDS INC.
EXHIBIT 99.3
WORLDS INC.
15 UNION WHARF
BOSTON, MASSACHUSETTS 02109
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Thomas Kidrin as Proxy, with the power to
appoint his substitute, and hereby authorizes him to represent and vote, as
designated below, all the shares of Common Stock of Worlds Inc. ("Worlds") held
of record by the undersigned on September , 1998 at the Special Meeting of
Shareholders to be held on , October , 1998, or any adjournment thereof.
1. To consider and vote upon a proposal to approve and adopt a certain
Agreement and Plan of Merger and Reorganization, dated as of June 25, 1998,
between Unity First Acquisition Corp., a Delaware corporation ("Unity"), and
Worlds, providing for, among other things, the merger of Worlds with and into
Unity, and the issuance by Unity of approximately 6,379,065 shares of its common
stock to Worlds' shareholders, all upon the terms and conditions described
therein.
/ / FOR / / AGAINST / / ABSTAIN
2. To approve an adjournment or postponement of the Special Meeting, if
necessary, to permit further solicitation of proxies in the event that there are
not sufficient votes at the Special Meeting to approve Proposal 1, above.
/ / FOR / / AGAINST / / ABSTAIN
3. To transact any other business incidental to the Special Meeting that may
properly come before such meeting or any adjournment or postponement thereof.
(CONTINUED ON REVERSE SIDE)
<PAGE>
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED BY
THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED
FOR PROPOSALS 1 AND 2. A VOTE TO "ABSTAIN" WILL NOT BE COUNTED TOWARDS THE
REQUISITE AFFIRMATIVE VOTE TO APPROVE PROPOSAL 1.
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE
ENCLOSED ENVELOPE.
PLEASE SIGN EXACTLY WHEN SHARES ARE HELD BY JOINT TENANTS, BOTH SHOULD
AS NAME APPEARS SIGN. WHEN SIGNING AS ATTORNEY, EXECUTOR,
BELOW. ADMINISTRATOR, TRUSTEE OR GUARDIAN, PLEASE GIVE FULL
TITLE AS SUCH. IF A CORPORATION, PLEASE SIGN IN FULL
CORPORATE NAME BY THE PRESIDENT OR OTHER AUTHORIZED
OFFICER. IF A PARTNERSHIP, PLEASE SIGN IN PARTNERSHIP
NAME BY AUTHORIZED PERSON.
SIGNATURE
SIGNATURE IF HELD JOINTLY
DATED: , 1998
