<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
ON APRIL 27, 1998 REGISTRATION NO. 333-49453
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
FORM SB-2
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
WORLDS INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
NEW JERSEY
(STATE OR OTHER JURISDICTION
OF INCORPORATION OR ORGANIZATION)
7370
(PRIMARY STANDARD INDUSTRIAL CLASSIFICATION CODE NUMBER)
22-1848316
(I.R.S. EMPLOYER IDENTIFICATION NO.)
15 UNION WHARF
BOSTON, MASSACHUSETTS 02109
617-725-8900
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL
EXECUTIVE OFFICES AND PRINCIPAL PLACE OF BUSINESS)
THOMAS KIDRIN
C/O WORLDS INC.
15 UNION WHARF
BOSTON, MASSACHUSETTS 02109
617-725-8900
(NAME, ADDRESS AND TELEPHONE NUMBER
OF AGENT FOR SERVICE)
Copies to:
IRVING ROTHSTEIN, ESQ.
HELLER, HOROWITZ & FEIT, P.C.
292 MADISON AVENUE
NEW YORK, NEW YORK 10017
TELEPHONE: (212) 685-7600
FACSIMILE: (212) 696-9459
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
The Company -- immediately upon effectiveness and continuously thereafter during
the offering period.
Selling Security Holders -- at their desire after the effective date of the
registration statement
<PAGE> 2
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. / /
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<PAGE> 3
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED PROPOSED
MAXIMUM MAXIMUM
TITLE OF EACH CLASS AMOUNT OFFERING AGGREGATE AMOUNT OF
OF SECURITIES TO BE TO BE PRICE PER OFFERING REGISTRATION
REGISTERED REGISTERED SECURITY PRICE (1) FEE
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.001 Par Value 7,294,000 $ 1.00(2) $7,294,000 $ 2,210.30
Common Stock, $.001 Par Value(3)(4) 110,375 $ 1.00 $ 110,375 $ 33.45
Common Stock, $.001 Par Value(3)(4) 50,000 $ 5.00 $ 250,000 $ 75.76
Common Stock, $.001 Par Value(4)(5) 150,000 $ 0.67 $ 100,500 $ 30.45
-------- ---------- ------------
Total $7,754,875 $ 2,349.96*
========== ============
</TABLE>
* $ 1,734.50 was previously paid with Registration Statement No. 333-44509 and
is credit hereto. An additional $ 615.38 is included herewith.
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to rule 457 under the Securities Act of 1933.
(2) As of the date of filing, there is no market for the registrant's
securities. This price represents the price at which the registrant is offering
its shares and the price last paid by investors for the registrant's securities.
(3) To be issued upon exercise of currently outstanding Common Stock Purchase
Warrants.
(4) Pursuant to Rule 416, there is also being registered such additional
securities as may become issuable pursuant to the anti-dilution provisions of
the Warrants or the Unit Purchase Option.
(5) To be issued upon exercise of currently outstanding stock options.
The registrant hereby amends the registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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SUBJECT TO COMPLETION
DATED APRIL 27, 1998
WORLDS INC.
[LOGO]
7,604,375 SHARES OF COMMON STOCK
Worlds Inc. (the "Company") hereby offers up to 2,000,000 shares of its
Common Stock, $.001 par value (the "Common Stock") on an "as-sold, best efforts"
basis at a price of $1.00 per share. All funds raised during this offering which
will extend for ninety days from the date hereof (unless extended by the Company
for up to an additional 60 days) will be available to the Company immediately
upon receipt. The Company has begun to contact registered broker dealers to act
as selling agents, although the Company may sell some shares directly. The
Company currently has no understandings or arrangements with anybody to act as
selling agent. See "Risk Factors." If all the shares offered are sold without
the use of agents, the Company should net approximately $1,900,000.
In addition, the holders of 5,604,375 shares of Common Stock, which
includes 150,000 shares of Common Stock underlying currently outstanding stock
options (the "Option Shares") and 160,375 shares of Common Stock underlying
currently outstanding warrants (the "Warrant Shares") (collectively, the
"Selling Security Holders") offer their securities for resale pursuant to this
Prospectus. Only the resale by the Selling Security Holders of the Option and
Warrant Shares is being covered hereby and not their issuance by the Company.
The proceeds from the sale of the securities offered by the Selling Security
Holders will not inure to the benefit of the Company, but rather to such
holders. See "Selling Security Holders."
The Common Stock is not actively traded, and while the Company intends
to use its best efforts to have it quoted on the OTC Bulletin Board, there can
be no assurance that such securities will be accepted for quotation or, if
accepted, that an active trading market will develop. See "Risk Factors."
THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK AS DESCRIBED HEREIN. SEE "RISK
FACTORS" ON PAGE 5.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
Price to Selling Proceeds to
Public Discount(1) Company
<S> <C> <C> <C>
Per Share $1.00 $0.10 $0.90
Total(3) $2,000,000.00 $200,000.00 $1,800,000.00
</TABLE>
(1) While the Company currently has no arrangements with any selling agents, it
anticipates entering into standard agreements calling for selling discounts up
to 10% of the proceeds.
(2) Does not reflect estimated expenses of $100,000.
(3) The offering is on a "best efforts" basis, and the Company can not predict
how many shares will be sold.
THE DATE OF THE PROSPECTUS IS APRIL __, 1998.
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The Company intends to furnish to its stockholders annual reports
containing audited financial statements examined and reported upon by an
independent certified public accounting firm. The Company's fiscal year end is
December 31. The Company has filed a Registration Statement with the Securities
and Exchange Commission to register under, and be subject to the reporting
requirements of, the Securities Exchange Act of 1934, as amended.
The Shares are being offered by the Company when, as and if delivered
to and accepted by the Company and subject to approval of certain legal matters
by its counsel and subject to certain other conditions, including the right to
reject orders in whole or in part. It is anticipated that delivery of
certificates representing the Shares will be made following the close of the
offering period.
ADDITIONAL INFORMATION
The Company has filed with the headquarters office of the Securities
and Exchange Commission located at 450 Fifth Street, N.W., Washington, D.C.
20549, a Registration Statement on Form SB-2 under the Securities Act of 1933
with respect to the securities offered hereby. This Prospectus filed as part of
such Registration Statement does not contain all the information set forth in,
or annexed as exhibits to, the Registration Statement. For further information
pertaining to the securities offered hereby and the Company, reference is made
to the Registration Statement and the exhibits thereto. The Registration
Statement and exhibits thereto may be inspected at the Headquarters Office of
the Securities and Exchange Commission located at 450 Fifth Street, N.W., Room
1024, Washington, D.C. 20549 and at certain of the Commission's regional offices
at the following addresses: 7 World Trade Center, 13th Floor, New York, New York
10048; and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies
of such material may be obtained from the Public Reference Section of the SEC,
at 450 Fifth Street, N.W., Room 1024, Washington, D.C. at prescribed rates. The
Commission also maintains a Web Site that contains reports, proxy and
information statements and other information regarding registrants such as the
Company, that file electronically with the Commission. This material can be
found at http://www.sec.gov.
PROSPECTIVE PURCHASERS SHOULD READ THIS PROSPECTUS CAREFULLY BEFORE MAKING ANY
INVESTMENT DECISION REGARDING THE COMPANY, AND SHOULD PAY PARTICULAR ATTENTION
TO THE INFORMATION CONTAINED IN THIS PROSPECTUS UNDER THE HEADING "RISK FACTORS"
AND FINANCIAL STATEMENTS AND RELATED NOTES APPEARING ELSEWHERE IN THIS
PROSPECTUS. IN ADDITION, PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN ADVISORS
IN ORDER TO UNDERSTAND FULLY THE CONSEQUENCES OF AN INVESTMENT IN THE COMPANY.
THE COMPANY, ORIGINALLY CALLED ACADEMIC COMPUTER SYSTEMS, INC., AS CURRENTLY
CONSTITUTED IS THE RESULT OF THE ACQUISITION THROUGH MERGER (THE "MERGERS') OF
WORLDS INC. AND WORLDS ACQUISITION CORP., BOTH FORMER DELAWARE CORPORATIONS.
ACCORDINGLY, THE COMPANY WHICH PRIOR TO THE MERGERS WAS INACTIVE WITH NO
OPERATIONS, NOW OPERATES THE BUSINESS FORMERLY OPERATED BY WORLDS INC. AND
REFERENCES HEREIN TO THE COMPANY'S BUSINESS, MEANS THE PRE-MERGER BUSINESS OF
WORLDS INC., REFERRED TO HEREIN AS "PREDECESSOR."
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SUMMARY
Statements contained herein which are not historical facts are forward-looking
statements. Forward-looking statements involve a number of risks and
uncertainties including, but not limited to, general economic conditions, the
Company's ability to complete development and then market its products,
competitive factors and other risk factors detailed herein. See "Risk Factors."
BACKGROUND
The Company today is the result of the contemporaneous Mergers on
December 3, 1997 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 Mergers. Thus, the Company 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 Mergers, an aggregate of
$4,415,000 in gross proceeds was raised in a private offering. The purpose of
the Mergers was to provide financing and a publicly-held vehicle for the
technology of Predecessor to be further developed and marketed. The Merger was
accounted for as the acquisition of Predecessor by WAC and a simultaneous merger
into the Company with WAC deemed the "Accounting Acquiror" in both transactions.
Prior to the Mergers, Academic had been inactive since 1975.
Predecessor had ceased most operations after accumulating approximately $21
million of operating losses developing various related technologies, one of
which was partially commercialized, another which was sold while still under
development and a third which remained under development. WAC was involved in
establishing contacts in the music industry and financing in anticipation of
licensing Predecessor's technologies. Due to its rapidly deteriorating financial
condition, Predecessor began substantial layoffs in early 1997 to reduce costs
and in March 1997 it retained an outside crisis management organization as its
general manager, at which time Predecessors' senior management resigned. The
Company's current post-merger management believes that Predecessors'
technologies can be further developed and marketed through the financing and
music industry contacts provided by WAC in a publicly held vehicle like the
Company, which will provide a larger shareholder base which may facilitate
raising additional capital in the future. The Company's principal executive
offices are located at 15 Union Wharf, Boston, MA 02109 at which its telephone
number is 617-725-8900.
BUSINESS
The Company develops applications for its three-dimensional ("3D")
Internet technology for different markets. At present the Company is targeting
three different markets for its 3D Internet technology. First, the Company is in
the process of marketing its 3D Internet technology with record companies to
produce music-oriented websites; second, the Company is in the process of
marketing its Worlds Chat technology to businesses for corporate intranet
applications; and third, the Company markets Worlds Chat, a 3D chat site on the
Internet, to consumers on the Internet.
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<PAGE> 7
THE OFFERING
The Company is offering hereby up to 2,000,000 shares of its Common
Stock for $1.00 per share on an "as-sold, best efforts" basis, which would allow
the Company to have immediate use of all funds raised regardless of how many
shares are sold. If all the shares offered are sold without the use of agents,
the Company should net approximately $1,900,000. No determination can be made as
to the amount of proceeds if agents are used to sell the shares on behalf of the
Company. See "Use of Proceeds."
The Company is also registering hereby 5,604,375 shares of its Common
Stock, including 310,375 shares underlying currently outstanding stock options
and warrants, all on behalf of selling security holders. The Company will not
receive any proceeds from the sale of these securities. However, the Company
will receive the proceeds of the exercise prices of the Option Shares and the
Warrant Shares ($.67 per Option Share and $1.00 per Warrant Share for 110,375
warrants and $5.00 per Warrant Share for 50,000 warrants) if the same are
exercised, in the aggregate amount of $460,875 in the event all are exercised.
RISK FACTORS
Purchasers of the securities offered hereby should be aware that the
securities are highly speculative and involve a very high degree of risk and,
therefore, should not be purchased by investors who cannot afford the loss of
their entire investment. In addition to the general risks of investing, the
Company's securities may be particularly risky based upon the fact that the
Company (i) is undercapitalized to complete its business plan; (ii) will have
use of the proceeds immediately and the early investors will have no assurance
that sufficient additional funds will be raised; (iii) is involved in a very
competitive and idiosyncratic industry; (iv) saw Predecessor's experienced
management team leave approximately one year ago; (v) is controlled by a small
group which includes its current management (vi) plans to use the Internet as
its medium; (vii) has not completed modification of its product for use in
connection of its target market; and (viii) has no market established for the
trading of its securities. Prospective investors should carefully review and
consider the factors set forth under "Risk Factors" as well as the other
information herein.
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<PAGE> 8
RISK FACTORS
THE PURCHASE OF THE SECURITIES OFFERED HEREBY INVOLVES A VERY HIGH
DEGREE OF RISK, INCLUDING, BUT NOT NECESSARILY LIMITED TO, THE RISKS DESCRIBED
BELOW. BEFORE PURCHASING THE SECURITIES OFFERED HEREBY, EACH PROSPECTIVE
INVESTOR SHOULD CONSIDER CAREFULLY THE GENERAL INVESTMENT RISKS ENUMERATED
ELSEWHERE IN THIS PROSPECTUS AND THE FOLLOWING RISK FACTORS, AS WELL AS THE
OTHER INFORMATION CONTAINED IN THIS PROSPECTUS.
DEVELOPMENT STAGE COMPANY WITH ONLY LIMITED OPERATIONS. The Company is still a
development stage company. The Company 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. The Company will be
subject to all of the risks, uncertainties, expenses, delays, problems and
difficulties typically encountered in the establishment 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 the
Company's efforts will result in successful product commercialization. See
"Business."
LIMITED REVENUES; SIGNIFICANT AND CONTINUING LOSSES; GOING CONCERN ACCOUNTING
OPINION. Following the Mergers, the business of the Company is substantially
premised upon the pre-Merger 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 fiscal years ended December 31,
1994, 1995, and 1996, respectively, and $2,285,220 for the period ended December
3, 1997 or an accumulated deficit since inception in April 1994 through December
3, 1997 of $21,236,139. The Company will not generate any meaningful revenues,
if ever, until after it successfully completes development and market testing of
its three dimensional ("3D") music web sites(s), obtain(s) 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 the Company 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 music site(s) will prove to be
commercially viable. The Company anticipates that it will continue to incur
significant losses until, at the earliest, the Company generates sufficient
revenues to offset the substantial expenditures and operating costs associated
with developing and commercializing its proposed products estimated to be
approximately $250,000-$300,000 per month, including approximately
$75,000-$100,000 in continuing research and development cost. There can be no
assurance that the Company can be operated profitably in the future. The
Company's independent auditors have included an explanatory paragraph in their
report dated March 25, 1998 stating that recurring losses during the development
stage raise substantial doubt about its ability to continue as a going concern.
See "Financial Statements."
NEED FOR SUBSTANTIAL ADDITIONAL FINANCING. The Company's capital requirements
relating to the further development and commercialization of Worlds Platinum,
the Company's 3D related Internet software technology, and its other activities
have been and will continue to be significant and is currently estimated at
approximately $4 million, including up to the $2 million, if raised in this
offering. The Company is dependent on the proceeds of future financings in order
to continue in business and develop and commercialize its proposed products. The
Company 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 it currently has only a
portion of the funds necessary to permit the Company 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
permit the Company to pursue its business plan or that any assumptions relating
to its business plan will prove to be
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accurate. The Company 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 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. See "Business."
OFFERING ONLY ON A "BEST EFFORTS" BASIS WITH NO ASSURANCE OF COMPLETION. In
addition to the risk identified immediately above that the offering will be
insufficient for the Company to complete its business plan, no assurance can be
given that the shares offered by the Company will be sold, notwithstanding the
Company's intent to use its best efforts. Accordingly, the first investors in
this offering will be more at risk as their funds will be immediately available
to the Company with no assurance that the full offering will be completed.
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, Predecessors' Board of
Directors decided to retain an outside crisis management organization to assess
possibilities for reorganization, liquidation or other disposition. At such time
Predecessors' 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 knowledge of Predecessors'
operations, financial affairs, technical projects, and other related items and
matters prior to the Merger is lost. The lack of institutional knowledge could
have a materially adverse effect on the Company's business. In addition,
contemporaneous with the departure of Predecessors' management, substantially
all of Predecessors' personnel were discharged and until recently, the Company
has not had the financial resources to hire new personnel. Consequently,
Predecessors' relations with customers, vendors and shareholder have been
severely disrupted and the Company may be required to expend significant funds
and management resources in dealing with Predecessors' old 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 the Company. The
Company has not yet undertaken third-party testing of the basic platform or the
development or testing of any system enhancements. The Company 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, expenses, technical problems or difficulties, as
well as the possible insufficiency of funds to 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 the Company
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. The Company 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 into the Company's product may
contain errors which only become apparent subsequent to commercial use.
Remedying such errors could delay the Company's plans and cause it to incur
substantial additional costs.
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NEED TO INTEGRATE OTHER TECHNOLOGIES THAT MAY NOT BE AVAILABLE. The Company's 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 the Company's core technology will be available; and even if
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 the Company's Worlds Platinum technology.
NEW CONCEPT; UNCERTAINTY OF MARKET ACCEPTANCE AND COMMERCIALIZATION STRATEGY.
The Company's 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 the Company to create awareness and demand by record companies,
record labels, recording artists, music buyers, and Internet consumers. The
Company's 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 the Company's 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 the Company's
product. The Company has not yet commenced significant marketing activities and
has limited experience and limited financial, technical, personnel and other
resources to independently undertake extensive marketing activities. The
Company's 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 the Company's marketing efforts, changes in
market conditions (including the emergence of potentially significant related
market segments for applications of the Company's 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 the Company 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 the Company's strategy
will result in successful product commercialization or that the Company's
efforts will result in initial or continued market acceptance for the Company's
proposed products. See "Business."
COMPETITIVE MARKETPLACE WITH SHORT TECHNOLOGICAL LIFE CYCLES. The markets that
the Company 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. The Company will face competition from
numerous sources, including prospective record labels which may develop and
market their own competitive products and services, online and Internet service
providers, and others with the technical capabilities and expertise which would
encourage them to develop and commercialize competitive 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 the Company, 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 the Company's
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 the Company to compete will be
dependent upon the Company's ability to complete development and introduce
Worlds Platinum into the marketplace in a timely manner, to continually enhance
and improve its software and to successfully develop and market new products.
There can be no assurance that the Company will be able to compete successfully,
that competitors will not develop technologies or products that render the
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Company's products obsolete or less marketable or that the Company will be able
to successfully enhance its products or develop new products. See "Business."
CAPACITY CONSTRAINTS COULD CAUSE SYSTEM FAILURE. The Company's operations will
depend upon the capacity and reliability of its system infrastructure. The
Company currently has limited system capacity consisting of only seven servers,
of which three are currently being used for internal development purposes,
leaving four which the Company believes can accommodate only 300-500 users
simultaneously. Accordingly, the Company will be required to continually expand
its system infrastructure to accommodate significant numbers of users and music
sites they may wish to access. Development and/or expansion of the Company's
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. The Company intends to
continue improving its servers' performance and will determine whether to
purchase or lease computer equipment to develop and/or expand system capacity.
There can be no assurance that the Company 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 the Company to develop and/or expand its
system infrastructure on a timely basis would have a material adverse effect on
the Company.
SECURITY RISKS OF BEING ONLINE. The Company will be highly dependent upon online
service providers for access to the Company's services. The Company's system
infrastructure will also be vulnerable to computer viruses, break-ins and
similar disruptions from unauthorized tampering with the Company's 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 any particular
release, the timing of such success or the popularity of any
particular artist. Thus, there can be no assurance that any of
the prerecorded music products in which the Company inserts
its technology will produce revenue for the Company or, if
they do, that such revenue will be sufficient to recoup any
costs incurred by the Company. See "Business."
- 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 the Company
believes can take 2-6 months. The period in which a record
company distributes the Company's 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 the
Company's plans in particular markets. See "Business."
UNCERTAIN FUTURE OF INTERNET - BASED BUSINESSES. The Company 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 online
networks is relatively new and still evolving, making it
difficult to predict whether the Internet will prove to be a
viable commercial
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marketplace. Consumer concern over Internet security has been,
and could continue to be, a barrier to commercial activities
requiring consumers to send their credit card information over
the Internet. The Company 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
online 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
support the demands placed on it by sustained growth. In
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, the Company's business, results of operations and
financial condition would be materially adversely affected.
- Need to Attract Advertisers - In order for the Company to
generate advertising revenues, advertisers and advertising
agencies must direct a portion of their budgets to the
Internet and, specifically, to the Company's Internet
websites. To date, sales of Internet advertising represent
only a small percentage of total advertising sales. There can
be no assurance that advertisers and advertising agencies will
accept the Internet as a medium. If Internet advertising is
not widely accepted by, or if the Company is not successful in
generating significant advertising revenues from, advertisers
and advertising agencies, the Company's business, results of
operations and financial condition could be materially
adversely affected. See "Business."
POTENTIAL LIABILITY AND INSURANCE. While the Company 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,
the Company could become involved in litigation regarding the musical content
transmitted over its system which could create adverse publicity, significant
defense costs and substantial damage awards against the Company. In addition,
because music content materials may be downloaded and may be subsequently
distributed to others, there is a potential that claims will be made against the
Company for defamation, negligence, copyright or trademark infringement or other
theories based on the nature and content of such materials. The Company 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 the Company if
material deemed inappropriate for viewing by children could be accessed. While
the Company carries only certain limited insurance policies, the Company's
insurance 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 the Company will not face claims resulting in substantial
liability for which the Company is partially or completely uninsured. Any
partially or completely uninsured claim against the Company, if successful and
of sufficient magnitude, would have a material adverse effect on the Company.
LACK OF PROTECTION FOR PROPRIETARY INFORMATION. The Company regards certain
computer software developed by Predecessor prior to the Mergers 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 the Company's know-
9
<PAGE> 13
how or software codes, concepts, ideas and documentation. Furthermore, there can
be no assurance that nondisclosure agreements with the Company's employees will
adequately protect the Company's trade secrets. While employees of Predecessor
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 the Company believes that its
proposed products do not and will not infringe patents or violate proprietary
rights of others, it is possible that infringement of existing or future patents
or proprietary rights of others have occurred or may occur. In the event the
Company's proposed products infringe patents or proprietary rights of others,
the Company may be required to modify the design of its proposed products or
obtain a license. There can be no assurance that the Company 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 the
Company. In addition, there can be no assurance that the Company will have the
financial or other resources necessary to enforce or defend a patent
infringement action and the Company could, under certain circumstances, become
liable for damages, which also could have a material adverse effect on the
Company. Also, while the Company has a patent application pending on its server
technology, no assurance can be give that the patent will issue to the Company
or even if it does issue to the Company that the Company will necessarily derive
any revenues from it or that competitors will not be able to develop other
technology around the Company's patent.
DEPENDENCE ON KEY PERSONNEL; NEED FOR QUALIFIED MANAGEMENT PERSONNEL; MANAGEMENT
LACK OF INTERNET EXPERIENCE. The success of the Company will be dependent on the
personal efforts of Thomas Kidrin, its President. Although the Company intends
to enter into an employment agreement with Mr. Kidrin which will expire in
December 2000 and the Company 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
the Company's proposed business plan and prospects. At present the Company is
understaffed and the success of the Company 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 the Company will be able to hire or retain
additional qualified personnel. Any inability to attract and retain qualified
management and other personnel would have a material adverse effect on the
Company. While senior managers and/or independent contractors retained by the
Company and the Board members have substantial business, financial and technical
experience, with the exception of one Board member, none of the senior managers
or the Board members has direct experience with Internet marketing, sales or
technology. This lack of Internet experience could lead the Company to make
flawed strategic judgments or decisions that could adversely affect the Company.
CONTROL BY SMALL GROUP INCLUDING MANAGEMENT. The former stockholders of Worlds
Acquisition Corp., two of whom are on the Company's Board of Directors and one
of which is also an executive officer, beneficially own, in the aggregate,
approximately 52% of the outstanding shares of the Company's Common Stock.
Accordingly, since the Company does not allow cumulative voting which would
provide minority shareholders with the ability to bundle their votes for a
greater say in Board elections, such persons, acting together, are in a position
to control the Company, elect all of the Company's directors, cause an increase
in the authorized capital or the dissolution, merger or sale of the assets of
the Company, and generally to direct the affairs of the Company. See
"Management" and "Principal Shareholders."
NO TRADING MARKET; LARGE OVERHANG OF SECURITIES. There is no present trading
market for the Company's shares of Common Stock, nor has there been any such
market for at least the past five years. No assurances can be given that a
trading market will develop for the Company's securities, or if developed, that
it will continue. In the absence of a trading market, a purchaser of the
securities in this offering may encounter difficulties in attempting to sell or
otherwise dispose of these shares notwithstanding their registration under the
Act. In addition to the 7,294,000 shares and 310,375 shares underlying
derivative securities being registered hereunder, the Company has an additional
10,399,996
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<PAGE> 14
shares of Common Stock outstanding that were issued in connection with the
Merger transactions. Of these additional shares, 1,999,996 shares will be freely
tradeable beginning December 4, 1998 and the balance of 8,400,000 shares will be
tradable subject to the following volume restrictions on such date: A number of
shares that does not exceed the greater of 1% of the total number of outstanding
shares of the same class (approximately 161,500 shares assuming only the
existing shares are outstanding or up to 18,150 shares if all the shares offered
by the Company are sold) or the average weekly trading volume of the Company's
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 Securities and
Exchange Commission (the "SEC").
POSSIBLE ADDITIONAL ISSUANCES CAUSING DILUTION. While the Company currently has
16,149,996 shares of Common Stock outstanding, the Company is authorized to
issue up to 30,000,000 shares and is therefore able to issue almost an
additional 14,000,000 shares (including the up to 2,000,000 shares offered
hereby on a "Best Efforts") without being required to obtain shareholder
approval and at a minimum could be obligated to issue 475,375 shares upon the
exercise of currently outstanding options and warrants (310,375 shares of which
are being registered herewith). Thus, investors in the securities offered hereby
could find their holdings drastically diluted, which, if it occurs, means that
they will own a smaller percentage of the Company, their book value per share
will be reduced and the value of their holdings will decrease.
PENNY STOCK RULES MAKE TRANSFERS DIFFICULT. Broker-dealer practices in
connection with transactions in "penny stocks" are regulated by certain penny
stock rules adopted by the SEC. Penny stocks generally are equity securities
with a price of less than $5.00 (other than securities registered on certain
national securities exchanges or quoted on the NASDAQ system). The penny stock
rules require a broker-dealer, prior to a transaction in a penny stock not
otherwise exempt from the rules, to deliver a standardized risk disclosure
document that provides information about penny stocks and the nature and level
of risks in the penny stock market. The broker-dealer also must provide the
customer with current bid and offer quotations for the penny stock, the
compensation of the broker-dealer and its salesperson in the transaction, and,
if the broker dealer is the sole market-maker, the broker-dealer must disclose
this fact and the broker-dealer's presumed control over the market, and monthly
account statements showing the market value of each penny stock held in the
customer's account. In addition, broker-dealers who sell such securities to
persons other than established customers and accredited investors (generally,
those persons with assets in excess of $1,000,000 or annual income exceeding
$200,000 or $300,000 together with their spouse), must make a special written
determination that the penny stock is a suitable investment for the purchaser
and receive the purchaser's written agreement to the transaction. Consequently,
these requirements may have the effect of reducing the level of trading
activity, if any, in the secondary market for a security that becomes subject to
the penny stock rules. If the Company's securities become subject to the penny
stock rules, investors in this Offering may find it more difficult to sell their
shares.
NO DIVIDENDS. To date, the Company has not paid any cash dividends on its stock
and the Company does not expect to declare or pay dividends on the Common Stock
in the foreseeable future. In addition, the payment of cash dividends may be
limited or prohibited by the terms of any future loan agreements. See
"Description of Securities - Dividend Policy."
CONSENT DECREE OF FOUNDER. In June 1994, Steven Greenberg, a founder of and
consultant to WAC and the Company's largest single shareholder with
approximately 29% of the outstanding shares, 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 $1.5 million in civil penalties. The action had absolutely no relationship
to Mr. Greenberg's affiliation with the Company and the Company does not
anticipate incurring any costs or liability in connection with the matter, which
was settled almost four years ago. See "Management - Directors, Executive
Officers and Consultant."
11
<PAGE> 15
LIMITATION ON LIABILITY OF DIRECTORS AND OFFICERS. The Company's By-Laws, as
amended to date, includes provisions to limit, to the fullest extent permitted
by New Jersey law, the personal liability of directors of the Company for
monetary damages arising from a breach of their fiduciary duties as directors.
The By-Laws also includes provisions to the effect that (subject to certain
exceptions) the Company shall indemnify any director or officer to the extent
permitted under New Jersey law as it may from time to time be in effect. In
addition, the Company's By-Laws require the Company to indemnify, to the fullest
extent permitted by law, any director, officer, employee, or agent of the
Company for acts which such person reasonably believes are not in violation of
the Company's corporate purposes as set forth in its Certificate of
Incorporation. As a result of such provisions in the By-Laws of the Company,
stockholders may be unable to recover damages against the directors, officers,
and other agents of the Company for actions taken by them which constitute
negligence, gross negligence, or a violation of their fiduciary duties, which
may reduce the likelihood of stockholders instituting derivative litigation
against directors, officers, and others and may discourage or deter stockholders
from suing directors, officers, employees, and agents of the Company for
breaches of their duty of care, even though such action, if successful, might
otherwise benefit the Company and its stockholders.
POTENTIAL RESTRICTIONS ON TAKE-OVER BIDS UNDER APPLICABLE STATE LAW. Under New
Jersey law to which the Company is subject, restrictions are placed on the
ability of persons to make take-over bids. These restrictions could allow
management to remain in place and could inhibit take-over attempts generally,
which could result in shareholders not realizing the full value of their
holdings as the market price of a company's stock tends to rise when it is the
target of a take-over. See "Description of Securities."
FORWARD-LOOKING STATEMENTS. The information herein contains forward-looking
statements that involve a number of risks and uncertainties. A number of
factors could cause actual results, performance, achievements of the Company, or
industry results to be materially different from any future results, performance
or achievements expressed or implied by such forward-looking statements. These
factors include, but are not limited to, the competitive environment, inflation,
changes in the costs of goods and services, economic conditions in general and
in the Company's business, demographic changes, changes in the availability of
terms of financing to fund the anticipated growth of the Company's business, the
ability to attract and retain qualified personnel, changes in the Company's
capital expenditure plans, and other factors referenced herein and in the
Company's filings with the SEC. In addition, such forward-looking statements
are necessarily dependent upon assumptions, estimates and dates that may be
incorrect or imprecise and involve known and unknown risks, uncertainties and
other factors. Accordingly, any forward-looking statements included herein do
not purport to be predictions of future events or circumstances and may not be
realized. Forward-looking statements can be identified by, among other things,
the use of forward-looking terminology such as "believes," "expects," "may,"
"will," "should," "seeks," "anticipates," "intends" or the negative of any
thereof, or other variations thereon or comparable terminology, or by
discussions of strategy or intentions. Given these uncertainties, prospective
investors are cautioned not to place undue reliance on such forward-looking
statements. The Company disclaims any obligation to update any such factors or
to announce publicly the results of any revisions to any of the forward-looking
statements contained herein to reflect future events or developments.
SELECTED FINANCIAL INFORMATION
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 Company's audited financial statements included elsewhere herein. 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 audited financial
statements included elsewhere herein. 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.
12
<PAGE> 16
The following data should be read in conjunction with the
financial statements of the Company and Predecessor.
STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
Worlds, Inc. - Predecessor (a development stage enterprise)
Worlds Inc.
(Formerly
Worlds
Acquisition Cumulative
Corp.) from April 26, For the April 26,
April 8, 1997 1994 Period from 1994
(inception) (inception) January 1 (inception)
through through through For the Year Ended through
December December 3, December 3, December 31, December 31, December
1997 1997 1997 1996 1995 31, 1994
<S> <C> <C> <C> <C> <C> <C>
Net Revenues $ 1,420 $ 6,026,691 $ 80,720 $ 3,784,019 $ 1,882,232 $ 279,720
Total Cost & Expenses 6,810,568(a) 27,779,637 2,885,088 13,871,984 9,561,265 1,461,300
Operating Loss (6,809,148) (21,752,946) (2,804,368) (10,087,965) (7,679,033) (1,181,580)
Other Income and
(Expenses) (3,099) 247,522 134,863 16,011 96,201 447
Net Loss Before Taxes
and Extraordinary
Item (6,812,247) (21,505,424) (2,669,505) (10,071,954) (7,582,832) (1,181,133)
Income Taxes (120,000) (5,000) (115,000) -- --
Net Loss Before
Extraordinary Item (6,812,247) (21,625,424) (2,674,505) (10,186,954) (7,582,832) (1,181,133)
Extraordinary Item-Gain
On Debt Settlement 125,776 389,285 389,285 -- -- --
Net Loss $(6,686,471) $(21,236,139) $(2,285,220) $(10,186,954) $(7,582,832) $(1,181,133)
Loss per share - before
extraordinary item
(basic and diluted) $ (0.73)
Loss per share
(basic and diluted) $ (0.72)
</TABLE>
(a) Includes $ 6,135,538 of acquired research and development costs resulting
from the merger with Predecessor.
BALANCE SHEET DATA
<TABLE>
<CAPTION>
December 31, 1997
<S> <C>
Working Capital $ 1,750,112
Total Assets 3,825,994
Total Liabilities 3,834,783
Stockholders' Deficit $ (8,769)
</TABLE>
13
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS
Statements contained herein which are not historical facts are forward-looking
statements. Forward-looking statements involve a number of risks and
uncertainties including, but not limited to, general economic conditions, the
Company's ability to complete development and then market its products and
competitive factors and other risk factors detailed herein. See "Risk Factors."
The Company was originally formed on May 20, 1968. Since 1975
the Company has been inactive with no operations and its only income has come
from interest, gain on the sale of securities and dividends. Following the
Mergers, the Company is engaged in the business and operations formerly
conducted by Predecessor. Accordingly, a discussion and analysis of the
Company's 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 the Company's current operations. Thus,
included herein is a discussion and analysis of the financial condition and
results of the operations of Predecessor's pre-Mergers operations. Similarly,
the BUSINESS section below will also contain a discussion of the former business
of the pre-Mergers Predecessor.
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 the
Company 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. The Company anticipates that it will continue to
incur significant losses until, at the earliest, the Company 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 the Company 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 the Company), 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, the Company will capitalize
software development costs at such time as the technological feasibility of the
product has been established.
14
<PAGE> 18
Plan of Operation
During the next twelve months of operation the Company 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 the Company's 3D technology for non-music applications such as corporate
intranets, and (iii) release a new version of Worlds Chat.
The Company is presently completing work on Worlds Platinum,
the latest version of the Company's 3D internet software, to adapt it for
distribution and use on CD+ media. The Company is also in discussions with
several major record labels and companies for them to distribute Worlds
Platinum, along with music related web site access. While the Company 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, the
Company's strategy of distributing its products on CD+ is wholly dependent upon
obtaining distribution agreements with record labels or companies. To date, the
Company has no such agreements.
The Company's present cash resources are insufficient to meet
the its requirements over the next twelve months; however, if substantially all
of the shares offered by the Company hereby are sold, the Company will have
sufficient cash resources for at least the next twelve months. The Company
currently has 7 full-time employees and is working with eight independent
software contractors who were former employees of the Company. The Company does
not anticipate hiring more than 2-3 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.
Results of Operations of the Company
(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 the
Company for the period from April 8, 1997 (the inception of WAC, the accounting
acquiror) through December 31, 1997 are discussed separately.)
Period from April 8, 1997 through December 31, 1997.
The Company's primary activities during the period from April
8, 1997 through December 31, 1997 were the formation of WAC, negotiating and
consummating the Mergers, attending to post-Merger administrative and legal
matters, the completion of a private placement, and the negotiation and
compromise of debts of Predecessor. Revenues were nominal at $1,420 due to an
almost total lack of sales directly attributable to the lack of operations
during this period. Selling, general and administrative expenses were $675,030
for this period and consisted largely of overhead, professional fees and other
expenses incurred in connection with the Mergers. An expense of $6,135,538 was
incurred during this period in the acquisition of research and development from
Predecessor, being the sum of the negative net worth of Predecessor, plus the
value of the 1,999,996 shares of the Company's common stock given in exchange
for all the outstanding stock of Predecessor at the time of the Mergers. The
Company had interest expense during this period of $16,692 primarily
attributable to interest on Predecessor's notes payable. The Company also
realized an extraordinary gain of $125,776 during this period by settling debts
of the Company at less than face value. The net loss for the period (including
the extraordinary gain on debt settlement) was $6,686,471.
15
<PAGE> 19
Liquidity and Capital Resources of the Company
Net cash used by the Company's operating activities from April
8, 1997 through December 31, 1997 was approximately $350,000. At December, 31
1997, the Company had working capital of $1,750,112.
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 the
Company, 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 "Mergers."
Prior to the Mergers, the Company had 910,000 shares
outstanding. Effective December 31, 1997, the Company 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 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 the
Company as of March 1, 1998 is therefore 16,149,996 shares. The terms of the
Mergers 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 Merger, the Company issued 425,000 shares as
a financial advisory fee to International Capital Growth, Ltd. which also
received warrants to purchase 110,375 shares of Common Stock for $1.00 per
share.
The Company's capital requirements relating to the development
and commercialization of Worlds Platinum have been and will continue to be
significant. The Company is dependent on the proceeds of its current offering
and other future financings in order to continue in business and develop and
commercialize its proposed products.
The Company 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 current offering, will provide only a portion of the funds
necessary to permit the Company to complete product development and
commercialization. Satisfactory completion of product development and
commercialization will require capital resources substantially greater than the
proceeds of its current offering or otherwise currently available to the
Company. In addition, as a result of the Mergers by operation of law, the
Company assumed Predecessor's then liabilities of approximately $4.6 million.
Although the Company 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.
There can be no assurance that the Company will be able to
raise any proceeds from its current offering or otherwise obtain the substantial
additional capital necessary to permit the Company to attract and retain a
sufficient number of subscribers or that any assumptions relating to its
business plans will prove to be accurate. While the Company hopes to raise an
additional $2 million from the shares it is currently offering, the Company has
no current arrangements with respect to, or sources of, additional financing and
there can be no assurance that any such financing, particularly the significant
amounts of financing that would be required, will be available to the Company on
commercially reasonable terms, or at all. Any proceeds raised under its current
offering is not likely to provide the significant funds required
16
<PAGE> 20
by the Company. 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. Based upon its current
projections, the Company believes it currently has sufficient funds to operate
for at least the next twelve months, if substantially all of the shares offered
by the Company hereby are sold.
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 production
revenue 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.
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%.
17
<PAGE> 21
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%.
18
<PAGE> 22
USE OF PROCEEDS
The net proceeds from the sale of the shares offered herein by
the Company is estimated to be approximately $1,700,000, assuming (i) all of the
shares offered are sold and (ii) the shares will all be sold through selling
agents. In the event less than all of the shares offered are sold, the Company
will realize less proceeds.
Purchase of the Warrant Shares and the Option Shares hereby
would generate approximately $460,875 in net proceeds to the Company. The
Company will not realize any funds from the sale of Common Stock by the Selling
Securityholders. The Company intends to use such funds for working capital. No
assurance can be given that any or all of the Warrant Shares or Option Shares
will be purchased and that these funds will become available to the Company.
The net proceeds of this Offering, assuming all shares offered
are sold by the outside agents should be approximately $1,700,000 and in the
event that all are sold by the Company (the Company currently has no
arrangements or understandings with any agents to sell any Shares), the net
proceeds should be approximately $1,900,000. The Company intends to use such net
proceeds as follows:
<TABLE>
<CAPTION>
ALL SOLD BY COMPANY ALL SOLD BY AGENTS
Approx. Approx.
Approx. % of Net Approx. % of Net
$ Amount Proceeds $ Amount $ Amount
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Advertising and promotion $ 300,000 15.7% $ 200,000 11.8%
Research and Systems Development $ 500,000 26.3% $ 400,000 23.5%
Relaunch of Worlds Chat $ 200,000 10.5% $ 200,000 11.7%
Intranet Marketing of Worlds Chat $ 100,000 5.3% $ 100,000 5.9%
3rd Party Technology Licensing $ 100,000 5.3% $ 100,000 5.9%
Artist Site Development $ 600,000 31.6% $ 600,000 35.3%
Working Capital and General
Corporate Purposes $ 100,000 5.3% $ 100,000 5.9%
---------- ----- ---------- -----
TOTAL $1,900,000 100.0% $1,700,000 100.0%
========== ===== ========== =====
</TABLE>
The foregoing table represents the Company's best estimate of
the allocation of the proceeds of this Offering based upon the current state of
the Company's development, its current plans and current economic and industry
conditions, and is subject to reapportionment of proceeds among the categories
listed above or to new categories in the event of drastic changes to the current
economic and industry conditions or an entirely unforeseen opportunity,
acquisition or otherwise, is presented to the Company.
The Company expects that the net proceeds of this Offering
will be sufficient for it to reach its objectives over at least the next 12
months. However, these proceeds, even if realized, will not be sufficient to
meet all of the Company's future capital requirements and additional financing
will be necessary. No assurance can be given that the Company will be able to
raise the additional funds necessary to reach its objectives. Until used, the
Company intends to invest the proceeds of this Offering in government
securities, certificates of deposit, money market securities or commercial
paper.
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<PAGE> 23
BUSINESS
Statements contained herein which are not historical facts are forward-looking
statements. Forward-looking statements involve a number of risks and
uncertainties including, but not limited to, general economic conditions, the
Company's ability to complete development and then market its products and
competitive factors and other risk factors detailed herein. See "Risk Factors."
Prospective investors are directed to the first paragraph in
the section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
OVERVIEW
The Company develops applications for its three-dimensional
("3D") Internet technology for different markets. At present the Company is
targeting three different markets for its 3D Internet technology. First, the
Company is in the process of marketing its 3D Internet technology with record
companies to produce music-oriented websites; second, the Company is in the
process of marketing its Worlds Chat technology to businesses for corporate
intranet applications; and third, the Company markets Worlds Chat, a 3D chat
site on the Internet, to consumers on the Internet.
Prior to the Mergers, Predecessor marketed Worlds Chat,
developed and marketed 3D toolsets and servers and performed contract
development work. However, the Company 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,
the Company does not anticipate that, over time, they will generate the bulk of
the Company's revenues.
The Company's 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 the Company or the
Company may license its technology for creation by third parties or the end
user.
The Company's primary focus is upon marketing its 3D Internet
technology to record companies to produce music-oriented websites. The Company
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,
the Company 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 the Company's 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. The Company intends to enter into revenue sharing
with recording labels and artists, from selling VIP on-line subscriber
memberships, advertising and database sales. In addition, the Company
anticipates the possibility of additional revenues from the sale of merchandise
of the artist on the site.
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<PAGE> 24
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.
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 Merger Agreement.
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 Mergers, Predecessor generated revenues of only approximately $6
million and had an accumulated deficit of approximately $21 million.
The Company will not generate any meaningful revenues until
after the company successfully completes development and market testing of
Worlds Platinum (also known as "Gamma," the Company's newest 3D toolset, as
further described below) and its 3D Internet music sites, and attracts and
retains a significant number of subscribers. The Company anticipates that it
will continue to incur significant losses until, at the earliest, the Company
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 the Company 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.
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<PAGE> 25
The CD+ appears to be an optimal medium to distribute the
Company's 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 the Company's 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. The Company
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 the Company's 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
The Company plans to enter the market in two phases. First,
the Company 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, the Company plans 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 the Company to develop sales, it is imperative
that relationships be developed between the Company 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 the Company's 3D artist
site program on an enhanced CD or CD+, the Company believes that record company
support is the most important because with their commitment to a particular
effort or format, the record company can give the Company 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 Mergers, management had numerous conversations and/or meetings
with representatives and/or high level management and/or executives from all six
major record companies. The Company believes it has received a positive response
to its concept and online artist's prototype from each of the companies and
intends to continue discussions with each of them.
22
<PAGE> 26
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, the Company believes that its proprietary technology
can be made VRML compliant. The Company believes that the VRML standard will
ultimately overcome its limitations but the current problems make a proprietary
solution such as the Company's technology attractive for the Company's 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 the Company, the barriers to
the adoption of 3D multi-user environments on the Internet. Predecessor's
technical solutions deliver 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 the
Company believes delivers user experiences far more interesting than what many
VRML environments provide today.
THE COMPANY'S TECHNOLOGY
The following is a summary of the Company's technologies, all
of which were developed and released by Predecessor. The Company's development
efforts are now focused on adapting World Platinum to produce music-oriented
websites.
Worlds Platinum
The Worlds Platinum Development Kit is the Company's third
generation and newest 3D toolset, and is expected to be completed in the first
half of 1998. The Company 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 the Company expects that
it can be made portable across Windows and UNIX Platforms because of Java's
platform independence.
23
<PAGE> 27
- - 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 the Company's 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 the Company anticipates will be used to
control and operate its future on-line virtual community,
Worlds of Worlds, that is currently in development. If the
Company 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, the Company
may make the browser an ActiveX control for Microsoft's
Internet Explorer and a plug-in for the Netscape Navigator.
- - 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 the Company's 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
the Company to compete will be dependent on the Company's 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 the
Company's products obsolete or less marketable or that the Company will be able
to successfully enhance its products or develop new products.
24
<PAGE> 28
Worlds Chat 1.0 Gold
The Company also owns its own proprietary online 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 the Company's 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).
The Company believes that the user base to Worlds Chat site
will develop into a valuable asset. Although the Company has no plans to build
advertising or subscription revenues through this site, such revenues may be
possible in the future as the Company 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, the Company
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,
the Company 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, the Company
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.
The Company believes that there is an opportunity to further
exploit the Worlds Chat product in modified form. The Company 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.
COMPETITION
The markets in which the Company 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. The Company will face competition from numerous sources, including
prospective customers which may develop and market their own competitive
products and services, software companies, and online and Internet service
providers. The Company 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 the Company. The
Company 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 the Company, permitting such companies to implement
extensive marketing campaigns.
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<PAGE> 29
Technologically, the market targeted by the Company 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. The Company's 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 the Company's
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 the Company's knowledge, no longer
offers 3D contract production) and Black Sun (now called Blaxxun and currently
focused on corporate applications) currently having a product available. Other
have announced their intention of bringing to market multi-user servers.
Each of the above mentioned organizations or technologies, as well as
possibly others not now known to the Company in some way competes with the
Company. The competition may be through entry into the same markets as the
Company, or through technology that either obviates Company's advantages or
lowers the barrier to entry in one of the Company's markets.
Besides technological competition, the Company will be competing with
established online music retailers with substantial resources and established
user bases. Among the leaders in online 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 the Company's. 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
online sales.
Notwithstanding the forgoing, to the best of the Company's knowledge,
no other company is currently offering a product that integrates 3D internet
technology with a music industry content application similar to what the
Company proposes to offer.
EMPLOYEES
The Company currently has seven full time employees, of whom one is an
executive officer, three are engaged in product development, one is engaged in
financial activities and one is engaged in marketing activities. The Company has
also re-established relationships with eight independent contractors (software
developers/programmers) who until early 1997 were performing technological
development work on its Worlds Platinum platform.
The Company, additional financing permitting, intends to hire up to
twelve 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.
The Company's employees are not represented by a labor union. The
Company believes that its relations with its employees are good.
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<PAGE> 30
FACILITIES
The Company's 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. The
Company has only negligible costs relating to environmental compliance laws.
LEGAL PROCEEDINGS
The Company is not currently involved in any material legal
proceedings.
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<PAGE> 31
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND CONSULTANT
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
<S> <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 Mergers, 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 Mergers, 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
the Company's 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
Mergers 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 online 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 the Company 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 the Company and the Company does not anticipate incurring any
costs or liability in connection with the matter. The Company's 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.
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<PAGE> 32
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's By-Laws includes certain provisions permitted pursuant to
the New Jersey Business Corporation Act ("NJBCA"), whereby officers and
directors of the Company 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. The Company believes that
these provisions will facilitate the Company's ability to continue to attract
and retain qualified individuals to serve as directors and officers of the
Company.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent of the Company where indemnification might
be required or permitted. The Company 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 the Company, 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. The Company 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 Mergers, the Company had not paid any compensation to its
executive officers or directors during the prior three years. From December 3,
1997 (effective date of the Mergers) through December 31, 1997, the Company paid
$21,903 in compensation to its President and Chief Executive Officer. The
Company intends to enter into an employment agreement with its President, Thomas
Kidrin that will expire 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 the Company for a period of one
year after termination.
1997 STOCK OPTION PLAN
The Board of Directors and stockholders of the Company have 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 ("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 the Company
in order to give such individuals a greater personal interest in the success of
the Company 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,
29
<PAGE> 33
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 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% stockholder). 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 non-plan 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 the Company's outside directors.
CERTAIN TRANSACTIONS
The Company 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.
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<PAGE> 34
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth, as of February 28, 1998, information
regarding the beneficial ownership of the Company's Common Stock based upon the
most recent information available to the Company for (i) each person known by
the Company to own beneficially more than five (5%) percent of its outstanding
Common Stock, (ii) each of its officers and directors, and (iii) all of its
officers and directors as a group. Each stockholder's address is c/o the
Company, 15 Union Wharf, Boston, MA 02109.
<TABLE>
<CAPTION>
Shares Owned Beneficially
and of Record
Name No. of Shares % of Total
- --------------------- ------------- ----------
<S> <C> <C>
Michael J. Scharf (1) 1,900,000 11.76%
Thomas Kidrin (2) 1,600,000 9.91%
Kenneth A. Locker (3) -0- N/A
Steven A. Greenberg 4,500,000 27.86%
All Officers and Directors 3,500,000 21.67%
as a Group (3 persons)
</TABLE>
- -----------------------
(1) Chairman.
(2) President, Chief Executive Officer, Secretary, Treasurer and a
Director.
(3) Director.
31
<PAGE> 35
DISCLOSURE OF COMMISSION POSITION ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Section 14A:3-5 of the NJBCA, as amended, authorizes the Company to
indemnify any director or officer under certain prescribed circumstances and
subject to certain limitations against certain costs and expenses, including
attorneys' fees actually and reasonably incurred in connection with any action,
suit or proceeding, whether civil, criminal, administrative or investigative, to
which such person is a party by reason of being a director or officer of the
Company if it is determined that such person acted in accordance with the
applicable standard of conduct set forth in such statutory provisions. The
Company's By-Laws contains provisions providing for the indemnification of
directors and officers to the full extent permitted by New Jersey Law.
The Company may also purchase and maintain insurance for the benefit of
any director or officer which may cover claims for which the Company could not
indemnify such person.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Company pursuant to the foregoing provisions, or otherwise, the Company has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore unenforceable.
DESCRIPTION OF SECURITIES
The Company 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, 16,149,996 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 the Company's Certificate of Incorporation, the
Company's 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 the
Company remaining after payment in full of all debts and obligations of the
Company and any preferences granted in the future to any preferred stock. The
Company 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 the Company's Certificate of Incorporation
without stockholder 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
32
<PAGE> 36
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 Bureau.
The New Jersey Shareholder Protection Act prohibits the Company from
engaging in business combinations with any interested stockholder for 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
The Company currently has 16,149,996 shares of Common Stock outstanding
(up to approximately 16,911,496 shares if all the currently outstanding options,
warrants and convertible notes are exercised or converted). Of these shares,
453,700 shares are freely tradeable without restriction or further registration
under the Securities Act of 1933, except for any shares purchased by an
"affiliate" of the Company (in general, a person who has a control relationship
with the Company) which will be subject to the limitations of Rule 144 adopted
under the Securities Act. In addition, another 2,426,996 shares of Common Stock
will be tradeable pursuant to Rule 144 on December 4, 1998, provided none of
such shareholders becomes an "affiliate" prior to such date. All of the
remaining 8,000,000 shares of Common Stock are "restricted securities," as that
term is defined under Rule 144 promulgated under the Securities Act.
In general, under Rule 144 as currently in effect, subject to the satisfaction
of certain other conditions, a person, including an affiliate of the Company (or
persons whose shares are aggregated with an affiliate of the Company), 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 number of outstanding shares of the
same class (approximately 161,500 shares assuming only the existing shares are
outstanding) or the average weekly trading volume of the Company's 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 Commission. Sales under Rule
144 are also subject to certain manner of sale provisions, notice requirements
and the availability of current public information about the Company. A person
who has not been an affiliate of the Company 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.
Of the 16,149,996 shares of Common Stock currently outstanding, 456,000
are currently freely tradeable and 5,294,000 are being registered herewith. In
the event the Company's offering is completed, the Company will have an
additional 2,000,000 shares outstanding, all of which would be freely tradeable.
As of January 22, 1998, there were 633 record holders of the Common
Stock.
CERTAIN MARKET INFORMATION
Currently there is, and at all times for at least the last five-years
there was, no active market for the Company's Common Stock. The Company intends
to take all necessary steps to cause its Common Stock to be traded on the
Bulletin Board. The Bulletin Board is an electronic inter-dealer quotation
system operated by the NASD for securities not quoted on NASDAQ that was
approved as a pilot project by the SEC in May 1990 and given permanent approval
in March 1997. A company's securities may be quoted for trading on the Bulletin
Board without the level of scrutiny applied by the NASD for NASDAQ listed
companies. Since December 1993, last transaction information on the Bulletin
Board is publicly
33
<PAGE> 37
available on a real-time basis (i.e. within 90 seconds). No assurance can be
given that the Company will be successful or that an active trading market will
ever develop. See "Risk Factors."
DIVIDEND POLICY
The Company has paid no dividends and does not expect to pay dividends
on its Common Stock in the foreseeable future as it intends to retain earnings
to finance the growth of its operations.
TRANSFER AGENT
The Company has engaged Continental Stock Transfer & Trust Company, 2
Broadway, New York, New York 10004, to act as Transfer Agent for the Company's
Common Stock.
PLAN OF DISTRIBUTION
The Company hereby offers up to 2,000,000 shares of its Common Stock on an
"as-sold, best efforts" basis at a price of $1.00 per share. All funds raised
during this offering which will extend for ninety days from the date hereof
(unless extended by the Company for up to an additional 60 days) will be
available to the Company immediately upon receipt. While the Company intends to
enter into arrangements with registered broker/dealers to help sell these Shares
in which case the Company will be required to pay commissions or other
compensation to these agents,the Company may sell some shares directly without
the use of agents. The Company currently has no understandings or arrangements
with anybody to act as selling agent.
The Securities offered herein by the Selling Security Holders hereby
may be sold from time to time directly by the Selling Security Holder.
Alternatively, the Selling Security Holders may from time to time offer such
Securities through underwriters, dealers or agents. The distribution of the
Securities by the Selling Security Holders may be effected in one or more
transactions that may take place on the over-the-counter market, including
ordinary broker's transactions, privately-negotiated transactions or through
sales to one or more broker-dealers for resale of such shares as principals at
market prices prevailing at the time of sale, at prices related to such
prevailing market prices or at negotiated prices. Usual and customary or
specifically negotiated brokerage fees or commissions may be paid by the Selling
Security Holders in connection with such sales of Securities. The Selling
Security Holders and intermediaries through whom such Securities are sold may be
deemed "underwriters" within the meaning of the Securities Act with respect to
the Securities offered, and any profits realized or commission received may be
deemed underwriting compensation. The Selling Security Holders may also transfer
the Securities pursuant to applicable exemptions from registration under the
Securities Act including Rule 144 under such Act.
Under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and the regulations thereto, any person engaged in a distribution of the
Securities of the Company offered by this Prospectus may not simultaneously
engage in market-making activities with respect to such securities of the
Company during the applicable "cooling off" period (nine days) prior to the
commencement of such distribution. In addition, and without limiting the
foregoing, the Selling Security Holders will be subject to applicable provisions
of the Exchange Act and the rules and regulations thereunder, including without
limitation, Regulation M and Rule 10b-7, in connection with transactions in such
Securities, which provisions may limit the timing of purchases and sales of such
Securities by the Selling Security Holders.
There are no current or future plans, arrangements or understandings of
or known by the Company with respect to transactions of the Selling Security
Holders, including transactions involving short selling. The Selling Security
Holders are not obligated to sell the Securities through any particular broker.
34
<PAGE> 38
SELLING SECURITY HOLDERS
The Company is registering the shares of Common Stock (the "Reoffer
Shares") purchased by investors in private placement offering; shares held by a
pre-Merger control shareholder of the Company; and 310,375 shares of Common
Stock underlying currently outstanding Stock options and warrants. Other than
the costs of preparing this Prospectus and a registration fee to the SEC, the
Company is not paying any costs relating to the sales by the Selling Security
Holders.
Each of the Selling Security Holders (or their transferees) and
intermediaries to whom such securities may be sold may be deemed to be an
"underwriter" of the Company's Common Stock offered hereby, as that term is
defined under the Act. Each of the Selling Security Holders (or their
transferees) may sell the Reoffer Shares from time to time for his own account
in the open market at the prices prevailing therein, or in individually
negotiated transactions at such prices as may be agreed upon. The net proceeds
from the sale of the Reoffer Shares by the Selling Security Holders will inure
entirely to their benefit and not to that of the Company.
Except as indicated below, none of the Selling Security Holders has
held any position or office, or had any material relationship with the Company
or any of its predecessors or affiliates within the last three years, and none
of the Selling Security Holders will own any of the outstanding Common Stock of
the Company after completion of the offering of such shares.
The Reoffer Shares may be offered for sale from time to time in regular
brokerage transactions in the over-the-counter market, or, either directly or
through brokers or to dealers, or in private sales or negotiated transactions,
or otherwise, at prices related to the then prevailing market prices. Thus, they
may be required to deliver a current prospectus in connection with the offer or
sale of the Reoffer Shares. In the absence of a current prospectus, if required,
these shares may not be sold publicly without restriction unless held for two
years, or after one year subject to volume limitations and satisfaction of other
conditions. The Selling Security Holders have been advised that Rules 10b-6 and
10b-7 of the General Rules and Regulations promulgated under the Securities
Exchange Act of 1934 will be applicable to their sales of Reoffer Shares. These
rules contain various prohibitions against trading by persons interested in a
distribution and against so-called "stabilization" activities.
The Selling Security Holders (or their transferees) might be deemed to
be "underwriters" within the meaning of Section 2(11) of the Act and any profit
on the resale of the Reoffer Shares as principal might be deemed to be
underwriting discounts and commissions under the Act.
Any sale of Reoffer Shares by Selling Stock Holders (or their transferees)
through broker-dealers may cause the broker-dealers to be considered as
participating in a distribution and subject to Rule 10b-6 promulgated under the
Securities Exchange Act of 1934, as amended. If any such transaction were a
"distribution" for purposes of Rule 10b-6, then such broker-dealers might be
required to cease making a market in the Company's equity securities for either
two or nine trading days prior to, and until the completion of, such activity.
35
<PAGE> 39
<TABLE>
<CAPTION>
Shares Shares Owned
Name Shares Held Offered After Sale
<S> <C> <C> <C>
Barrington Capital Group, L.P. 120,000 120,000 0
Harvey Bibicoff 60,000 60,000 0
Harvey R. Brice 30,000 30,000 0
Cameo Trust Corporation Limited 24,000 24,000 0
Cameo Trust Corporation Limited 120,000 120,000 0
Cameo Trust Corporation Limited 60,000 60,000 0
Cass & Co. - Magnum Capital Growth Fund 120,000 120,000 0
Cass & Co. - Magnum Tech Fund 100,000 100,000 0
Cass & Co. - Magnum US Equity Fund 240,000 240,000 0
Steven Chrust & Sharon Chrust JTWROS 60,000 60,000 0
Steven Chrust IRA 60,000 60,000 0
CML Strategic Investment Fund, Ltd. 20,000 20,000 0
Dine Investors, L.P. 60,000 60,000 0
Engel Investors 230,000 230,000 0
James C. Gale, Trustee
F/B/O Ariana J. Gale 30,000 30,000 0
Leo I. George 120,000 120,000 0
Jay Gottlieb 30,000 30,000 0
Greenberg & Panish APC defined Benefits
Pension Plan dated 2/1/88 30,000 30,000 0
David Greenberg IRA 30,000 30,000 0
Susan Greenberg 60,000 60,000 0
DLJSC, Custodian f/b/o
Stewart Greisman (IRA) 30,000 30,000 0
Katarina Kalda 5,000 5,000 0
John J. & Lenore Heckler JTWROS 30,000 30,000 0
Paul Hochhauser 60,000 60,000 0
Intergalactic Growth Fund, Inc. 120,000 120,000 0
Ronald Koenig(1) 60,000 60,000 0
Laurick Trust 30,000 30,000 0
John M. Liviakis 25,000 25,000 0
Mercantile Capital, LLC 120,000 120,000 0
Robert E. Mullane 120,000 120,000 0
Napier Brown Holdings, Ltd. 120,000 120,000 0
Patricia Bartlett Nemes 30,000 30,000 0
Christiane Olsen 60,000 60,000 0
Palestra Partners LP 120,000 120,000 0
David A. Rees 120,000 120,000 0
Rosebud Capital Growth Fund, Ltd. 110,000 110,000 0
S-A Capital LLC 30,000 30,000 0
Elizabeth Varabiev 5,000 5,000 0
Howard Landis 10,000 10,000 0
</TABLE>
36
<PAGE> 40
<TABLE>
<CAPTION>
Shares Shares Owned
Name Shares Held Offered After Sale
<S> <C> <C> <C>
Marvin M. Shiller 40,000 40,000 0
Murray Slimowitz 60,000 60,000 0
Murray Slimowitz, IRA 60,000 60,000 0
Tore Staubo 60,000 60,000 0
Michael & Marjorie Stern JTWROS 240,000 240,000 0
Peter Stern Family Trust 180,000 180,000 0
U.A.D. 8/21/90
Cowen & Company custodian
FBO William G. Walters, IRA (29
98054) 60,000 60,000 0
Raphael & Bella Wizman JTWROS 15,000 15,000 0
International Capital Growth, Ltd.(2) 535,375 535,375 0
John Cattier(3) 50,000 50,000 0
Unity Venture Capital Associates Ltd.(4) 94,000 94,000 0
Summit Bank as Trustee
Hannah S. and Samuel A. Cohn.
Memorial Foundation Under
Agreement of Trust Dated 8/17/94 60,000 60,000 0
Summit Bank as Trustee
Cynthia J. Cohn Under Agreement of
Trust Dated 12/29/89 60,000 60,000 0
Joseph F. & Linda Galvin 40,000 40,000 0
Heidrun Eckes - Chantre 360,000 360,000 0
Elizabeth G. Konaxis 40,000 40,000 0
Robert B. Prag 25,000 25,000 0
Lawrence Burstein (5) 140,000 140,000 0
Jerome Baron 7,200 7,200 0
Murdoch & Company 18,000 18,000 0
Cricket Services 23,400 23,400 0
Richard Kress & Cheryl Kess JTTEN 2,700 2,700 0
Stephen Verchick 21,600 21,600 0
Richard Braver 2,700 2,700 0
Bear Stearns Securities Corp. f/b/o Dan
Brecher -- IRA 6,300 6,300 0
Barry Ridings 3,600 3,600 0
Carl L. Norton 5,400 5,400 0
Financiera E Inyersionista Salles S.A. 7,200 7,200 0
Ian Barnett 2,700 2,700 0
Henry Rothman 3,600 3,600 0
Donald Rabinovitch 3,150 3,150 0
David Vozick 3,150 3,150 0
Jonathan Rothschild 900 900 0
Ira Roxland 3,600 3,600 0
Equity Interest Inc. 900 900 0
Domaco venture Capital 900 900 0
</TABLE>
37
<PAGE> 41
<TABLE>
<CAPTION>
Shares Shares Owned
Name Shares Held Offered After Sale
<S> <C> <C> <C>
The Sagres Group Ltd. 3,600 3,600 0
Heptagon Investments Ltd.(6) 45,000 45,000 0
Steven Milner (7) 60,800 60,800 0
Charles L. Greenberg & Donna Greenberg,
JTWROS (8) 120,000 120,000 0
Tucker Anthony C/F Charles L. Greenberg,
IRA Rollover Dtd 1/8/97(8) 120,000 120,000 0
Cowen & Co. Custodian for Stanley
Hollander (9) 78,000 78,000 0
Norman Leben 9,000 9,000 0
Heptagon Capital Management Inc. 900 900 0
Michael Karfunkel 20,700 20,700 0
George Karfunkel 20,700 20,700 0
Jay M. Haft 6,300 6,300 0
Credo Interactive Inc.(10) 50,000 50,000 0
Joseph G. and Lillian P. Matulich (11) 16,000 16,000 0
------ ------ -
Total 5,604,375 5,604,375 0
</TABLE>
(1) Chairman and CEO of International Capital Growth, Ltd.
(2) Includes 110,375 shares of Common Stock underlying currently exercisable
warrants. Placement Agent for the Offering.
(3) Consists of shares of Common Stock underlying currently exercisable stock
options. Director of the Company prior to the Merger. An affiliate of Cricket
Services and Chairman of Heptagon investment Ltd., an affiliate of Heptagon
Capital Management Inc.
(4) Prior to the Mergers, this entity was a control shareholder. This entity's
president was the president of the Company prior to the Mergers.
(5) President of Unity Venture Capital Associates Ltd. and a Director of the
Company prior to the Mergers. Includes 50,000 shares underlying currently
exercisable stock options.
(6) An affiliate of Heptagon Capital Management Inc.
(7) Director of the Company prior to the Mergers. Includes 50,000 shares
underlying currently exercisable stock options.
(8) Brother of Steven A. Greenberg, the Company's principal shareholder.
(9) Executive Vice President of International Capital Growth, Ltd. Includes
shares held in an IRA account for his benefit.
(10) Consists of shares of Common Stock underlying currently exercisable
warrants.
(11) Parents of a Senior Vice President of International Capital Growth, Ltd.
LEGAL MATTERS
The validity of the issuance of the Securities offered hereby will be
passed upon for the Company by the law firm of Heller, Horowitz & Feit, P.C.,
New York, New York.
Irving Rothstein, Esq. is a member of the law firm of Heller, Horowitz
& Feit, P.C., counsel to the Company. As of September 15, 1997, Mr. Rothstein
was appointed an Assistant Secretary of the Company. This is purely an
administrative position and Mr. Rothstein was appointed solely to assist, and to
ease the burdens of, the executive officers of the Company in the execution of
various documents and/or certificates on
38
<PAGE> 42
behalf of the Company. Neither Mr. Rothstein nor his law firm receive any
additional compensation for these efforts.
EXPERTS
The financial statements of the Company and Worlds Inc. - Predecessor
included in the Registration Statement 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
the 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.
39
<PAGE> 43
WORLDS INC.
(A DEVELOPMENT STAGE ENTERPRISE)
FINANCIAL STATEMENTS
PERIOD FROM APRIL 8, 1997 (INCEPTION)
TO DECEMBER 31, 1997
<PAGE> 44
WORLDS INC.
(A DEVELOPMENT STAGE ENTERPRISE)
FINANCIAL STATEMENTS
PERIOD FROM APRIL 8, 1997 (INCEPTION)
TO DECEMBER 31, 1997
F-1
<PAGE> 45
WORLDS INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONTENTS
WORLDS INC. (THE "COMPANY")
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-3
FINANCIAL STATEMENTS:
Balance sheet F-4
Statement of operations F-5
Statement of stockholders' deficit F-6
Statement of cash flows F-7
Summary of accounting policies F-8 - F-11
Notes to financial statements F-12 - F-21
WORLDS INC. ("PREDECESSOR")
[Predecessor company - information prior to date of
merger with the Company herein disclosed]:
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-24
FINANCIAL STATEMENTS:
Balance sheet F-25
Statements of operations F-26
Statements of stockholders' deficit F-27
Statements of cash flows F-28
Summary of accounting policies F-29 - F-31
Notes to financial statements F-32 - F-41
F-2
<PAGE> 46
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> 47
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> 48
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> 49
WORLDS INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF STOCKHOLDERS' DEFICIT
(NOTE 7)
Period from April 8, 1997 (inception) to December 31, 1997
<TABLE>
<CAPTION>
Deficit
accumulated
Common stock during the Total
------------------------ Additional development stockholders'
Shares Amount paid-in capital stage deficit
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Issuance of common stock to 8,400,000 $ 8,400 $ 195,600 $ -- $ 204,000
founding stockholders
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> 50
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> 51
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 The carrying amounts of financial
INSTRUMENTS 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.
F-8
<PAGE> 52
WORLDS INC.
(A DEVELOPMENT STAGE ENTERPRISE)
SUMMARY OF ACCOUNTING POLICIES
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.
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 Software development costs are charged
COSTS 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 Research and development costs are
COSTS expensed as incurred.
F-9
<PAGE> 53
WORLDS INC.
(A DEVELOPMENT STAGE ENTERPRISE)
SUMMARY OF ACCOUNTING POLICIES
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-10
<PAGE> 54
WORLDS INC.
(A DEVELOPMENT STAGE ENTERPRISE)
SUMMARY OF ACCOUNTING POLICIES
NEW ACCOUNTING STANDARDS In June 1997, the FASB issued SFAS No. 130,
NOT YET ADOPTED "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-11
<PAGE> 55
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.
F-12
<PAGE> 56
WORLDS INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
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 over
Predecessor's capital deficit of $6,135,538
was expensed as acquired research and
development.
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 The Private Placement called for WAC to
PLACEMENT 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
F-13
<PAGE> 57
WORLDS INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
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 A summary of property and equipment as of
EQUIPMENT December 31, 1997 is as follows:
<TABLE>
December 31, 1997
- --------------------------------------------------------------------------------
<S> <C>
Computers, software and equipment $650,557
Less: Accumulated depreciation and amortization 441,105
- --------------------------------------------------------------------------------
$209,452
================================================================================
</TABLE>
F-14
<PAGE> 58
WORLDS INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
5. NOTES PAYABLE Long-term debt at December 31, 1997 consists
of the following:
<TABLE>
<CAPTION>
December 31, 1997
- ----------------------------------------------------------------------------------------------------
<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.
F-15
<PAGE> 59
WORLDS INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
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>
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.
F-16
<PAGE> 60
WORLDS INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
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.
F-17
<PAGE> 61
WORLDS INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
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.
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 exercisble at year-end 55,000 $.50 $.50
- ----------------------------------------------------------------------------------------
Weighted average fair value of
options granted during the year $.59
- ----------------------------------------------------------------------------------------
</TABLE>
F-18
<PAGE> 62
WORLDS INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
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.
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:
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 -0-
----------
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 -0-
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 ($0.72)
----------
Diluted loss per share - as calculated ($0.71)
----------
Diluted loss per share - as disclosed
due to anti-dilutive effect of stock options ($0.72)
----------
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.
F-19
<PAGE> 63
WORLDS INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
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
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.
F-20
<PAGE> 64
WORLDS INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
12. SUPPLEMENTAL CASH Interest paid during the period ended
FLOW INFORMATION 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-21
<PAGE> 65
WORLDS INC. - PREDECESSOR
(A DEVELOPMENT STAGE
ENTERPRISE)
FINANCIAL STATEMENTS
PERIOD ENDED DECEMBER 3, 1997,
YEAR ENDED DECEMBER 31, 1996 AND PERIOD FROM
APRIL 26, 1994 (INCEPTION) TO DECEMBER 3, 1997
F-22
<PAGE> 66
WORLDS INC. - PREDECESSOR
(A DEVELOPMENT STAGE ENTERPRISE)
CONTENTS
Worlds Inc. ("Predecessor") is considered a predecessor company and the
information disclosed herein is as of and prior to the date of merger with
Worlds Inc. (formerly Worlds Acquisition Corp.) ("WAC") on December 3, 1997.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-24
FINANCIAL STATEMENTS:
Balance sheet F-25
Statements of operations F-26
Statements of stockholders' deficit F-27
Statements of cash flows F-28
Summary of accounting policies F-29 - F-31
Notes to financial statements F-32 - F-41
F-23
<PAGE> 67
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-24
<PAGE> 68
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-25
<PAGE> 69
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, December 3, December 3,
1996 1997(a) 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-26
<PAGE> 70
WORLDS INC. - PREDECESSOR
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
Preferred stock
--------------------------------- Deferred
Common stock Series A Series B compensation Additional Total
--------------- --------------- --------------- on stock paid-in Accumulated stockholders
Shares Amount Shares Amount Shares Amount options capital deficit deficit
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <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 $ (8,763,965) $ (423,721)
Issuance of common stock 261,386 26 - - - - - 112,795 - 112,821
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 - 8,618,989
Compensation related to
stock options - - - - - - 24,202 (9,394) - 14,808
Net loss for the year - - - - - - - - (10,186,954) (10,186,954)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31,
1996 5,535,646 553 1,801,533 180 1,022,726 102 (21,445) 17,107,472 (18,950,919) (1,864,057)
Compensation related to
stock options - - - - - - 16,108 (2,369) - 13,739
Net loss for the period
ended December 3, 1997 - - - - - - - - (2,285,220) (2,285,220)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 3,
1997 5,535,646 $553 1,801,533 $180 1,022,726 $102 $ (5,337) $17,105,103 $(21,236,139) $(4,135,538)
====================================================================================================================================
</TABLE>
See accompanying summary of accounting policies
and notes to financial statements.
F-27
<PAGE> 71
WORLDS INC. - PREDECESSOR
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period from
April 26,
1994
(inception)
Year ended Period ended to
December 31, December 3, December 3,
1996 1997(a) 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
=======================================================================================================
</TABLE>
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.
- --------------------------------------------------------------------------------
(a) Date of merger with Worlds Inc. (formerly Worlds Acquisition Corp.)
- --------------------------------------------------------------------------------
See accompanying summary of accounting policies
and notes to financial statements.
F-28
<PAGE> 72
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 The accompanying financial statements have been
PRESENTATION 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 Due to recurring losses, insufficient revenue, a
OPERATIONS 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.
F-29
<PAGE> 73
WORLDS INC. - PREDECESSOR
(A DEVELOPMENT STAGE ENTERPRISE)
SUMMARY OF ACCOUNTING POLICIES
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 Cash and cash equivalents are comprised of highly
EQUIVALENTS liquid money market instruments, which have
original maturities of three months or less at the
time of purchase.
PROPERTY AND Property and equipment are stated at cost.
EQUIPMENT 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 Software development costs are charged to expense
COSTS 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 Research and development costs are expensed as
DEVELOPMENT COSTS incurred.
F-30
<PAGE> 74
WORLDS INC. - PREDECESSOR
(A DEVELOPMENT STAGE ENTERPRISE)
SUMMARY OF ACCOUNTING POLICIES
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 The Predecessor derives revenues from corporate
CREDIT RISK 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 Effective January 1, 1996, the Predecessor adopted
STANDARDS 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 (see Note 5).
F-31
<PAGE> 75
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 A summary of property and equipment as of December
EQUIPMENT 3, 1997 is as follows:
<TABLE>
<CAPTION>
December 3, 1997
-------------------------------------------------------------
<S> <C>
Computers, software and equipment $650,557
Less:. Accumulated depreciation and
amortization 424,782
-------------------------------------------------------------
$225,775
=============================================================
</TABLE>
F-32
<PAGE> 76
WORLDS INC. - PREDECESSOR
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
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 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 issue 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.
F-33
<PAGE> 77
WORLDS INC. - PREDECESSOR
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
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>
<CAPTION>
-------------------------------------------------------------
<S> <C>
1998 $ 70,000
1999 40,000
2000 1,690,000
2001 36,667
=============================================================
</TABLE>
F-34
<PAGE> 78
WORLDS INC. - PREDECESSOR
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
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.
5. STOCKHOLDERS' Preferred Stock
DEFICIT
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.
F-35
<PAGE> 79
WORLDS INC. - PREDECESSOR
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
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
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.
F-36
<PAGE> 80
WORLDS INC. - PREDECESSOR
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
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, December 3,
1996 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 Weighted
available for ----------------------------------- average price
grant Shares Price per 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-37
<PAGE> 81
WORLDS INC. - PREDECESSOR
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
6. RELATED PARTY For the year ended December 31, 1996, $1,276,780
REVENUE 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 In March 1997, Predecessor sold certain of its
OF TECHNOLOGY 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.
F-38
<PAGE> 82
WORLDS INC. - PREDECESSOR
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
The provision for income taxes for the year ended
December 31, 1996 and the period ended December 3,
1997 consists of:
<TABLE>
<CAPTION>
Period
Year ended 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 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").
F-39
<PAGE> 83
WORLDS INC. - PREDECESSOR
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
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.
F-40
<PAGE> 84
WORLDS INC. - PREDECESSOR
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
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 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-41
<PAGE> 85
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE
ANY IMPLICATION THAT THERE HAD BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OFFERED HEREBY BY ANYONE IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH
THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO
ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
TABLE OF CONTENTS
PAGE
----
Additional Information....................................................... 2
Summary ..................................................................... 3
Risk Factors................................................................. 5
Selected Financial Information .............................................. 12
Management's Discussion and Analysis of Financial Conditions and
Results of Operations................................................... 14
Use of Proceeds.............................................................. 19
Business .................................................................... 20
Management................................................................... 28
Security Ownership of Certain Beneficial Owners and Management............... 31
Disclosure of Commission Position on Indemnification For
Securities Act Liability................................................ 32
Description of Securities.................................................... 32
Plan of Distribution ...................................................... 34
Selling Security Holders..................................................... 35
Legal Matters................................................................ 38
Experts .................................................................... 39
Index to Financial Statements................................................F-2
UNTIL _________________ (25 DAYS AFTER THE DATE OF THIS PROSPECTUS) ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
7,604,375 SHARES OF COMMON STOCK
WORLDS INC.
PROSPECTUS
MARCH __, 1998
<PAGE> 86
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 14A:3-5 of the New Jersey Business Corporation Act, as amended,
authorizes the Registrant to indemnify any director or officer under certain
prescribed circumstances and subject to certain limitations against certain
costs and expenses, including attorneys' fees actually and reasonably incurred
in connection with any action, suit or proceeding, whether civil, criminal,
administrative or investigative, to which such person is a party by reason of
being a director or officer of the Registrant if it is determined that such
person acted in accordance with the applicable standard of conduct set forth in
such statutory provisions. Article VI of the Registrant's By-Laws extends such
indemnities to the full extent permitted by New Jersey law.
The Registrant may also purchase and maintain insurance for the benefit
of any director or officer which may cover claims for which the Registrant could
not indemnify such persons.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following statement sets forth the estimated expenses in connection
with the offering described in the Registration Statement, all of which will be
borne by the Registrant.
<TABLE>
<CAPTION>
<S> <C>
Securities and Exchange Commission Fee..................... $ 2,350
Accountants' Fees.......................................... $ 22,000
Legal Fees................................................. $ 40,000
Blue Sky Qualification, Fees and Expenses.................. $ 15,000
Printing and engraving..................................... $ 20,000
------
TOTAL............................................. $ 99,350
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
Effective December 3, 1997, Worlds Acquisition Corp. ("WAC") merged
into the Registrant and the Registrant issued an aggregate of 14,200,000 shares
of its Common Stock to the former stockholders of WAC. None of the stockholders
of WAC received any consideration other than shares of the Registrant. This
issuance of securities was exempt from registration pursuant to Section 4(2) of
the Securities Act of 1933.
On December 31, 1997 the Registrant sold a total of 585,000 shares at
$1.00 per share, for a total purchase price of $585,000 to five accredited
persons and one non-accredited person in a private offering exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933. The
Registrant received net proceeds of $526,000 from this offering.
On January 2, 1998, the Registrant sold 30,000 shares of its Common
Stock at $1.00 per share, for a total purchase price of $30,000, to one
accredited investor in a private offering exempt from registration pursuant to
Section 4(2) of the Securities Act of 1933. The Registrant received net proceeds
of $26,500 from this offering.
On November 21, 1997, the Registrant issued 425,000 shares of its
Common Stock as a financial advisory fee to its investment banker. The issuance
was exempt from registration pursuant to Section 4(2) of the Securities Act of
1933.
<PAGE> 87
ITEM 27. EXHIBITS
The following exhibits were previously filed;
3.1 Certificate of Incorporation*
3.1.1 Certificate of Merger
3.2 By-Laws
4.1 Specimen Common Stock Certificate**
5 Opinion of Heller, Horowitz & Feit, P.C.
10.1 Merger Agreement between Worlds Acquisition Corp. and
Academic Computer Systems, Inc.***
23.1 Consent of Heller, Horowitz & Feit, P.C.
(included in the Opinion filed as Exhibit 5)
23.2 Consents of BDO Seidman, LLP
- ---------------
* Incorporated by reference from Registration Statement No. 2-31876.
** To be filed by Amendment
*** Incorporated by reference from the Company's Current Report on Form 8-K
dated December 3, 1997.
The following exhibits are filed herewith;
4.1 Specimen Common Stock Certificate
5.1 Amended Opinion of Heller, Horowitz & Feit, P.C.
23.3 Consents of BDO Seidman, LLP
ITEM 28. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information in the
registration statement; and
(iii) Include any additional or changed material information on the
plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the Company pursuant to the foregoing provisions, or otherwise, the
Company has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Company of expenses incurred or paid by a
director, officer or controlling person of the Company in the successful defense
of any action, suit or proceedings) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Company will, unless in the opinion of its counsel the
<PAGE> 88
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
The Company will provide to the Representative of the Underwriters at
the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Representative to
permit prompt delivery to each purchaser.
<PAGE> 89
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and has authorized this registration
statement or amendment to be signed on its behalf by the undersigned, in the
City of Boston and State of Massachusetts on the 26th day of April, 1998.
WORLDS INC.
By: /s/ Thomas Kidrin
----------------------------
Thomas Kidrin
President, Chief Executive Officer
and Director
In accordance with the requirements of the Securities Act of 1933, this
registration statement or amendment was signed by the following persons in the
capacities and on the dates stated:
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ Thomas Kidrin President, CEO, Treasurer April 26, 1998
- -------------------------
Thomas Kidrin
/s/ Michael J. Scharf Chairman April 27, 1998
- -------------------------
Michael J. Scharf
/s/ Kenneth A. Locker Director April 27, 1998
- -------------------------
Kenneth A. Locker
<PAGE> 90
EXHIBIT INDEX
4.1 Specimen Common Stock Certificate
5.1 Opinion of Heller, Horowitz & Feit, P.C.
23.3 Consents of BDO Seidman, LLP
<PAGE> 1
EXHIBIT 4.1
FORM COMMON STOCK CERTIFICATE
Number Shares
WIC
WORLDS See reverse for
certain definitions
[logo]
Incorporated under the Laws
of the State of New Jersey
THIS CERTIFIES THAT CUSIP 981918 10 5
IS THE OWNER OF
Fully paid and non-assessable shares of
Common Stock of Worlds Inc.
transferable on the books of the Corporation or by the holder hereof in person
or by duly authorized Attorney, upon surrender of this Certificate properly
endorsed. This Certificate is not valid until countersigned and registered by
the Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
Dated:
[SEAL]
/s/ /s/
President and Secretary Chairman of the Board
Countersigned and Registered
Continental Stock Transfer & Trust Company
(New Jersey)
By:
Authorized Signature
<PAGE> 2
Reverse Side of Stock Certificate
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations.
<TABLE>
<S> <C>
TEN COM - as tenants in common UNIF FIT MIN ACT-________Custodian__________
(Cust) (Minor)
TEN ENT - as tenants by the
entireties under Uniform Gifts to Minors
JT TEN - as joint tenants with Act__________________________
right of survivorship and not as (State)
tenants in common
</TABLE>
Additional abbreviations may also be used though not in the above list.
For Value Received,_____________________________hereby sell, assign
and transfer unto
PLEASE INSERT SOCIAL SSECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- -----------------------------------------------
- -------------------------------------------------------------------------------
(Please print or typewrite name and address of assignee)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
__________________________________________________________ shares
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint ______________________ Attorney to transfer
the said stock on the books of the within named Corporation with full power of
substitution in the premises.
Dated_________________________
-----------------------------------
NOTICE: The signature to this
assignment must correspond with the
name as written upon the face of the
Certificate, in every particular,
without alteration or enlargement or
any change whatever.
SIGNATURE(S)
GUARAHTEED:________________________
The signature(s) should be
guaranteed by an eligible guarantor
institution (banks, stockbrokers,
savings and loan associations and
credit unions with membership in an
approved signature guarantee
medallion program), pursuant to
S.E.C. Rule 17Ad-15.
<PAGE> 1
EXHIBIT 5.1
<TABLE>
<S> <C> <C>
HELLER, HOROWITZ & FEIT, P.C.
JACOB W. HELLER ATTORNEYS AT LAW COUNSEL
RICHARD F. HOROWITZ 292 MADISON AVENUE ROBERT C. MALABY
ELI FEIT NEW YORK, N.Y. 10017
LAWRENCE J. TOSCANO (212) 685-7600 CABLE ADDRESS
STUART A. BLANDER HELLFEITER, N.Y.
SIGMUND S. WISSNER-GROSS
MAURICE W. HELLER TELECOPIER
ALAN A. HELLER (2I2) 696-9459
IRVING ROTHSTEIN
WORLD WIDE WEB
MAY ORENSTEIN HTTP://WWW.HHANDF.COM
LOUIS A. BRILLEMAN
JOEL C. HAIMS WRITERS E-MAIL
CLIFFORD J. BOND [email protected]
ALLEN M. EISENBERG
JOSEPH H. CARLISLE
JESSICA Y.CHUN
</TABLE>
April 27, 1998
Worlds Inc.
15 Union Wharf
Boston, MA 02109
Gentlemen:
As counsel for your Company, we have examined your Articles of
Incorporation, By-Laws, such other corporate records, documents and proceedings
and such questions of law as we have deemed relevant for the purpose of this
opinion.
We have also, as such counsel, examined the Registration
Statement (the Registration Statement) of your Company on Form SB-2, covering
the registration under the Securities Act of 1933, as amended, of the proposed
(1) offer and resale of (i) up to 5,294,000 shares of Common Stock, par value
$.001 (the "Common Stock"), (ii) 160,375 shares of Common Stock underlying
Warrants, and (iii) 150,000 shares of Common Stock underlying options, all of
which are being registered on behalf of selling stockholders, and (2) the offer
and sale of up to 2,000,000 shares of Common Stock (collectively, items (1) and
(2), the Registered Securities). Our review has also included the exhibits and
forms of prospectus (the Prospectus) for the resale of the Registered
Securities.
On the basis of such examination, we are of the opinion that:
1. The Company is a corporation duly authorized and validly
existing and in good standing under the laws of the State of New Jersey, with
corporate power to conduct the business which it conducts as described in the
Registration Statement.
2. The Common Stock identified above in item (1)(i) has been
fully paid and is duly and validly issued and is nonassessable, and as to the
Common Stock identified in items (1)(ii) ,(1)(iii) and (2), subject to the
payment therefore pursuant to their terms, will be duly and validly issued,
fully paid and nonassessable shares of Common Stock of the Company.
<PAGE> 2
Heller, Horowitz & Feit, P.C.
Worlds Inc.
April 27, 1998
Page 2
We hereby consent to the filing of this opinion as an exhibit
to the Registration Statement and to the use of our name in the Prospectus under
the caption "Legal Matters."
Very truly yours,
/S/
------------------------------
HELLER, HOROWITZ & FEIT, P.C.
<PAGE> 1
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
April 27, 1998
<PAGE> 2
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
April 27, 1998
