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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Fiscal Year ended December 31, 1997 Commission File Number 2-31876
WORLDS INC.
(Exact Name of Registrant as Specified in its Charter)
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New Jersey 22-1848316
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number)
15 Union Wharf, Boston, Massachusetts 02109
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including Area Code: (617) 725-8900
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
None
Title of Class
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve (12) months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past ninety (90) days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
registrant's best knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of voting stock held by non-affiliates of the
Registrant: can not be determined because of the absence of an active trading
market for Registrant's securities.
The number of shares outstanding of Registrant's Common Stock as of April 3,
1998: 16,149,996.
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PART I
ITEM 1. BUSINESS
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.
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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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.
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.
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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.
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
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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.
- - 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.
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- - 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.
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
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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.
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. Companies in the former category
include Paragraph (recently acquired by Silicon Graphics), Superscape, OZ
Interactive, Dimension X (recently 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! and Black Sun currently having a product
available. Other have announced their intention of bringing to market multi-user
servers.
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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.
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.
ITEM 2. PROPERTIES
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 $2,500 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.
ITEM 3. LEGAL PROCEEDINGS
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 the 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
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settlement agreement, which, among other things, would terminate both the State
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
September 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.
Fraser and the Company are presently negotiating the terms of a
settlement agreement. The Company's management and its counsel believe that the
maximum additional liability for resolution of these two lawsuits would be
approximately $150,000, which amount has been accrued 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 affect on the Company's
financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET PRICE OF REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
While the Company has not filed a Registration Statement with the
Securities and Exchange Commission to register under, and be subject to the
reporting requirements of, the Securities and Exchange Act of 1934, as amended,
the Company files Annual, Quarterly and Current Reports required thereunder and
expects to shortly be subject to the reporting requirements.
As of January 22, 1998, there were 633 record holders of the
Registrant's common stock.
Since its inception, the Registrant has not paid any dividends on its
common stock and has no current intention to do so in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
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
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selected statements of operations data for Predecessor for the period from April
26, 1994 to December 31, 1994 and for the year ended December 31, 1995 is
derived from Predecessor's audited financial statements not included herein.
The following data should be read in conjunction with the
financial statements of the Company and Predecessor.
STATEMENT OF OPERATIONS DATA
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Worlds Inc.
(Formerly
Worlds
Acquisition
Corp.) Worlds, Inc. - Predecessor (a development stage enterprise)
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Cumulative
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 31, December 3, December December December December
1997 1997 3, 1997 31, 1996 31, 1995 31, 1994
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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>
10
<PAGE> 11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION 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
11
<PAGE> 12
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.
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
12
<PAGE> 13
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.
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.
13
<PAGE> 14
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 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.
14
<PAGE> 15
As a result of the foregoing, Predecessor incurred a net loss
of $2,285,220, inclusive of the $389,287 extraordinary gain, for the eleven
months ended December 3, 1997, compared to $10,186,954 for the fiscal year ended
December 31, 1996, a decrease of 78%.
Year Ended December 31, 1995 Compared with Year Ended December 31, 1996.
Revenue increased by 101% from $1,882,232 for the year ended
December 31, 1995 to $3,784,019 for the year ended December 31, 1996. This
increase was primarily attributable to an increase in the number of production
projects and the licensing revenue from these projects.
Costs of revenue increased by 35% from $4,445,582 for the year
ended December 31, 1995 to $6,014,432 for the year ended December 31, 1996. The
increase in costs was related to the increased number of production projects and
the high costs relative to revenue, associated with the network operations
center.
Research and Development costs increased by 8% from $2,257,082
for the year ended December 31, 1995 to $2,446,724 for the year ended December
31, 1996. All software development costs consisting primarily of salaries and
related costs were expensed as incurred in accordance with Financial Accounting
Standards Board (FASB) Statement No. 86.
Selling, general and administrative expenses were $4,901,628
for the year ended December 31, 1996 compared to $2,858,601 for the year ended
December 31, 1995, an increase of 71%. The increase was attributable to several
factors, including the addition of new management personnel, increased marketing
efforts, new office facilities and increased legal costs.
Other income and expenses includes interest earned from
investment capital and interest charged on finance leases. Lawsuit settlement
expenses in 1996 are primarily associated with claims asserted by ex-employees.
As a result of the foregoing, Predecessor incurred a net loss
of $10,071,954 for the year ended December 31, 1996 compared to $7,582,832 for
the year ended December 31, 1995, an increase of 33%.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements are included herein commencing on
page F-1. The registrant is not required to provide supplementary financial
information.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
On January 31,1998 Registrant dismissed Lipner, Gordon & Co.
LLP as its independent accountants ("LG&C"). This action had been approved by
Registrant's Board of Directors. During the past three years LG&C did not issue
a report on Registrant's financial statements that either contained an adverse
opinion or a disclaimer of opinion, or was qualified or modified as to
uncertainty, audit scope or accounting principles.
15
<PAGE> 16
During the period of its engagement there were no
disagreements between Registrant and LG&C on any matter of accounting principles
or practices, financial statement disclosure, or audit scope and procedure,
which disagreement, if not resolved to the satisfaction of LG&C, would have
caused them to make reference to the subject matter of the disagreement in
connection with its opinion.
On January 31, 1998 the Board of Directors of Registrant
appointed BDO Seidman, LLP ("BDO") as its independent accountants. Prior to such
engagement, BDO was the independent auditor of Worlds Inc. and Worlds
Acquisition Corp., two Delaware corporations which merged into the
Registrant(the "Mergers"). BDO provided written reports of these two
corporations which was included in offering materials for a private financing
continued by the Registrant after the Mergers. BDO was also consulted regarding
the filing obligations of the Registrant pursuant to the change in fiscal year
reported in Item 8 hereof. Finally, BDO was consulted regarding the nature of
the financial statements required to be included by the Registrant in its recent
filing of a Registration Statement on Form SB-2, in which BDO also provided
written reports regarding the two merged corporations.
Other than as disclosed above, Registrant did not consult with
BDO regarding the application of accounting principles to a specified
transaction, or the type of audit opinion that may be rendered with respect to
the Registrant's financial statements.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS, EXECUTIVE OFFICERS AND CONSULTANT
The directors and executive officers of the Company are as follows:
Name Age Position
- ---- --- --------
Michael J. Scharf 55 Chairman of the Board
Thomas Kidrin 45 President, Chief Executive Officer,
Secretary, Treasurer and Director
Kenneth A. Locker 49 Director
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.
16
<PAGE> 17
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.
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.
ITEM 11. EXECUTIVE COMPENSATION
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
17
<PAGE> 18
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, 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.
18
<PAGE> 19
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission.
Officers, directors and greater-than-ten-percent shareholders are required by
SEC regulation to furnish the Company with copies of all Section 16(a) forms
they file. The officers, directors and shareholders of the Company are not
currently obligated to file reports under Section 16(a).
ITEM 12. 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.
Shares Owned Beneficially
and of Record
Name No. of Shares % of Total
---- ------------- ----------
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
as a Group (3 persons) 3,500,000 21.67%
- ----------
(1) Chairman.
(2) President, Chief Executive Officer, Secretary, Treasurer and a
Director.
(3) Director.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED 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.
19
<PAGE> 20
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.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
(a) 1. and 2. Financial Statements and Schedules
The financial statements are listed in the Index to Financial
Statements on page F-1 and are filed as part of this annual report.
3. Exhibits
27 - Financial Data Schedule.
(b) Reports on Form 8-K
A Report on Form 8-K dated January 31, 1998 regarding a change in
accountants was filed on February 13, 1998 and an amended Report
previously filed was filed on February 17, 1998.
20
<PAGE> 21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, Registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized.
WORLDS INC.
By: /s/
---------------------------
Thomas Kidrin
President and CEO
Dated: 15th day of April, 1998
Pursuant to the requirements of the Securities Exchange Act of
1934, this Report has been signed below as of the 30th of December, 1997 by the
following persons on behalf of Registrant and in the capacities indicated.
/s/ Date: April 15, 1998
- ---------------------
Thomas Kidrin
President, CEO and Director
(Chief Financial/Accounting Officer)
/s/ Date: April 15, 1998
- ---------------------
Michael J. Scharf
Chairman
/s/
- --------------------- Date: April 15, 1998
Kenneth A. Locker
Director
21
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WORLDS INC.
(A DEVELOPMENT STAGE ENTERPRISE)
FINANCIAL STATEMENTS
PERIOD FROM APRIL 8, 1997 (INCEPTION)
TO DECEMBER 31, 1997
F-1
<PAGE> 23
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> 24
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> 25
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 10) 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 10)
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> 26
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):
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> 27
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 2) 4,810,000 4,810 3,689,866 -- 3,694,676
Issuance of shares to
Academic Computer
Systems, Inc. (Note 1) 910,000 910 557,116 -- 558,026
Issuance of shares pursuant to
merger with Predecessor
(Note 1) 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> 28
WORLDS INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF CASH FLOWS
(NOTE 11)
<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> 29
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> 30
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> 31
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.
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> 32
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> 33
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> 34
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 the simultaneous
merger of the Company with and into Academic
(the "Mergers") and a private offering of
WAC's securities (the "Private Placement").
In both mergers, WAC was the acquiror for
accounting purposes. All of the common and
preferred stock of Predecessor were
exchanged for 1,999,996 shares of 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. Academic was an inactive
company with no operations. 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 $3,689,866. 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> 35
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> 36
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> 37
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> 38
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> 39
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> 40
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. 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").
F-19
<PAGE> 41
WORLDS INC.
(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 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> 42
WORLDS INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
11. 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> 43
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> 44
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> 45
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> 46
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> 47
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> 48
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> 49
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> 50
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> 51
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> 52
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> 53
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> 54
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 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 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 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> 55
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
$8.75, $10.00 and $11.25 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.
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. There is no conversion benefit associated
with the convertible promissory notes and the options
associated with the bridge note financing.
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> 56
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> 57
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> 58
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> 59
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> 60
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> 61
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> 62
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
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL
STATEMENTS OF WORLDS, INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-Mos
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-START> Apr-08-1997
<PERIOD-END> Dec-31-1997
<CASH> 3,541,829
<SECURITIES> 0
<RECEIVABLES> 140,856
<ALLOWANCES> (140,318)
<INVENTORY> 0
<CURRENT-ASSETS> 3,616,542
<PP&E> 650,557
<DEPRECIATION> (441,105)
<TOTAL-ASSETS> 3,825,994
<CURRENT-LIABILITIES> 1,866,430
<BONDS> 0
0
0
<COMMON> 16,120
<OTHER-SE> (24,889)
<TOTAL-LIABILITY-AND-EQUITY> 3,825,994
<SALES> 1,420
<TOTAL-REVENUES> 1,420
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 6,810,568
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,692
<INCOME-PRETAX> (6,812,247)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,812,247)
<DISCONTINUED> 0
<EXTRAORDINARY> 125,776
<CHANGES> 0
<NET-INCOME> (6,686,471)
<EPS-PRIMARY> (.72)
<EPS-DILUTED> (.72)
</TABLE>
