SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 1998
[ ] Transition report under Section 13 or 15(d) of the Exchange Act
Commission file number 2-31876
WORLDS INC.
(Exact name of small business issuer as specified in its charter)
New Jersey
(State or other jurisdiction of
incorporation or organization)
13-3768554
(IRS Employer Identification No.)
15 Union Wharf, Boston, Massachusetts 02109 (Address of
principal executive offices)(Zip Code)
(617) 725-8900
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months, and (2) has
been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares of Common Stock outstanding was 17,868,531 shares
as of November 10, 1998
Transitional Small Business Disclosure Format: Yes [ ] No [X]
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
Worlds Inc.
(a development stage enterprise)
Financial Statements
Period from April 8, 1997 (Inception) to September 30, 1998
<PAGE>
Worlds Inc.
(a development stage enterprise)
Financial Statements
Period from April 8, 1997 (Inception) to September 30, 1998
<PAGE>
Worlds Inc.
(a development stage enterprise)
Contents
Worlds Inc. (the "Company")
Financial statements (unaudited):
Balance sheets F-3
Statements of operations F-4
Statement of stockholders' deficit F-5
Statements of cash flows F-6
Summary of accounting policies F-7 - F-10
Notes to financial statements F-11 - F-14
Worlds Inc. ("Predecessor")
[Predecessor company - information prior to date of merger with the
Company herein disclosed]:
Financial statements (unaudited):
Statements of operations F-17
Statements of cash flows F-18
Summary of accounting policies F-19 - F-22
Notes to financial statements F-23 - F-24
F-2
<PAGE>
Worlds Inc.
(a development stage enterprise)
Balance Sheets
<TABLE>
December 31, September 30,
1997 1998
<S> <C> <C>
(Unaudited)
Assets
Current: Cash and cash equivalents $ 3,541,829 $ 2,363,097
Trade receivables, less allowances for doubtful
accounts of $140,318 and $140,318 538 --
Prepaid expenses and other current assets 74,175 44,772
Total current assets 3,616,542 2,407,869
Property and equipment, net of accumulated
depreciation and amortization 209,452 88,030
$ 3,825,994 $ 2,495,899
Liabilities and Stockholders' Deficit
Current:
Accounts payable $ 568,707 $ 264,992
Accrued expenses 592,250 713,112
Advanced customer billings and deferred revenue 436,140 436,140
Current maturities of notes payable 269,333 184,166
Total current liabilities 1,866,430 1,598,410
Long-term portion, notes payable 1,968,333 1,937,500
Total liabilities 3,834,763 3,535,910
Stockholders' deficit (Notes 2 and 3):
Common stock, $.001 par value - shares authorized
30,000,000; issued 16,119,996 and 17,981,996 16,120 17,982
Additional paid-in capital 6,661,582 8,402,020
Deficit accumulated during the development stage(6,686,471) (9,395,270)
(8,679) (975,268)
Treasury stock, at cost, 113,465 shares -- (64,743)
Total stockholders' deficit (8,769) (1,040,011)
$ 3,825,994 $ 2,495,899
See accompanying summary of accounting policies
and notes to financial statements
F-3
</TABLE>
<PAGE>
Worlds Inc.
(a development stage enterprise)
Statements of Operations (Unaudited)
<TABLE>
Period from Cumulative
Three April 8, period from
months 1997 Three months Nine months April 8, 1997
ended (inception) to ended ended (inception) to
September 30, September 30, September 30, September 30, September 30,
1997 1997 1998 1998 1998(a)
<S> <C> <C> <C> <C> <C>
Net revenues $ -- $ -- $ -- $16,132 $17,552
Costs and expenses:
Cost of revenues -- -- -- (25,101) (25,101)
Selling, general and administrative (16,779) (167,995) (683,969) (1,991,494) (2,666,524)
Research and development -- -- (353,504) (887,932) (887,932)
Acquired research and development -- -- -- -- (6,135,538)
(Note 1)
Operating loss (16,779) (167,995) (1,037,473) (2,888,395) (9,697,543)
Other income (expenses):
Interest income -- -- 37,825 114,817 128,410
Interest expense -- -- (35,656) (107,768) (124,460)
Loss before extraordinary item (16,779) (167,995) (1,035,304) (2,881,346) (9,693,593)
Extraordinary item - gain on debt -- -- 20,893 172,547 298,323
settlement
Net loss $ (16,779) $ (167,995) $ (1,014,411) $(2,708,799)$(9,395,270)
Loss per share (basic and diluted):
Loss before extraordinary item $ -- $ (.02) $ (.06) $ (.17)
Extraordinary item -- -- -- .01
Net loss per share (basic and $ -- $ (.02) $ (.06) $ (.16)
diluted)
Weighted average common shares
outstanding:
Basic and diluted 8,400,000 8,400,000 17,868,531 16,917,657
</TABLE>
(a) Includes the results of Predecessor and Academic which were merged into
the Company on December 3, 1997.
See accompanying summary of accounting policies
and notes to financial statements.
<PAGE>
Worlds Inc.
(a development stage enterprise)
Statement of Stockholders' Deficit
Period from April 8, 1997 (inception) to September 30, 1998.
<TABLE>
Deficit
accumulated
during the Total
Common stock Additional development Treasury stockholders'
Shares Amount paid-in capital stage stock deficit
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock
to founding stockholders 8,400,000 $ 8,400 $ 195,600 $ $ - $ 204,000
Sale of shares in private
offering memorandum
and shares issued to
placement agent, net
(Note 3) 4,810,000 4,810 3,689,866 3,694,676
Issuance of shares to
Academic Computer
Systems, Inc. (Note 2) 910,000 910 557,116 - - 558,026
Issuance of shares
pursuant to merger
with predecessor
(Note 2) 1,999,996 2,000 1,998,000 - - 2,000,000
Capital contribution
resulting from
forgiveness of debt to
shareholders of
predecessor - - 221,000 - - 221,000
Net loss for the period
April 8 to
December 31, 1997 - - - (6,686,471) - (6,686,471)
Balance, December 31, 1997 16,119,996 16,120 6,661,582 (6,686,471) - (8,769)
Sale of shares in private
offering memorandum
(January 1998)(unaudited) 30,000 30 26,470 - - 26,500
Sale of shares in public
offering of common
stock, net (June 1998)
(unaudited) 1,832,000 1,832 1,713,968 - - 1,715,800
Conversion of 113,465
shares to certain
stockholders
(June 1998) (Note 2)
(unaudited) - - - - (64,743) (64,743)
Net loss for the nine
months ended
September 30, 1998
(unaudited) - - - (2,708,799) - (2,708,799)
Balance, September 30,
1998 (unaudited) 17,981,996 $17,982 $8,402,020 $(9,395,270) $(64,743) $(1,040,011)
See accompanying summary of accounting policies
and notes to financial statements.
</TABLE>
F-5
<PAGE>
Worlds Inc.
(a development stage enterprise)
Statements of Cash Flows (Unaudited)
<TABLE>
Period from April 8, Cumulative, period
1997 (inception) to Nine months ended from April 8, 1997
September 30, 1997 September 30, 1998 (inception) to
September 30, 1998
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(167,955) $(2,708,799) $(9,395,270)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization - 136,012 152,336
Gain on debt settlement - (172,547) (298,323)
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 - 29,403 123,119
Accounts payable and accrued
expenses 55,276 (10,306) 204,054
Total adjustments 55,276 (16,900) 6,316,724
Net cash used in operating
activities (112,679) (2,725,699) (3,078,546)
Cash flows from investing activities:
Advance to Predecessor (100,000) - -
Acquisition of property and equipment - (14,590) (14,590)
Net cash used in investing
activities (100,000) (14,590) (14,590)
Cash flows from financing activities:
Proceeds from sale of common stock to
founding stockholders 204,000 - 204,000
Proceeds from sale of common stock in
private offering memorandum - 26,500 3,721,176
Proceeds from sale of common stock in
public offering - 1,715,800 1,715,800
Payment of conversion price of shares to
certain stockholders - (64,743) (64,743)
Payments on note payable - (116,000) (120,000)
Loan from stockholder 11,724 - -
Net cash provided by financing
activities 215,724 1,561,557 5,456,233
Net increase (decrease) in cash and cash
equivalents 3,045 (1,178,732) 2,363,097
Cash and cash equivalents, beginning of
period - 3,541,829 -
Cash and cash equivalents, end of period $ 3,045 $ 2,363,097 $ 2,363,097
See accompanying summary of accounting policies
and notes to financial statements.
</TABLE>
F-6
<PAGE>
Worlds Inc.
(a development stage enterprise)
Summary of Accounting Policies
Definitions. The Company is the resulting entity of two contemporaneous
mergers (the "Mergers") of Worlds Inc., a Delaware
corporation ("Predecessor"), with and into Worlds
Acquisition Corp., a Delaware corporation ("WAC"), and WAC
with and into Academic Computer Systems, Inc., a New Jersey
corporation ("Academic"), which changed its name to Worlds
Inc. (see Note 2). While Academic was the legal entity that
survived the mergers, WAC was the accounting acquiror in
both mergers. The Company's fiscal year-end is December 31.
The term the "Company," as used herein, refers to the
consolidated entity resulting from the two contemporaneous
mergers, as well the pre-merger Predecessor, WAC and
Academic; however, Predecessor, WAC and Academic are
hereinafter sometimes referred to separately as the context
requires.
Nature of Business WAC was incorporated on April 8, 1997 to design, develop and
market three-dimensional ("3D") music oriented Internet
sites on the World Wide Web. These web sites are anticipated
to utilize 3D technologies developed by Predecessor.
Basis of Presentation
The accompanying financial statements are unaudited;
however, in the opinion of management, all adjustments
necessary for a fair statement of financial position and
results for the stated periods have been included. These
adjustments are of a normal recurring nature. Selected
information and footnote disclosures normally included in
financial statements prepared in accordance with generally
accepted accounting principles have been condensed or
omitted. Results for interim periods are not necessarily
indicative of the results to be expected for an entire
fiscal year. It is suggested that these condensed financial
statements be read in conjunction with the audited financial
statements and accompanying notes for the Company for the
year ended December 31, 1997 and for the Predecessor for the
period ended December 3, 1997.
F-7
<PAGE>
The financial statements include the results of Predecessor
and Academic from December 4, 1997, the date of the Mergers
(the "Merger Date").
The financial statements have been prepared in accordance
with the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 7, "Accounting, and Reporting by
Development Stage Enterprises," which requires development
stage enterprises to employ the same accounting principles
as operating companies.
Fair Value of Financial Instruments
The carrying amounts of financial instruments, including
cash and short-term Instruments debt, approximated fair
value as of September 30, 1998 because of the relatively
short maturity of the instruments. The carrying value of
long-term debt, including the current portion, approximates
fair value as of September 30, 1998, based upon estimates
for similar debt issues.
Use of Estimates The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and 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.
F-8
<PAGE>
Revenue Recognition Revenue from technology development and licensing contracts
is recognized upon the attainment of contractual milestones
(approximating the percentage-of-completion method). Cash
received in advance of revenues earned is recorded as
deferred revenue.
Software Development Costs
Software development costs are charged to expense when
incurred until the technological feasibility of the product
has been established. After technological feasibility has
been established, any additional costs would be
capitalizable in accordance with the Financial Accounting
Standards Board's ("FASB") SFAS No. 86 ("SFAS No. 86"). No
such costs have been capitalized to date.
Research and Development Costs
Research and development costs are expensed as incurred.
Income Taxes
The Company uses the liability method of accounting for
income taxes in accordance with SFAS No. 109, "Accounting
for Income Taxes." Deferred income tax assets and
liabilities are recognized based on the temporary
differences between the financial statement and income tax
bases of assets, liabilities and carryforwards using enacted
tax rates. Valuation allowances are established, when
necessary, to reduce deferred tax assets to the amount
expected to be realized.
F-9
<PAGE>
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.
Comprehensive Income
Effective January 1, 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income", which establishes
standards for reporting and display of comprehensive income,
its components and accumulated balances. Comprehensive
income is defined to include all changes in equity except
those resulting from investments by owners and distributions
to owners. Adoption of the standard has had no effect on
financial statement disclosures since there were no items of
comprehensive income during the periods presented.
F-10
<PAGE>
Worlds Inc. (a development stage enterprise)
Notes to Financial Statements
(information pertaining to the periods ended
September 30, 1997 and 1998 is unaudited)
1. Going Concern As discussed in Note 3, the Company completed a private
placement raising gross proceeds of $4,415,000, consummated
a merger agreement with a development stage enterprise,
Predecessor, and completed a public offering in June 1998
raising gross proceeds of $1,832,000. Predecessor had not
generated significant revenues from operations and had an
accumulated deficit from inception to the Merger Date of
$21,236,139 and a capital deficit of $4,135,538. The
acquisition of Predecessor by the Company was accounted for
as a purchase. Accordingly, $6,135,538, the portion of the
purchase allocable to in-process research and development
projects that had not reached technological feasibility and
had no probable alternative future uses, was expensed by the
Company at the date of merger.
The accompanying financial statements have been prepared
assuming that the Company will continue as a going concern.
The Company is in the development stage and has had minimal
revenues from operations since the series of merger
transactions. The Company anticipates that it currently has
only a portion of the funds necessary to complete product
development and commercialization. There can be no assurance
that the Company will be able to obtain the substantial
additional capital resources necessary to pursue its
business plan or that any assumptions relating to its
business plan will prove to be accurate. The Company is
pursuing sources of additional financing and there can be no
assurance that any such financing will be available to the
Company on commercially reasonable terms, or at all. Any
inability to obtain additional financing will have a
material adverse effect on the Company, including possibly
requiring the Company to significantly curtail or cease
operations.
These factors raise substantial doubt about the ability of
the Company to continue as a going concern. The financial
statements do not include any adjustments that might result
from the outcome of this uncertainty.
F-11
<PAGE>
2. The Mergers On December 3, 1997, Predecessor was merged with and into
WAC in a series of related transactions which included a
simultaneous capital transaction between the Company and
Academic (the "Mergers") and a private offering of WAC's
securities (the "Private Placement"). In both the merger
with Predecessor and the capital transaction with Academic,
WAC was the acquiror for accounting purposes.
The acquisition of Predecessor was accounted for as a
purchase whereby all of the common and preferred stock of
Predecessor were exchanged for 1,999,996 shares of WAC. The
shares issued to Predecessor common and preferred
shareholders were valued at $1.00 per share which
represented the share value in the private placement that
occurred during this time period (see Note 3); a purchase
price of approximately $2,000,000. The exchange ratio was
determined after extensive negotiation between management of
Predecessor and WAC. Predecessor was a development stage
company, had not generated significant revenues from
operations and had an accumulated deficit from inception to
December 3, 1997 of $21,236,139 and a capital deficit of
$4,135,538. The assets acquired of Predecessor (cash,
prepaid expenses, property and equipment) were recorded at
fair market value which approximated book value at December
3, 1997, and, as discussed in Note 1 above, since
technological feasibility of the various Predecessor
technologies acquired had not been established, the excess
purchase price over Predecessor's capital deficit of
$6,135,538 was expensed as acquired research and
development.
Academic was an inactive company with no operations. The
value assigned to the 910,000 shares in the capital
transaction with Academic on December 3, 1997 represented
Academic's net tangible assets (primarily cash) of $558,026.
During June 1998, 113,465 shares of common stock were
converted at $0.57 per share ($64,743) as a result of
certain stockholders dissenting with respect to the
Academic/WAC capital transaction of December 3, 1997. Such
reacquired shares have been classified as treasury stock in
the accompanying balance sheets. Academic voluntarily
reported under the Securities Exchange Act of 1934 (the
"Exchange Act").
F-12
<PAGE>
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. Private Placement and Public Offering
The Private Placement called for WAC to offer for sale a
maximum of 50 units Public Offering (57-1/2 with the
over-allotment), each consisting of 120,000 shares of WAC's
common stock (the "Units") at a price of $120,000 per Unit.
In connection with the Private Placement, the placement
agent was to receive one warrant to purchase one share of
WAC's common stock at $1 per share for every $40 of gross
proceeds from the sale of the Units. On November 21, 1997,
WAC sold 31.67 Units with gross proceeds of $3,800,000
(3,800,000 shares) (the "Initial Private Placement Closing")
and the placement agent was issued 425,000 shares of common
stock. On December 31, 1997, the Company sold 4.88 Units
with gross proceeds of $585,000 (585,000 shares). On January
2, 1998 a further 30,000 shares were issued with gross
proceeds of $30,000. Cumulative net proceeds, after
commissions and expenses of the offering, aggregated
$3,721,176.
WAC agreed to include the shares of common stock underlying
the Units sold in the Private Placement (the "Private
Placement Shares") in a registration statement to be filed
with the Securities and Exchange Commission (the "SEC").
Such registration statement was declared effective on May 1,
1998. During June 1998, WAC sold 1,832,000 shares in a
public offering of its stock and received gross proceeds of
$1,832,000. Net proceeds, after commissions of this
offering, aggregated $1,715,800.
F-13
<PAGE>
4. Agreement and
Plan of Merger
On June 25, 1998, the Company entered into an agreement and
plan of merger and Merger reorganization (the "Agreement")
with Unity First Acquisition Corp., a Delaware corporation
("Unity"), whereby Unity would acquire all of the
outstanding shares of the Company in exchange for shares of
its own common stock. The acquisition called for each share
of the Company's stock being converted into .357 shares of
Unity's common stock. At that point, the Company would
"reverse-merge" into Unity which would then change its name
to "Worlds Inc." The Agreement was, among other conditions,
subject to approval by both Unity and the Company's
stockholders.
On October 29, 1998, the Company's stockholders voted in
favor of the Agreement, however, Unity did not obtain the
super majority of 80% required by Unity's charter, thereby
canceling the proposed plan of merger and reorganization.
F-14
<PAGE>
Worlds Inc. - Predecessor
(a development stage enterprise)
Financial Statements
Nine Months Ended September 30, 1997 and Period from
April 26, 1994 (Inception) to December 3, 1997
<PAGE>
Worlds Inc. - Predecessor
(a development stage enterprise)
Nine Months Ended September 30, 1997 and Period from
April 26, 1994 (Inception) to December 3, 1997
F-15
<PAGE>
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.
Financial statements (unaudited):
Statements of operations F-17
Statements of cash flows F-18
Summary of accounting policies F-19 - F-22
Notes to financial statements F-23 - F-24
F-16
<PAGE>
Worlds Inc. - Predecessor
(a development stage enterprise)
Statements of Operations
<TABLE>
Three months ended Nine months ended Cumulative, period
September 30, 1997 September 30, 1997 from inception to
(unaudited) (unaudited) December 3, 1997(a)
<S> <C> <C> <C>
Net revenues $ 4,771 $ 69,098 $ 6,026,691
Costs and expenses:
Cost of revenues 1,927 29,556 11,279,348
Selling, general and administrative 458,795 2,259,283 10,602,749
Research and development 13,186 401,345 5,388,340
Lawsuit settlements - - 509,200
Total costs and expenses 473,908 2,690,184 27,779,637
Operating loss (469,137) (2,621,086) (21,752,946)
Other income (expenses):
Interest income - 10,344 237,629
Interest expense - (71,338) (171,082)
Gain (loss) on disposal of property and - 4,070 (79,125)
equipment
Income from sale of technology - 260,100 260,100
Loss before income taxes and extraordinary (469,137) (2,417,910) (21,505,424)
item
Income taxes - (5,000) (120,000)
Loss before extraordinary item (469,137) (2,422,910) (21,625,424)
Extraordinary item - gain on debt settlement 373,333 373,333 389,285
Net loss $ (95,804) $(2,049,577) $(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-17
<PAGE>
Worlds Inc. - Predecessor
(a development stage enterprise)
Statements of Cash Flows
<TABLE>
Nine months ended Cumulative, period
September 30, 1997 from inception to
(unaudited) December 3, 1997(a)
<S> <C> <C>
Cash flows from operating activities:
Net loss $(2,049,577) $(21,236,139)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 174,083 721,097
(Gain) loss on disposal of property and equipment (4,070) 79,125
Gain on debt settlement (373,333) (389,284)
Compensation related to stock options 13,263 761,453
Compensation related to common stock issuance - 58,525
Licensed technology expense - 750,000
Changes in operating assets and liabilities:
Trade receivables 489,050 -
Prepaid expenses and other assets 100,150 (167,891)
Accounts payable and accrued liabilities (101,156) 1,856,619
Advanced customer billings and deferred revenue - 436,140
Net cash used in operating activities (1,549,278) (17,130,355)
Cash flows used in investing activities:
Acquisition of property and equipment (2,063) (999,302)
Cash flows from financing activities:
Proceeds from issuance of common stock - 116,857
Proceeds from issuance of preferred stock, net of issuance costs - 16,163,766
Advance from Worlds Inc. (formerly Worlds Acquisition Corp.) 100,000 561,397
Payments on capital lease - (116,018)
Payments on note payable (40,000) (190,000)
Proceeds from note payable 650,000 1,650,000
Net cash provided by financing activities 710,000 18,186,002
Net increase (decrease) in cash and cash equivalents (841,341) 56,345
Cash and cash equivalents, beginning of period 894,692 -
Cash and cash equivalents, end of period $ 53,351 $ 56,345
Supplemental disclosures of cash flow information:
Interest paid $ - $ 23,916
Income taxes paid 2,128 5,620
</TABLE>
Disclosure of Noncash Financing and Investing Activities:
In the nine months ended September 30, 1997, as part of the restructuring
of operations, the Predecessor disposed of property and equipment with
a net book value of $252,180, which included $138,439 of equipment
under capital leases. The related capital lease obligations, totaling
$123,013, were assumed by the lessor and a party which acquired certain
assets used in the Predecessor's prior Seattle operations. The
agreement with this party also resulted in a reduction of trade
payables totaling $87,226.
(a) Date of merger with Worlds Inc. (formerly Worlds Acquisition Corp.)
See accompanying summary of accounting policies
and notes to financial statements.
F-18
<PAGE>
Worlds Inc. - Predecessor
(a development stage enterprise)
Summary of Accounting Policies
Nature of Business
Worlds Inc.(the "Predecessor") was incorporated under the
laws of Delaware on April 26, 1994. The Predecessor was
formed to develop and commercialize 3D multi-user tools and
technologies for the Internet market. The Predecessor is in
the development stage and, as such, has not generated
significant revenues from operations.
Basis of Presentation
The accompanying financial statements are unaudited;
however, in the opinion of management, all adjustments
necessary for a fair statement of financial position and
results for the stated periods have been included. These
adjustments are of a normal recurring nature. Selected
information and footnote disclosures normally included in
financial statements prepared in accordance with generally
accepted accounting principles have been condensed or
omitted. Results for interim periods are not necessarily
indicative of the results to be expected for an entire
fiscal year. It is suggested that these condensed financial
statements be read in conjunction with the audited financial
statements and accompanying notes for the Predecessor for
the period ended December 3, 1997.
The accompanying financial statements have been prepared
assuming that the Predecessor will continue as a going
concern. The Predecessor is in the development stage (see
Note 1) and has suffered recurring losses from operations
since its inception that raises substantial doubt about its
ability to continue as a going concern. The financial
statements do not include any adjustments that might result
from the outcome of this uncertainty. As more fully
described in Note 2, on December 3, 1997, the Predecessor
consummated a merger agreement with Worlds Inc. (formerly
Worlds Acquisition Corp.) ("WAC"), a company which had
completed a private placement offering of securities.
F-19
<PAGE>
The financial statements have been prepared in accordance
with the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 7, "Accounting and Reporting by
Development Stage Enterprises," which requires development
stage enterprises to employ the same accounting principles
as operating companies.
Restructuring of Operations
Due to recurring losses, insufficient revenue, a working
capital deficit and a net stockholders' deficit, the
Predecessor's management made significant reductions in
operations in February 1997 that are reflected in the
Predecessor's financial statements for the period ended
December 3, 1997. In March 1997, the Predecessor engaged an
outside management firm to assist with the downsizing of
operations which has included a major reduction in employees
and a consolidation of all operations to one location in San
Francisco.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results
could differ from these estimates.
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.
F-20
<PAGE>
Software Development Costs
Software development costs are charged to expense when
incurred until the technological feasibility of the product
has been established. After technological feasibility has
been established, any additional costs would be
capitalizable in accordance with SFAS No. 86. No such costs
have been capitalized to date.
Research and
Development Costs Research and development costs are expensed as incurred.
Income Taxes The Predecessor uses the liability method of accounting for
income taxes in accordance with SFAS No. 109, "Accounting
for Income Taxes.". Deferred income tax assets and
liabilities are recognized based on the temporary
differences between the financial statement and income tax
bases of assets, liabilities and carryforwards using enacted
tax rates. Valuation allowances are established, when
necessary, to reduce deferred tax assets to the amount
expected to be realized.
Concentration of
Credit Risk The Predecessor derives revenues from corporate customers in
a variety of industries. For the periods ended September 30,
1997 and December 3, 1997, no individual customer accounted
for more than 10% of revenues.
F-21
<PAGE>
New Accounting
Standards Effective January 1, 1996, the Predecessor adopted the
provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation". Under this standard, companies are
encouraged, but not required, to adopt the fair value method
of accounting for employee stock-based transactions. Under
the fair value method, compensation cost is measured at the
grant date based on the fair value of the award and is
recognized over the service period, which is usually the
vesting period. Companies are permitted to continue to
account for employee stock-based transactions under
Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees," but are required
to disclose pro forma net income and earnings per share as
if the fair value method has been adopted. The Predecessor
has elected to continue to account for stock-based
compensation under APB No. 25.
F-22
<PAGE>
Worlds Inc. - Predecessor
(a development stage enterprise)
Notes to Financial Statements
1. Going Concern
The accompanying financial statements have been prepared on
a going-concern basis, which contemplates the realization of
assets and the satisfaction of liabilities in the normal
course of business. As shown in the financial statements,
the Predecessor, as of December 3, 1997, had incurred
recurring losses since inception totaling $21,236,139. As
discussed in Note 2, on December 3, 1997, the Predecessor
consummated a merger agreement with WAC, a company which had
completed a private placement offering of securities whereby
$4,415,000 of gross proceeds was raised.
The Predecessor anticipates, however, that it currently has
only a portion of the funds necessary to permit it to
complete product development and commercialization. There
can be no assurance that the Predecessor will be able to
obtain the substantial additional capital resources
necessary to permit the Predecessor to pursue its business
plan or that any assumptions relating to its business plan
will prove to be accurate. WAC is pursuing sources of
additional financing and there can be no assurance that any
such financing will be available to WAC on commercially
reasonable terms, or at all. Any inability to obtain
additional financing will have a material adverse effect on
the Predecessor and WAC, including possibly requiring the
Predecessor or WAC to significantly curtail or cease
operations.
These factors raise substantial doubt about the ability of
the Predecessor to continue as a going concern. The
financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
F-23
<PAGE>
2. Merger
On December 3, 1997, the Predecessor was merged with and
into Worlds Inc. (formerly Worlds Acquisition Corp.) ("WAC")
in a series of related transactions which included the
simultaneous merger with and into Academic Computer Systems,
Inc., a New Jersey corporation ("Academic") (the "Mergers")
and a private offering of WAC's securities (the "Private
Placement"). All of the common and preferred stock of the
Predecessor were exchanged for 1,999,996 shares of WAC. WAC
was incorporated in Delaware on April 8, 1997 to engage in
designing, developing and marketing three-dimensional ("3D")
music oriented Internet sites on the World Wide Web. These
web sites are anticipated to utilize 3D technologies
developed by the Predecessor. Academic was an inactive
company with no operations. Academic voluntarily reported
under the Securities Exchange Act of 1934 "Exchange Act").
The combined entity that resulted from the Mergers (the
"Combined Entity") intends to continue reporting under the
Exchange Act. While no trading market existed for the
securities of Academic, or currently exists for the
securities of the Combined Entity, the Combined Entity
intends to cause its common stock to be traded on the
Bulletin Board.
F-24
<PAGE>
Item 2. 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,
competitive factors and other risks as stated in other of the Company's public
filings with the Securities and Exchange Commission.
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
contemporaneous mergers (the "Mergers") 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, 1998 ("WAC") and of WAC with
and into the Company, then called Academic Computer Systems, Inc., which changed
its name to Worlds Inc., 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, and comparison to, the
financial condition and results of the operations of Predecessor's pre-Mergers
operations. The following discussion should be read in conjunction with the
Financial Statements and related notes thereto included elsewhere herein.
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.
<PAGE>
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 administrative. Revenues consisted primarily of production
service activities and sales of technology licenses.
Software development costs (consisting primarily of salaries and
related expenses) incurred prior to establishing technological feasibility are
expensed in accordance with Financial Accounting Standards Board (FASB)
Statement No. 86. In accordance with FASB 86, the Company will capitalize
software development costs at such time as the technological feasibility of the
product has been established.
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 entered
into four agreements.
The Company currently has sufficient cash resources for at least the
next twelve months. The Company currently has 11 full-time employees and is
working with eight independent software contractors who were former employees of
Predecessor. The Company does not anticipate hiring 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.
<PAGE>
Results of Operations of the Company (Note to Results of Operations.
The Predecessor merged into WAC and Academic on December 3, 1997)
Nine Months Ended September 30, 1998 Compared with nine months Ended
September 30, 1997
The following data extracted from the attached financial statements
compares the results of operations of the Company for the nine months ended
September 30, 1998 to those of Predecessor for the nine months ended September
30, 1997.
Statements of Operations
Worlds Inc. Worlds Inc.
Predecessor
Nine months ended
9/30/98 9/30/97
Net Revenues $ 16,132 69,098
Costs & Expenses:
Cost of revenues (25,101) (29,556)
Selling, general & administrative (1,991,494) (2,259,283)
Research & development (887,932) (401,345)
Operating Loss (2,888,395) (2,621,086)
Other income (Expense)
Interest income 114,817 10,344
Interest expense (107,768) (71,338)
-------- -------
Gain on disposal of equipment --- 4,070
Income from the sale of technology --- 260,100
Loss before taxes & extraordinary
item (2,881,346) (2,417,910)
Income taxes --- (5,000)
Loss before extraordinary item (2,881,346) (2,422,910)
Extraordinary item -
gain on debt settlement 172,547 373,333
Net Loss (2,708,799) (2,049,577)
In the first nine months of 1998 the company continued the
implementation of the new business plan. Significant expenditure was incurred
towards completion of the Platinum technology and also with legal and
professional fees as the company proceeds with its fund raising activities and
aborted merger with Unity First Acquisition Corp. ("Unity"). In the first
quarter of 1997 Predecessor was insolvent and had failed to raise any additional
capital.
<PAGE>
In January and February 1997 the majority of Predecessor's personnel
were released and most of its management team resigned. Normal operations of
Predecessor ceased and significant wind down costs were incurred. The Seattle
network operations center and Active Worlds an earlier generation of
Predecessor's technology, were both sold, resulting in net proceeds of
approximately $260,100.
Revenues are nominal and are derived from the company's WorldsChat
product and one custom production product. Revenue was $16,132 and had
associated direct costs of $25,101 for the nine months ended September 30, 1998
compared to $69,098 in revenue and $29,556 of direct costs for the same period
in 1997.
Selling, general and administrative expenses were $1,991,494 for the
nine months ended September 30, 1998. This represented a decrease of $267,789
from $2,259,283 compared to the nine months ended September 30, 1997. This
decrease was directly attributable to the higher costs associated with
Predecessor ceasing normal operations in the first quarter of 1997.
Research and development costs increased by $486,587 to $887,932 for
the nine months ended September 30, 1998 from $401,345 for the nine months ended
September 30, 1998. This increase is directly attributable to the company
ceasing development technology at the end of the first quarter of 1997.
Other income included $114,817 of interest income in the nine months to
September 30,1998 earned from the proceeds of the recent share offerings. Other
income in the nine months to September 30, 1997 included interest income of
$10,344, the sale of the Activeworlds technology in the amount of $260,100 and a
property disposal gain of $4,070. Other expenses included interest expense of
$107,768 directly attributable to the Predecessor's notes payable in the nine
months to September 30, 1998. Interest expense in the nine months to September
30, 1997 was $71,338. Settlement of Predecessor's debts generated an
extraordinary gain of $172,547 for the nine months ended September 30, 1998 and
$373,333 for the nine months ended September 30, 1997.
As a result of the foregoing Worlds Inc. incurred a net loss of
$2,708,799 for the nine months to September 30, 1998, compared to a loss
$1,953,577 for the nine months to September 30, 1997 an increase of 39%.
<PAGE>
Three Months Ended September 30, 1998 Compared with 3 months Ended
September 30, 1997
The following data extracted from the attached financial statements
compares the results of operations of the Company for the three months ended
September 30, 1998 to those of Predecessor for the three months ended September
30, 1997.
Statements of Operations
Worlds Inc. Worlds Inc.
Predecessor
Three months ended
9/30/98 9/30/97
Net Revenues --- 4,771
Costs & Expenses:
Cost of revenues --- (1,927)
Selling, general & administrative (683,969) (458,795)
Research & development (353,504) (13,186)
Operating Loss (1,037,473) (469,137)
Other income (Expense)
Interest income 37,825 ---
Interest expense (35,656) ---
Loss before extraordinary item (1,035,304) (469,137)
Extraordinary item -
gain on debt settlement 20,893 373,333
Net Loss (1,014,411) (95,804)
In the third quarter of 1998 the company continued the implementation
of the new business plan. Significant expenditure was incurred towards
completion of the Platinum technology and the aborted Unity transaction.
There was no revenue for the three months ended September 30, 1998
compared to $4,771 in revenue and $1,927 of direct costs for the same period in
1997.
Selling, general and administrative expenses were $683,969 for the
three months ended September 30, 1998. This represented a increase of $225,174
from $458,795 compared to the three months ended September 30, 1997. This
increase was directly attributable to the Predecessor ceasing normal operations
in the first quarter of 1997.
<PAGE>
Research and development costs increased by $340,318 to $353,504 for
the three months ended September 30, 1998 from $13,186 for the three months
ended September 30, 1997. This increase was directly attributable to Predecessor
ceasing normal operations in the first quarter of 1997
Other income included $37,825 of interest income in the three months to
September 30, 1998 earned from the proceeds of the recent share offerings.
Interest expense in the three months to September 30, 1998 was $35,656 directly
attributable to the Predecessor's notes payable. Settlement of Predecessor's
debts generated an extraordinary gain of $20,893 for the three months ended
September 30, 1998 and $373,333 for the nine months ended September 30, 1997.
As a result of the foregoing Worlds Inc. incurred a net loss of
$1,014,411 for the three months to September 30,1998, compared to a loss $95,804
for the three months to September 30, 1997, an increase of $918,607.
Liquidity and Capital Resources of the Company
Net cash used by the Company's operating activities from January 1,1998
through September 30, 1998 was $2,725,699. At September 30, 1998 the Company had
working capital of $809,459.
The Company's capital requirements relating to the development and
commercialization of Worlds Platinum have been and will continue to be
significant and is currently estimated at approximately $3.0 to $5.0 million.
The Company is dependent on the proceeds of future financings in order to
continue in business and develop and commercialize its proposed products.
The Company anticipates, based on currently proposed business plans and
assumptions relating to its operations (including the timetable of, and costs
associated with, product development and commercialization), that the proceeds
of its recent public 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 recent public offering or otherwise currently available to the
Company. In addition, as a result of the Mergers by operation of law, the
Company assumed the Company's liabilities of approximately $4 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. The Company's inability to obtain additional financing will have a
material adverse effect on the Company including possibly requiring the Company
to significantly curtail operations. Based upon its current projections, the
Company believes it has sufficient funds to operate for the next twelve months.
<PAGE>
PART II
OTHER INFORMATION
Item 5. Other Information.
On May 7, 1998, the Company signed a Letter of Intent with Unity First
Acquisition Corp., a Delaware corporation ("Unity"), whereby Unity would acquire
all of the outstanding shares of the Company in exchange for shares of its own
common stock, par value $.0001 per share. The transaction called for each share
of the Company's stock being converted into .357 shares of Unity's common stock.
At that point the Company would "reverse-merge" into Unity which would then
change its name to "Worlds Inc." The consummation of the contemplated
transaction was subject to, among other things, the approval of the shareholders
of each corporation. On October 29, 1998, the Company's stockholders voted in
favor of the Agreement, however, Unity did not obtain the super majority of 80%
required by Unity's charter, thereby canceling the proposed plan of merger and
reorganization.
Item 6. Exhibits and Reports on Form 8-K.
(a) A financial data schedule is filed herewith as an exhibit.
(b) No reports on Form 8-K were filed during the quarter for which this
report is being filed.
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
caused this Report to be signed on its behalf by the undersigned thereto duly
authorized.
Date: November 13, 1998
WORLDS INC.
By: ____________________________
Thomas Kidrin,
President, CEO and Treasurer
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
The schedule contains summary information extracted from the financial
statements of Worlds Inc. for the nine months ended September 30, 1998 and is
qualified in its entirety by reference to such financial statements.
<ARTICLE> 5
<CIK> 0000001961
<NAME> WORLDS INC.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Sep-30-1998
<CASH> 2,363,097
<SECURITIES> 0
<RECEIVABLES> 140,318
<ALLOWANCES> (140,318)
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<CURRENT-ASSETS> 2,407,869
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<TOTAL-ASSETS> 2,495,899
<CURRENT-LIABILITIES> 1,598,410
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<COMMON> 17,982
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<TOTAL-LIABILITY-AND-EQUITY> 2,495,899
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