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, 1998
Commission File Number 2-31876
WORLDS INC.
(Exact Name of Registrant as Specified in its Charter)
New Jersey 22-1848316
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
15 Union Wharf, Boston, Massachusetts 02109
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including Area Code: (617) 725-8900
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Title of Class
Common Stock, par value $.001
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.
The aggregate market value of voting stock held by non-affiliates of the
Registrant: $8,034,496
The number of shares outstanding of Registrant's Common Stock as of
March 19, 1999: 17,919,131
<PAGE>
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.
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: (1) the
Company is in the process of marketing its 3D Internet technology with record
companies to produce music-oriented websites; (2), the Company is in the process
of marketing its Gamma 3D Internet technology to businesses for corporate
intranet applications; and (3) the Company markets Worlds Ultimate 3D 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 has introduced a new and
improved upgraded version of Worlds Chat and intends to use its Gamma technology
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 web sites. The Company
intends to produce interactive, 3D, music related web sites 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 companies and/or their related record labels.
<PAGE>
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.
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.
While the Company has successfully completed development and market
testing of Worlds Platinum (also known as "Gamma," the Company's newest 3D
<PAGE>
toolset, as further described below) and its 3D Internet music sites, the
Company will not generate any meaningful revenues until after it 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. 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, merchandise
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 five
major record companies that operate worldwide: Warner Bros. Music, Sony Music,
BMG Entertainment, Universal/Polygram Music Group, and EMI. These companies in
<PAGE>
the aggregate sold approximately 800 million CD units in the U.S. and 2.5
billion CD units worldwide in 1997. 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 of
the 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.
The Company also created BowieWorld for David Bowie's BowieNet, the
first artist created ISP (Internet Service Provider) which has been released by
UltraStar Internet Services LLP in the US and UK. The Company has also signed an
agreement with one of the major record companies to have its technology and
content encoded on mutually agreed upon CDs of select recording artists of that
company subject to the artist's approval. The Company is also in discussions
with a number of other corporate entities about other projects, including all of
the major record companies and/or one or more of their related record labels;
several of the major search engines; and others with whom World is desirous of
entering into a long term relationship or strategic alliance. In September 1998
the Company created and released under contract with Universal/Hyundai a 3D
world titled AnimalHouse.com as an internet destination directed towards college
students. Under the agreement, a total of 1,000,000 enhanced CD's were to be
distributed by Universal/Hyundai.
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 five years. This new technology
received a boost from an early standardization effort called Virtual Reality
Modeling Language ("VRML") which increased consumer and developer awareness of
the medium. The VRML effort evolved into a consortium of approximately 55
companies (including Predecessor), all with competing interests and underlying
technologies.
VRML is supposed to deliver rich and dynamic 3D experiences over the
Internet, viewable through the most commonly used Web browsers. However, VRML
based Internet experiences and the companies developing these tools and
technologies have not yet achieved significant market penetration for several
reasons. To date, the user's experience with VRML has been unsatisfactory. VRML
is slow in rendering images, has a long download time, confusing user interfaces
and scene description language that is difficult to manipulate, and because it
lacks standards for support of other media within the scene, the user
experiences are less dynamic. Adequate VRML performance also requires high-end
PCs, precluding effective use by average consumers with less advanced PCs. A new
version of VRML, VRML 2.0 was just released at the end of 1997 with enhanced
performance characteristics addressing some of VRML's performance problems. If
and when VRML appears to be on the verge of overcoming its current limitations,
the Company believes that its proprietary technology can be made VRML compliant.
The Company believes that the VRML standard will ultimately overcome its
limitations but the current problems make a proprietary solution such as the
<PAGE>
Company's technology attractive for the Company's intended use of 3D Internet
technology.
Predecessor spent its 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, which were
initially developed by Predecessor. During 1998 the Company directed its efforts
toward completing development of its Gamma development tool kit. The Company's
development efforts are now focused on adapting World Platinum to produce
music-oriented websites.
The Worlds Platinum Development Kit, or Gamma, is the Company's third
generation and newest 3D toolset, and was completed in the second half of 1998.
The Company believes that Worlds Platinum delivers 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 Company has successfully utilized the Gamma tool kit in the development of
3D content for David Bowie's 3D on-line environment, BowieWorld, as well as the
Company's recently released Worlds Ultimate 3D Chat which has been marketed to
the Company's proprietary e-mail list of over 200,000 users that had previously
downloaded the Company's free version of Worlds Chat. A major part of the Gamma
platform was also utilized in the 3D AnimalHouse project which the Company
created for Universal/Hyundai and in the Company's e-commerce site,
WorldsStore.com. See "The Company's Products."
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.
- - - - 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
<PAGE>
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.
THE COMPANY'S PRODUCTS
Worlds Ultimate 3D Chat
The Company owns its own proprietary online 3D Internet chat site known
as Worlds Ultimate 3D Chat. Originally launched as Worlds Chat, another
proprietary 3D chat site still operated by Worlds, it is an upgraded version
using the Company's newest technology. The 3D environment was originally created
by Predecessor and launched in 1996 to test its technologies and to learn about
user behaviors and preferences in 3D environments. The Company's 3D technology
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 the Worlds Ultimate 3D Chat
site will develop into a valuable asset. Although the Company has no plans to
build advertising or subscription revenues through the original Worlds Chat
site, such revenues may be possible in the future as the Company released the
updated version of this product in December, 1998 and is attempting to market a
customized version of
<PAGE>
this product for intranet applications by corporations. Currently, the Company
collects a name and an e-mail address from its Worlds Ultimate 3D Chat users and
a complete name, address, and credit card information from its direct customers.
Worlds Ultimate 3D Chat also contains an e-commerce component, which the Company
believes is the first commercial real 3D virtual store online, selling music
merchandise of major recording artists including Elto John, David Bowie, Spice
Girls, U2, Hanson, John Mellencamp, Shania Twain and others.
In order to rapidly increase the number of potential subscribers of its
3D music sites, the Company will be offering its Worlds Ultimate 3D Chat product
as a free download in the future. The objective in this marketing approach is
that by reducing the price barrier, the Company may generate new members to its
Chat service. These new members may be matriculated to the 3D music sites when
launched and to the Company's e-commerce website. The proliferation of Worlds
Ultimate 3D Chat may increase corporate brand identity that could translate into
valuable consumer data and related advertising potential. The strategy of a free
distribution model is comparable to the marketing strategy implemented by
Netscape, Hotmail, Geocities and Tripod. The strategic objective is to rapidly
establish market segment dominance in order to upsell to a large user base.
The Company believes that there is an opportunity to further exploit
the Worlds Ultimate 3D Chat product in modified form. The Company is now
exploring the modification of Worlds Ultimate 3D Chat as a corporate intranet
chat and information service for corporate clients. The modified application of
Worlds Ultimate 3D 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.
David Bowie
The company has entered into an agreement with UltraStar Internet
Services LLP to create the official 3D David Bowie environment entitled
BowieWorld. The development of BowieWorld has been completed and was released in
January 1999. As part of the agreement Worlds has received the exclusive rights
to create the 3D DavidBowieStore.com which sells selected Bowie merchandise.
Universal/Hyundai - Animal House.com
The company has entered into a contract with Universal Studios in
partnership with Hyundai to create a 3D Animal House site which has been encoded
on a music CD containing songs from 10 Universal recording artists. As part of
the launch of Animal House.com, Universal was to distribute 1,000,000 of the
enhanced CD's targeted to college students.
Polygram Merchandising
The company has entered into an agreement with Polygram merchandising
to develop and maintain the SuperStarSuperstore.com employing an e-commerce
engine to sell music merchandise of major recording artists including Elton
John, David Bowie, Hanson, U2, Spice Girls, Shania Twain and others. Worlds has
developed the 3D stores for these artists and these are included in Worlds
Ultimate 3D Chat. In conjunction with this 3D site, Worlds has launched
WorldsStore.com, an HTML ("2D") commerce site that offers the same merchandise
as the 3D store sites to consumers who wish to access these artists stores
through traditional HTML ("2D") pages on the Internet.
<PAGE>
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.
Many companies now compete with the Company in one way or another and
new ones may emerge in the future that might compete with the company. The
competition may be through entry into the same markets as the Company, or
through technology that either obviates the Company's advantages or lowers the
barrier to entry in one of the Company's markets.
<PAGE>
Besides technological competition, the Company will be competing with
established online music retailers with substantial resources and established
user bases. Among the leaders in non-3D online music web sites are Amazon.com
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 revenues in online sales.
Notwithstanding the foregoing, to the best of the Company's knowledge,
no other company is currently offering a product that integrates 3D internet
technology with a music industry content application similar to that which the
Company is now offering.
EMPLOYEES
The Company currently has nine full time employees, of which four are
engaged in product development, one is engaged in financial activities and four
are engaged in marketing activities. The Company has also re-established
relationships with seven 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 $4,700 per month and in Boston the lease expires in
September 2000 and provides for an annual rental of approximately $50,000. The
Company has only negligible costs relating to environmental compliance laws.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently involved in any material legal
proceedings.
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
<PAGE>
The Company's common stock started being quoted on the OTC Bulletin
Board on October 20, 1998, under the symbol WLDI. The high and low closing price
from the inception of quotation through December 31, 1998 was $2.00 and $.25,
respectively.
As of March 19, 1999, there were 596 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 for the year ended December 31, 1998 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
and for the year ended December 31, 1996, for the period ended December 3, 1997
is derived from audited financial statements included elsewhere herein.
The following data should be read in conjunction with the financial
statements of the Company and Predecessor.
<PAGE>
<TABLE>
Statement of Operations Data
- - ------------------------------ ------------------------------------------ -----------------------------------------
Worlds Inc. Predecessor
- - ------------------------------ ----------------- ------------------------ -------------------- --------------------
Year Ended 12/31/98 From 4/8/97 For the Period For the Year Ended
(inception) to Ended 12/3/97 12/31/96
12/31/97
- - ------------------------------ ----------------- ------------------------ -------------------- --------------------
<S> <C> <C> <C> <C>
Net Revenues $ 29,110 $ 1,420 $80,720 $ 3,784,019
- - ------------------------------ ----------------- ------------------------ -------------------- --------------------
Total Cost and Expenses $ 3,672,914 $ 6,810,568(b) $2,885,088 $ 13,871,984
- - ------------------------------ ----------------- ------------------------ -------------------- --------------------
Operating Loss $ 3,643,804 $ 6,809,148 $ (2,804,368) $(10,087,965)
- - ------------------------------ ----------------- ------------------------ -------------------- --------------------
Other Income and (Expenses) $ 822,576(a) $ (3,099) $ 134,863 $ 16,011
- - ------------------------------ ----------------- ------------------------ -------------------- --------------------
Net Loss Before Taxes and $ 2,821,228 $ 6,812,247 $ (2,669,505) $(10,071,954)
Extraordinary Item
- - ------------------------------ ----------------- ------------------------ -------------------- --------------------
Income Taxes -0- -0- $ (5,000) $ (115,000)
- - ------------------------------ ----------------- ------------------------ -------------------- --------------------
Net Loss Before $ 2,821,228 $ 6,812,247 $ (2,674,505) $(10,186,954)
Extraordinary Item
- - ------------------------------ ----------------- ------------------------ -------------------- --------------------
Extraordinary Item - Gain on $ 172,547 $ 125,776 $ 389,285 -0-
Debt Settlement
- - ------------------------------ ----------------- ------------------------ -------------------- --------------------
Net Loss $ 2,648,681 $ 6,686,471 $ (2,285,220) $(10,186,954)
- - ------------------------------ ----------------- ------------------------ -------------------- --------------------
Loss Per Share - Before $ (.16) $ (.73)
Extraordinary Item (Basic
and Diluted)
- - ------------------------------ ----------------- ------------------------
Loss Per Share (Basic and $ (.15) $ (.72)
Diluted)
- - ------------------------------ ----------------- ------------------------
</TABLE>
Balance Sheet Data
December 31, 1998
Working Capital $ 680,879
Total Assets 1,908,012
Total Liabilities 2,887,905
Stockholders' Deficit $ (979,893)
(a) Includes $810,140 gain resulting from reversal of certain Predecessor
liabilities.
(b) Includes $6,135,538 of acquired research and development costs resulting
from the merger with Predecessor.
<PAGE>
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.
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 importance 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.
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 did not generate significant revenues. While the Company
has completed development and market testing of Worlds Platinum and its 3D
Internet music sites, the Company will not generate significant revenues, if
ever, until after it successfully attracts and retains a significant number of
subscribers and/or advertisers. The Company anticipates that it will continue to
incur significant losses until, at the earliest, the Company generates
sufficient revenues to offset the substantial up-front expenditures and
operating costs associated with developing and commercializing its proposed
products. There can be no assurance that the Company will be able to attract and
retain a sufficient number of subscribers and/or advertisers to generate
significant revenues or achieve profitable operations or that its products and
services will prove to be commercially viable.
Predecessor (and now the Company), classified its expenses into three
broad groups: (i) research and development; (ii) cost of revenues; and (iii)
selling, general and administration. Revenues consisted primarily of production
service activities and sales of technology licenses.
Software development costs (consisting primarily of salaries and
related expenses) incurred prior to establishing technological feasibility are
expensed in accordance with Financial Accounting Standards Board (FASB)
<PAGE>
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. The Company began to capitalize its software in
the 4th quarter with the commercial release of three products, Animal House,
BowieWorld and Worlds Ultimate 3D Chat. $160,000 has been allocated toward
capitalization.
Plan of Operation
In December 1998, Worlds Ultimate 3D Chat (WU3D) was released, as a
successor to Worlds Chat Gold. The product has been primarily marketed via the
company's web site, Worlds.com and the Company's e-commerce site,
WorldsStore.com. WU3D is built on the Company's Gamma platform and incorporates
e-commerce, voice to voice chat, articulated, customizable avatars and video and
audio streaming.
The Company has completed 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 in discussions with several major record labels and
companies for them to distribute Worlds Platinum, along with music related web
site access. 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 three agreements.
During the fourth quarter, the Company successfully completed the
development of the Gamma development tool kit and commercially released three
products utilizing the Company's 3D Internet technology. The first product to be
released was AnimalHouse.com, a 3D environment created by the Company for
Universal/Hyundai targeting the college market. Worlds 3D technology was encoded
on an enhanced CD with audio tracks of 10 Universal musical artists and
distributed to college students through a variety of Universal distribution
outlets. The agreement entered into by the Company with Universal called for the
manufacture and distribution by Universal of up to 1,000,000 CD's. The second
product to be released was for David Bowie's BowieNet, the first artist created
ISP (Internet Service Provider). The product created by Worlds is named
BowieWorlds and has been released in the US as well as the UK by UltraStar
Internet Services LLP, the owners of Bowie Net. The third product to be released
was Worlds Ultimate 3D Chat which has been primarily marketed via the Company's
web site, Worlds.com and the Company's e-commerce site, WorldsStore.com. WU3D is
built on the Company's Gamma platform and incorporates e-commerce, voice to
voice chat, articulated, customizable avatars and video and audio streaming. The
Company also reached an agreement with UltraStar Internet Services LLP, owners
of BowieNet, to have WU3D released as a bonus to BowieNet members.
The Company has been actively pursuing strategic alliances with a
number of companies that can provide exposure and distribution of the Company's
products and technology. The Company has recently entered into two confidential
agreements with two major companies in the internet arena. The first is with
Excite, the number 3 portal site on the internet, which calls for the Company to
provide select e-commerce content to Excite. The second agreement is with Road
Runner Broadband Service Company, owned by Time Warner, Media One and Microsoft.
The agreement calls for the Company to develop and operate a custom 3D site on
the Road Runner Service. The site will be targeted to music consumers and will
provide for a download of the Company's software at a high bandwidth, which is
the essential technology offered by Road Runner. As part of the agreement the
Company can offer Road Runner users access to the Company's other 3D products as
well as the Company's e-commerce site. The agreement is a showcase to the
Company's technology and a strategic alliance for its distribution.
<PAGE>
The Company's present cash resources are insufficient to meet all of
its requirements over the next twelve months. However, by limiting the scope of
its business plan and cutting back on its development, the Company can stretch
its current cash resources for at least the next twelve months. The Company
currently has nine full-time employees and is working with seven independent
software contractors who were former employees of the Company. 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.
Results of Operations of the Company
Fiscal Year Ended December 31, 1998 Compared With Period from April 8, 1997
through December 31, 1997.
The Company's primary activities during 1998 were signing three
contracts to produce content for music related web sites, completing a small
financing and attempting a merger for additional financing, completing
development of Worlds Platinum, releasing a new version of Worlds Chat and
developing and operating a web site for the sale of music related merchandise.
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 $29,110 during 1998 as compared to $1,420 in
1997 due to almost total lack of sales directly attributable to the fact that
its WorldsStore.com web site was not operational until November.
Selling, general and administrative expenses were $2,650,703 during
1998 as compared to $675,030 in 1997 for this period and consisted largely of
overhead, expenses relating to development of its web site and content for the
contracts within the music industry, professional fees and other expenses
incurred in connection with the Mergers and the attempted merger with Unity
First Acquisition Corp., representing an increase of $1,975,673.
An expense of $6,135,538 was incurred during 1997 for the acquisition
of research and development from Predecessor, being the sum of the negative net
worth of Predecessor, plus the value of the 1,999,996 shares of the Company's
common stock given in exchange for all the outstanding stock of Predecessor at
the time of the Mergers. The Company invested $992,932 during 1998 in research
and development as it completed development of its Gamma technology.
The Company had net interest income during 1998 of $12,436 as compared
to net interest expense of $3,099 in 1997, primarily attributable to more earned
on the funds raised in the Company's financings than accumulated on
Predecessor's notes payable.
The Company also realized an extraordinary gain of $172,547 during 1998
as compared to $125,776 during 1997, by settling debts of the Company at less
than face value.
As a result of the above, plus a recorded gain of $810,140 resulting
from the reversal of certain items previously recorded as liabilities of
Predecessor, the Company's net loss for 1998 (including the extraordinary gain
on debt settlement of $172,547) was $2,648,681 as compared to a net loss of
$6,686,471 during 1997.
<PAGE>
Liquidity and Capital Resources of the Company
Net cash used by the Company's operating activities during 1998 was
$3,333,035. At December 31, 1998, the Company had a working capital of $680,879
and cash and cash equivalents in the amount of $1,581,764.
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. In June 1998, the Company closed on a secondary
offering of $1,832,000 gross proceeds, of which it netted $1,715,800 by selling
1,832,000 shares at $1.00 per share.
The Company's capital requirements relating to the commercialization of
Worlds Platinum and development of web site access and content for the music
industry have been and will continue to be significant. The Company is dependent
on the proceeds of future financings in order to continue in business and
develop and commercialize its proposed products.
The Company anticipates, based on currently proposed business plans and
assumptions relating to its operations (including the timetable of, and costs
associated with, product development and commercialization), that it has 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 those currently available to the Company. However, by limiting the
scope of its business plan and cutting back on its development budget, the
Company can stretch its current cash resources for at least the next twelve
months. The Company is continuing to explore financing opportunities. 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. At December 31, 1998, the Company's total liabilities are
approximately $2.9 million.
There can be no assurance that the Company will be able to raise any
proceeds from an offering of its securities 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
additional financing, 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 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.
<PAGE>
Results of Operations of Predecessor
Year Ended December 31, 1996 Compared with the Eleven Months Ended December 3,
1997.
In the first quarter of 1997 Predecessor was insolvent and had failed
to raise any additional capital. In January and February the majority of
Predecessor's personnel were released and most of its management team resigned.
Normal operations of Predecessor ceased and significant wind down costs were
incurred. In March, the board of directors appointed Regent Pacific, a firm with
experience in crisis management, as acting general manager of Predecessor. The
Seattle network operations center and Active Worlds, an earlier generation of
Predecessor's technology, were both sold, resulting in net proceeds of $260,100.
Revenue decreased by $3,703,299 to $80,720 for the eleven months ended
December 3, 1997 from $3,784,019 for the fiscal year ended December 31, 1996.
The decrease was caused primarily by the lack of any production revenue during
the period. The nominal revenue for the period was derived from Worlds Chat CD
sales and web site hosting at the Company's Seattle operations.
Costs of revenue decreased by $5,982,128 to $32,304 for the eleven
months ended December 3, 1997 from $6,014,432 for the fiscal year ended December
31, 1996. The decrease was directly attributable to the lack of operations
during the period.
Research and development costs decreased by $1,993,827 to $452,897 for
the eleven months ended December 3, 1997 from $2,446,724 for the fiscal year
ended December 31, 1996. This was a result of a significant reduction in
research and development effort and personnel.
Selling, general and administrative expenses decreased by $2,501,741 to
$2,399,887 for the eleven months ended December 3, 1997 from $4,901,628 for the
fiscal year ended December 31, 1996. This decrease was due to reduction in
personnel as Predecessor ceased normal operations.
Predecessor's interest expense increased by $122,900 to $139,650 for
the eleven months ended December 3, 1997 from $16,750 for the fiscal year ended
December 31, 1996. This was attributable primarily to interest on $1,685,000 in
loans received by Predecessor.
In 1997, Predecessor recognized an extraordinary gain of $389,285 upon
the partial forgiveness of debt owed in connection with technology purchases.
As a result of the foregoing, Predecessor incurred a net loss of
$2,285,220, inclusive of the $389,285 extraordinary gain, for the eleven months
ended December 3, 1997, compared to $10,186,954 for the fiscal year ended
December 31, 1996.
Effect of Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." ("SFAS No. 133"), which requires companies
to recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. SFAS No. 133 is
effective for fiscal years beginning after June 15, 1999. The Company does not
presently enter into any transactions involving derivative financial instruments
and, accordingly, does not anticipate the new standard will have any effect on
its financial statements.
<PAGE>
Year 2000 disclosure
The Company itself is Year 2000 compliant and does not anticipate any
internal problems. In the event any internal problems should arise, the Company
has many expert computer technicians on its payroll and believes that it will be
able to satisfactorily address any such problems. However, the Company is
dependent on the integrity of the Internet being maintained for it to derive
income from the sale of merchandise on its own e-commerce site and through links
to the products it created. The Company has employed a redundancy system as a
safeguard to protect the viability of its site by having its site hosted by two
of the larger Internet Service Providers. Thus, in the event one of its hosts
should fail, the Company could continue uninterrupted on the other ISP. The
Company has been advised that its hosts are addressing the Year 2000 issue and
hope to be compliant. The Company uses Wells Fargo to process its e-mail
transactions. Wells Fargo processes a significant portion of all Internet
e-commerce transactions and if it fails due to year 2000 problems the Company
will be impacted, but not likely more than many other e-commerce vendors. In
summary, the Company is totally dependent upon 3rd parties for hosting and
processing its e-commerce activities and while the Company cannot control the
actions of these 3rd parties, the Company believes that given its redundant
safeguard, the availability of other hosts and processors to switch to in the
event the Company's current hosts and/or processor crashes and the fact that the
Company only sees nominal revenue from its e-commerce at this time, the Company
does not believe that its profitability or operations will be materially
affected by the Year 2000 problem.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements are included herein commencing on page F-1.
The Company 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 the Company dismissed Lipner, Gordon & Co. LLP as
its independent accountants ("LG&C"). This action had been approved by the
Company's Board of Directors. During the past three years LG&C did not issue a
report on the Company'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.
During the period of its engagement there were no disagreements between
the Company 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 the Company 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 Company. BDO provided written
reports of these two corporations which was included in offering materials for a
private financing continued by the Company after the Mergers. BDO was also
consulted regarding the filing obligations of the Company pursuant to the change
<PAGE>
in its fiscal year. Finally, BDO was consulted regarding the nature of the
financial statements required to be included by the Company in its 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, the Company 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 Company'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 56 Chairman of the Board
Thomas Kidrin 46 President, Chief Executive Officer,
Secretary, Treasurer and Director
Kenneth A. Locker 50 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
as 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. 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 the college market under
the brand name College Television Network, (TM) the largest private network on
college campuses in the United States.
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.
<PAGE>
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. 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. Total Board related expenses, including
travel, lodging, and director's fees, is 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 December 31, 1997, the Company paid
$21,903 in compensation to its President and Chief Executive Officer and
$175,000 during 1998. 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
<PAGE>
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 105,000 stock options outstanding at an exercise
price of $.50 and 60,000 to one of the Company's outside directors exercisable
at $.60 that were granted in 1997, and 629,000 options at an exercise price of
$1.00 including 40,000 to one of the Company's outside directors, that were
granted during 1998. All outstanding options vest in equal amounts over a three
year period.
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. During fiscal 1998, Mr. Locker, an outside director, did not file a
Form 4 reflecting the receipt of 40,000 stock options.
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 19, 1999, 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 10.60%
Thomas Kidrin (2) 1,600,000 8.93%
Kenneth A. Locker (3) 20,000(4) *
Steven A. Greenberg 4,500,000 25.11%
All Officers and Directors
as a Group (3 persons) 3,500,000 19.53%
- - ----------------
* less than 1/10 of 1%
(1) Chairman.
(2) President, Chief Executive Officer, Secretary, Treasurer and a
Director.
(3) Director.
(4) Consists of currently exercisable stock options.
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. Greenberg loaned $77,000 to WAC of which $73,000 was repaid as of December
31, 1998. Also, during 1998, Mr. Greenberg received $180,000 in consulting fees.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, AND
REPORTS ON FORM 8-K
(a) 1. Financial Statements
The financial statements are listed in the Index to Financial
Statements on page F-1 and are filed as part of this annual report.
2. Not Applicable.
3. Exhibits
27 - Financial Data Schedule.
(b) Reports on Form 8-K
None.
<PAGE>
Worlds Inc. (a development stage enterprise)
Financial Statements
Period from April 8, 1997 (Inception) to December 31, 1997
and Year Ended December 31, 1998
F-1
<PAGE>
Worlds Inc. (a development stage enterprise)
Financial Statements
Period from April 8, 1997 (Inception) to December 31, 1997
and Year Ended December 31, 1998
<PAGE>
Worlds Inc. (a development stage enterprise)
Period from April 8, 1997 (Inception) to December 31, 1997
and Year Ended December 31, 1998
<PAGE>
Worlds Inc.
(a development stage enterprise)
Contents
Report of independent certified public accountants F-3
Financial statements:
Balance sheets F-4
Statements of operations F-5
Statements of stockholders' deficit F-6
Statements of cash flows F-7
Summary of accounting policies F-8 - F-11
Notes to financial statements F-12 - F-23
Worlds Inc. ("Predecessor")
[Predecessor company - information prior to date of merger with the
Company herein disclosed]:
Report of independent certified public accountants F-26
Financial statements:
Balance sheet F-27
Statements of operations F-28
Statements of stockholders' deficit F-29
Statements of cash flows F-30
Summary of accounting policies F-31 - F-33
Notes to financial statements F-34 - F-45
<PAGE>
Report of Independent Certified Public Accountants
Worlds Inc.
Boston, Massachusetts
We have audited the accompanying balance sheets of Worlds Inc. (the "Company")
(a development stage enterprise) as of December 31, 1997 and 1998, and the
related statements of operations, stockholders' deficit and cash flows for the
period from April 8, 1997 (inception) to December 31, 1997 and for the year
ended December 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. at December 31,
1997 and 1998 and the results of its operations and its cash flows for the
period from April 8, 1997 (inception) to December 31, 1997 and for the year
ended December 31, 1998, 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 26, 1999
F-3
<PAGE>
Worlds Inc.
(a development stage enterprise)
Balance Sheets
<TABLE>
<S> <C> <C>
December 31, 1997 1998
--------------------------------------------------------------------- ---------------------- ----------------------
Assets
Current:
Cash and cash equivalents $ 3,541,829 $ 1,581,764
Prepaid expenses and other current assets 74,713 53,486
Inventory - 58,516
--------------------------------------------------------------------- ---------------------- ----------------------
Total current assets 3,616,542 1,693,766
Property, equipment and software development, net of accumulated 209,452 214,246
depreciation and amortization (Note 5)
--------------------------------------------------------------------- ---------------------- ----------------------
$ 3,825,994 $ 1,908,012
--------------------------------------------------------------------- ---------------------- ----------------------
Liabilities and Stockholders' Deficit
Current:
Accounts payable (Note 11) $ 568,707 $ 319,906
Accrued expenses (Note 11) 592,250 446,333
Advanced customer billings (Note 11) 436,140 -
Current maturities of notes payable (Note 6) 269,333 246,648
--------------------------------------------------------------------- ---------------------- ----------------------
Total current liabilities 1,866,430 1,012,887
Long-term portion, notes payable (Note 6) 1,968,333 1,875,018
--------------------------------------------------------------------- ---------------------- ----------------------
Total liabilities 3,834,763 2,887,905
--------------------------------------------------------------------- ---------------------- ----------------------
Commitments (Note 7)
Stockholders' deficit (Notes 2, 3 and 8):
Common stock, $.001 par value - shares authorized 30,000,000; 16,120 18,032
issued 16,119,996 and 18,031,996
Additional paid-in capital 6,661,582 8,401,970
Deficit accumulated during the development stage (6,686,471) (9,335,152)
--------------------------------------------------------------------- ---------------------- ----------------------
(8,769) (915,150)
Treasury stock, at cost, 113,465 shares (Note 2) - (64,743)
--------------------------------------------------------------------- ---------------------- ----------------------
Total stockholders' deficit (8,769) (979,893)
--------------------------------------------------------------------- ---------------------- ----------------------
$ 3,825,994 $ 1,908,012
--------------------------------------------------------------------- ---------------------- ----------------------
</TABLE>
See accompanying summary of accounting policies
and notes to financial statements.
F-4
<PAGE>
Worlds Inc.
(a development stage enterprise)
Statements of Operations
<TABLE>
Period from Year ended Cumulative,
April 8, 1997 December 31, 1998 period from
(inception) to April 8, 1997
December 31, (inception) to
1997(a) December 31,
1998(a)
- - ------------------------------------------------------ ------------------- -------------------- -------------------
<S> <C> <C> <C>
Net revenues $ 1,420 $ 29,110 $ 30,530
Costs and expenses:
Cost of revenues - (29,279) (29,279)
Selling, general and administrative (675,030) (2,650,703) (3,325,733)
Research and development - (992,932) (992,932)
Acquired research and development (Note 1) (6,135,538) - (6,135,538)
- - ------------------------------------------------------ ------------------- -------------------- -------------------
Operating loss (6,809,148) (3,643,804) (10,452,952)
Other income (expenses):
Gain resulting from reversal of certain - 810,140 810,140
predecessor liabilities (Note 11)
Interest income 13,593 124,006 137,599
Interest expense (16,692) (111,570) (128,262)
- - ------------------------------------------------------ ------------------- -------------------- -------------------
Loss before extraordinary item (6,812,247) (2,821,228) (9,633,475)
Extraordinary item - gain on debt settlement 125,776 172,547 298,323
(Note 10)
- - ------------------------------------------------------ ------------------- -------------------- -------------------
Net loss $(6,686,471) $(2,648,681) $ (9,335,152)
- - ------------------------------------------------------ ------------------- -------------------- -------------------
Loss per share (basic and diluted) (Note 12):
Loss before extraordinary item $ (.73) $ (.16)
Extraordinary item .01 .01
- - ------------------------------------------------------ ------------------- --------------------
Net loss per share (basic and diluted) $ (.72) $ (.15)
- - ------------------------------------------------------ ------------------- --------------------
Weighted average common shares outstanding:
Basic and diluted 9,336,569 17,170,288
- - ------------------------------------------------------ ------------------- --------------------
</TABLE>
------------
(a) Includes the results of Predecessor and Academic which were merged into
the Company on December 3, 1997.
See accompanying summary of accounting policies
and notes to financial statements.
F-5
<PAGE>
Worlds Inc.
(a development stage enterprise)
Statements of Stockholders' Deficit
(Note 8)
Period from April 8, 1997 (inception) to December 31, 1998
<TABLE>
Common stock Additional Deficit Treasury stock Total
------------------------- paid-in accumulated stockholders'
Shares Amount capital during the deficit
development
stage
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock 8,400,000 $ 8,400 $ 195,600 $ $ - $ 204,000
to founding
stockholders
Sale of shares in private 4,810,000 4,810 3,689,866 - - 3,694,676
offering memorandum
and shares issued to
placement agent, net
(Note 3)
Issuance of shares to 910,000 910 557,116 - - 558,026
Academic Computer
Systems, Inc. (Note 2)
Issuance of shares 1,999,996 2,000 1,998,000 - - 2,000,000
pursuant to merger
with predecessor
(Note 2)
Capital contribution - - 221,000 - - 221,000
resulting from
forgiveness of debt to
shareholders of
predecessor (Note 6)
Net loss for the period - - - (6,686,471) - (6,686,471)
April 8 to
December 31, 1997
- - --------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 16,119,996 16,120 6,661,582 (6,686,471) - (8,769)
Sale of shares in private 30,000 30 26,470 - - 26,500
offering memorandum
(January 1998) (Note 3)
Sale of shares in public 1,832,000 1,832 1,713,968 - - 1,715,800
offering of common
stock, net (June 1998)
(Note 3)
Conversion of 113,465 - - - - (64,743) (64,743)
shares to certain
stockholders
(June 1998) (Note 2)
Conversion of employee 50,000 50 (50) - - -
stock options into
shares (October 1998)
(Note 8)
Net loss for the year - - - (2,648,681) - (2,648,681)
ended December 31, 1998
- - --------------------------------------------------------------------------------------------------------------------
Balance, December 31, 18,031,996 $18,032 $8,401,970 $(9,335,152) $(64,743) $ (979,893)
1998
- - --------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying summary of accounting policies
and notes to financial statements.
F-6
<PAGE>
Worlds Inc.
(a development stage enterprise)
Statements of Cash Flows
(Note 13)
<TABLE>
Period from Year ended Cumulative,
April 8, 1997 December 31, 1998 period from
(inception) to April 8, 1997
December 31, 1997 (inception) to
December 31, 1998
- - --------------------------------------------------------- ------------------ ------------------- ------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(6,686,471) $(2,648,681) $(9,335,152)
- - --------------------------------------------------------- ------------------ ------------------- ------------------
Adjustments to reconcile net loss to net cash used in
operating activities:
Loss on disposal of fixed assets - 54,041 54,041
Depreciation and amortization 16,323 129,752 146,075
Gain resulting from reversal of certain - (810,140) (810,140)
predecessor liabilities
Gain on debt settlement (125,776) (172,547) (298,323)
Acquired research and development 6,135,538 - 6,135,538
Allowance for doubtful accounts (538) 538 -
Changes in operating assets and liabilities, net
of effects from merger with Predecessor and
Academic:
Inventory - (58,516) (58,516)
Prepaid expenses and other assets 93,716 20,689 114,405
Accounts payable and accrued expenses 214,361 151,829 366,190
- - --------------------------------------------------------- ------------------ ------------------- ------------------
Total adjustments 6,333,624 (684,354) 5,649,270
- - --------------------------------------------------------- ------------------ ------------------- ------------------
- - --------------------------------------------------------- ------------------ ------------------- ------------------
Net cash used in operating activities (352,847) (3,333,035) (3,685,882)
- - --------------------------------------------------------- ------------------ ------------------- ------------------
- - --------------------------------------------------------- ------------------ ------------------- ------------------
Cash flows from investing activities:
Acquisition of property and equipment - (28,587) (28,587)
Additions to software development costs - (160,000) (160,000)
- - --------------------------------------------------------- ------------------ ------------------- ------------------
Net cash used in investing activities - (188,587) (188,587)
- - --------------------------------------------------------- ------------------ ------------------- ------------------
Cash flows from financing activities:
Proceeds from sale of common stock to founding 204,000 - 204,000
stockholders
Proceeds from sale of common stock in private 3,694,676 26,500 3,721,176
offering memorandum
Proceeds from sale of common stock in public offering - 1,715,800 1,715,800
Payment of conversion price of shares to certain - (64,743) (64,743)
stockholders
Payments on note payable (4,000) (116,000) (120,000)
- - --------------------------------------------------------- ------------------ ------------------- ------------------
Net cash provided by financing 3,894,676 1,561,557 5,456,233
activities
- - --------------------------------------------------------- ------------------ ------------------- ------------------
Net increase (decrease) in cash and cash equivalents 3,541,829 (1,960,065) 1,581,764
Cash and cash equivalents, beginning of period - 3,541,829 -
- - --------------------------------------------------------- ------------------ ------------------- ------------------
Cash and cash equivalents, end of period $ 3,541,829 $ 1,581,764 $ 1,581,764
- - --------------------------------------------------------- ------------------ ------------------- ------------------
</TABLE>
See accompanying summary of accounting policies
and notes to financial statements.
F-7
<PAGE>
Worlds Inc.
(a development stage enterprise)
Summary of Accounting Policies
Definitions
The Company is the resulting entity of two contemporaneous
mergers (the "Mergers") of Worlds Inc., a Delaware
corporation ("Predecessor"), with and into Worlds
Acquisition Corp., a Delaware corporation ("WAC"), and WAC
with and into Academic Computer Systems, Inc., a New Jersey
corporation ("Academic"), which changed its name to Worlds
Inc. (see Note 2). While Academic was the legal entity that
survived the Mergers, WAC was the accounting acquiror in
both Mergers. The Company's fiscal year-end is December 31.
The term the "Company," as used herein, refers to the
consolidated entity resulting from the two contemporaneous
Mergers, as well the pre-merger Predecessor, WAC and
Academic; however, Predecessor, WAC and Academic are
hereinafter sometimes referred to separately as the context
requires.
Nature of Business
WAC was incorporated on April 8, 1997 to design, develop and
market three-dimensional ("3D") music oriented Internet
sites on the World Wide Web. These web sites are anticipated
to utilize 3D technologies developed by Predecessor.
Basis of Presentation
The financial statements include the results of Predecessor
and Academic from December 3, 1997, the date of the Mergers
(the "Merger Date").
The financial statements have been prepared in accordance
with the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 7, "Accounting and Reporting by
Development Stage Enterprises," which requires development
stage enterprises to employ the same accounting principles
as operating companies.
F-8
<PAGE>
Fair Value of Financial Instruments
The carrying amounts of financial instruments, including
cash and short-term Instruments debt, approximated fair
value as of December 31, 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 December 31, 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.
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.
Inventory
Inventory consists of merchandise held for resale and is
valued at the lower of cost or market or a first-in,
first-out (FIFO) basis.
F-9
<PAGE>
Software Development Costs
In accordance with the provisions of Statement of Financial
Accounting Standards (SFAS) No. 86 "Accounting for the Costs
of Computer Software to be Sold, Leased, or Otherwise
Marketed", software development costs incurred by the
Company subsequent to establishing technological feasibility
of the resulting product or enhancement and until the
product is available for general release to customers are
capitalized and carried at the lower of unamortized cost or
net realizable value. Net realizable value is determined
based on estimates of future revenues to be derived from the
sale of the software product reduced by the costs of
completion and disposing of the product. During the fourth
quarter of 1998 technological feasibility of the company's
software was established. In this regard $160,000 was
capitalized and included in property, equipment and software
development as of December 31, 1998. Amortization of the
costs capitalized will commence in 1999 and will be based on
current and anticipated future revenues for each product or
enhancement with an annual minimum equal to straight-line
amortization over the remaining estimated economic life of
the product or enhancement.
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-10
<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-11
<PAGE>
Worlds Inc.
(a development stage enterprise)
Notes to Financial Statements
1. Going Concern
As discussed in Note 3, the Company completed a private
placement raising gross proceeds of $4,415,000, 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-12
<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.
While no trading market existed for the securities of
Academic, the Company's common stock is traded on the
Bulletin Board.
F-13
<PAGE>
Worlds Inc.
(a development stage enterprise)
Notes to Financial Statements
3. Private Placement
and Public
Offering
The Private Placement called for WAC to offer for sale a
maximum of 50 units (57-1/2 with the over-allotment), each
consisting of 120,000 shares of WAC's common stock (the
"Units") at a price of $120,000 per Unit. In connection with
the Private Placement, the placement agent was to receive
one warrant to purchase one share of WAC's common stock at
$1 per share for every $40 of gross proceeds from the sale
of the Units. On November 21, 1997, WAC sold 31.67 Units
with gross proceeds of $3,800,000 (3,800,000 shares) (the
"Initial Private Placement Closing") and the placement agent
was issued 425,000 shares of common stock. On December 31,
1997, the Company sold 4.88 Units with gross proceeds of
$585,000 (585,000 shares). On January 2, 1998 a further
30,000 shares were issued with gross proceeds of $30,000.
Cumulative net proceeds, after commissions and expenses of
the offering, aggregated $3,721,176.
WAC agreed to include the shares of common stock underlying
the Units sold in the Private Placement (the "Private
Placement Shares") in a registration statement to be filed
with the Securities and Exchange Commission (the "SEC").
Such registration statement was declared effective on May 1,
1998. During June 1998, WAC sold 1,832,000 shares in a
public offering of its stock and received gross proceeds of
$1,832,000. Net proceeds, after commissions of this
offering, aggregated $1,715,800.
4. Agreement and Plan of Merger
On June 25, 1998, the Company entered into an agreement and
plan of merger and reorganization (the "Agreement") with
Unity First Acquisition Corp., a Delaware corporation
("Unity"), whereby Unity would acquire all of the
outstanding shares of the Company in exchange for shares of
its own common stock. The acquisition 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.
F-14
<PAGE>
Worlds Inc.
(a development stage enterprise)
Notes to Financial Statements
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.
5. Property,
Equipment and
Software Development
A summary of property, equipment and software development at
December 31, Software Development 1997 and 1998 is as
follows:
December 31, 1997 1998
- - --------------------------------------------------- -------- --------
Computers, software and $650,557 $426,796
equipment
Software development costs -- 160,000
- - --------------------------------------------------- -------- --------
Total 650,557 586,796
Less: Accumulated 441,105 372,550
depreciation and
amortization
- - --------------------------------------------------- -------- --------
$209,452 $214,246
- - --------------------------------------------------- -------- --------
F-15
<PAGE>
6. Notes Payable Long-term debt at December 31, 1997 and
1998 consists of the following:
<TABLE>
December 31,
1997 1998
- - -------------------------------------------- --------------- -----------------
<S> <C> <C>
Convertible promissory notes payable - $1,685,000 $1,685,000
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: 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).
Note payable - technology obligation 186,666 186,666
(noninterest bearing), payable in
monthly installments of $3,333 until
November 2001
Note payable - stockholder, payable in 250,000 250,000
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).
Note payable - investment banker, payable 116,000 -
in monthly installments of $2,000 until
September 1998, with a final payment of
$100,000, plus interest at 8%.
- - ------------------------------------------- ---------------- -----------------
2,237,666 2,121,666
Less: Current maturities 269,333 246,648
- - ------------------------------------------- ---------------- -----------------
Long-term portion $1,968,333 $1,875,018
- - ------------------------------------------- ---------------- -----------------
</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, was
accounted for as a contribution of
capital to the Company for the
period ended December 31, 1997.
F-16
<PAGE>
Worlds Inc.
(a development stage enterprise)
Notes to Financial Statements
Approximate maturities of long-term debt
over the next four years are as follows:
Year ended December 31,
- - ------------------------------------------------------- ----------
1999 $ 246,648
2000 1,808,340
2001 39,996
2002 26,682
- - ------------------------------------------------------- ----------
7. Commitments (a) During September 1997, the Company commenced leasing of
office space in Boston under a noncancellable operating
lease expiring in September 2000. Minimum rentals under this
lease are approximately as follows:
Year ending December 31,
- - ---------------------------------------------------- -------
1999 $50,000
2000 34,400
- - ---------------------------------------------------- -------
Total minimum payments $84,400
- - ---------------------------------------------------- -------
Rent expense for the period ended December 31, 1997 and the
year ended December 31, 1998 was approximately $21,000 and
$112,000, respectively.
(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-17
<PAGE>
Worlds Inc.
(a development stage enterprise)
Notes to Financial Statements
8. 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 sheets as of December 31, 1997 and
1998 and the statement of stockholders'
equity for the period from April 8, 1997
to December 31, 1998 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-18
<PAGE>
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 and 1998, no dividend
yield; expected volatility of 30% in 1997
and 46.1% in 1998; risk-free interest rate
of 5.6% in 1997 and 4.3% in 1998; and
expected life of 10 years.
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:
Period from Year ended
inception to December 31, 1998
December 31, 1997
----------------- -----------------
Net loss:
As reported $ (6,686,471) $ (2,648,681)
Pro forma (6,751,856) (2,654,185)
Net loss per share (basic and diluted):
As reported $ (.72) $ (.15)
Pro forma (.72) (.15)
----------------- -----------------
F-19
<PAGE>
Worlds Inc.
(a development stage enterprise)
Notes to Financial Statements
A summary of the status of the Company's
stock option plan as of December 31, 1997
and 1998, and changes during the years
ending on those dates, is presented below:
December 31, 1997 December 31, 1998
Weighted Weighted
average average
exercise exercise
Shares price Shares price
- - ----------------------------- ------------ ------------ ----------- ------------
Outstanding at beginning of
year - $ - 165,000 $ .50
Granted 165,000 .50 664,000 1.00
Exercised - - - -
Cancelled - - (35,000) (1.00)
- - ----------------------------- ------------ ------------ ----------- ------------
Outstanding at end of year 165,000 $.50 794,000 $ .90
- - ----------------------------- ------------ ------------ ----------- ------------
Options exercisable at 13,750 $.50 153,805 $ .78
year-end
- - ----------------------------- ------------ ------------ ----------- ------------
Weighted average fair value $ - $ -
of options granted during
the year
- - ----------------------------- ------------ ------------ ----------- ------------
The following table summarizes information about stock
options outstanding at December 31, 1998.
Options outstanding Options exercisable
------------------------------------- ------------------------
Weighted
Number of average Weighted Number Weighted
oustanding at remaining average exercisable at average
Range of December 31, contractual exercise December 31, exercise
exercise prices 1998 life price 1998 price
- - --------------- -------------- ------------ --------- -------------- ---------
$.50 to $1.00 794,000 9.1 $.90 153,805 $.78
9. 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.
F-20
<PAGE>
Worlds Inc.
(a development stage enterprise)
Notes to Financial Statements
At December 31, 1998, 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 $6 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 due to the uncertainty of its
realization.
10. Extraordinary Item
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. During 1998, additional trade
payables amounting to $172,547 were forgiven resulting in a
total gain on debt forgiveness since inception of $298,323.
11. Gain Resulting
from Reversal of
Certain
Predecessor
Liabilities
During December 1998, management determined that certain
predecessor Reversal of Certain liabilities assumed at the
date of the Merger with Predecessor were no longer
Predecessor Liabilities owed. During the fourth quarter of
1998, accounts payable ($220,000), accrued expenses
($154,000) and advanced customer billings ($436,140), which
aggregated $810,140, were reversed and accounted for as
other income in the accompanying statement of operations for
the year ended December 31, 1998.
F-21
<PAGE>
Worlds Inc.
(a development stage enterprise)
Notes to Financial Statements
The following table sets forth the computation of basic and
diluted loss per share:
<TABLE>
Period from Year ended
April 8, 1997 December 31, 1998
(inception) to
December 31, 1997
- - ------------------------------------------ ----------------- ------------
<S> <C> <C>
Numerator:
Loss before extraordinary item $(6,812,247) $ (2,821,228)
Extraordinary item 125,776 172,547
- - ------------------------------------------ ----------- ------------
Net loss, numerator for basic (6,686,471) (2,648,681)
loss per share
Effect of dilutive securities:
Convertible debt -- --
- - ------------------------------------------ ----------- ------------
Net loss, numerator for $(6,686,471) $ (2,648,681)
diluted loss per share
- - ------------------------------------------ ----------- ------------
Denominator:
Denominator for basic loss per 9,336,569 17,170,288
share - weighted average common
shares
- - ------------------------------------------ ----------- ------------
Effect of dilutive securities:
Convertible debt -- --
Stock options and warrants 33,343 79,724
- - ------------------------------------------ ----------- ------------
Dilutive potential common 33,343 79,724
shares
- - ------------------------------------------ ----------- ------------
Denominator for diluted loss per 9,369,912 17,250,012
share - adjusted weighted
average common shares and
assumed conversions
- - ------------------------------------------ ----------- ------------
Basic loss per share $ (.72) $ (.15)
- - ------------------------------------------ ----------- ------------
Diluted loss per share - as calculated $ (.71) $ (.15)
- - ------------------------------------------ ----------- ------------
Diluted loss per share - as disclosed $ (.72) $ (.15)
due to anti-dilutive effect of
stock options
- - ------------------------------------------ ----------- ------------
</TABLE>
F-22
<PAGE>
Worlds Inc.
(a development stage enterprise)
Notes to Financial Statements
For additional disclosure regarding stock
options, warrants and convertible debt,
see Notes 8, 3 and 6, respectively.
Options to purchase 50,000 shares of
common stock at $5 per share were
outstanding during 1997 and 1998 but were
not included in the computation of diluted
loss per share because the option exercise
price was greater than the fair value of
common shares and, therefore, the effect
would be anti-dilutive.
13. Supplemental
Cash Flow
Information
Interest paid was approximately $1,600 and $1,000 for the
period ended Information December 31, 1997 and the year
ended December 31, 1998, respectively.
Noncash investing and financing activities during the period
ended December 31, 1997 and year ended December 31, 1998
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 (see Note 6).
(c) The Company converted accounts payable of $250,000 into
a note payable (see Note 6).
F-23
<PAGE>
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
<PAGE>
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-24
<PAGE>
Worlds Inc. - Predecessor
(a devlepment 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-26
Financial statements:
Balance sheet F-27
Statements of operations F-28
Statements of stockholders' deficit F-29
Statements of cash flows F-30
Summary of accounting policies F-31 - F-33
Notes to financial statements F-34 - F-45
F-25
<PAGE>
Report of Independent Certified Public Accountants
The Board of Directors
and Stockholders of
Worlds Inc. - Predecessor
We have audited the accompanying balance sheet of Worlds Inc. - Predecessor (a
development stage enterprise) (the "Predecessor") as of December 3, 1997, and
the related statements of operations, stockholders' deficit and cash flows for
the period ended December 3, 1997, the year ended December 31, 1996 and the
period from April 26, 1994 (inception) to December 3, 1997. These financial
statements are the responsibility of the Predecessor's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Worlds Inc. - Predecessor as of
December 3, 1997, and the results of its operations and its cash flows for the
period ended December 3, 1997, the year ended December 31, 1996 and the period
from April 26, 1994 (inception) to December 3, 1997, in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Predecessor will continue as a going concern. As discussed in the summary of
accounting policies, the Predecessor is in the development stage and has
suffered recurring losses from operations, has a working capital deficit, and
has a stockholders' deficit since inception that raise substantial doubt about
its ability to continue as a going concern. Management's plans in regard to
these matters are described in Note 1 (Development Stage Risks) and Note 10
(Merger) to the financial statements. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
BDO Seidman, LLP
San Francisco, California
March 25, 1998
F-26
<PAGE>
Worlds Inc. - Predecessor
(a development stage enterprise)
Balance Sheet
<TABLE>
December 3, 1997(a)
- - -------------------------------------------------------------------------------------------- ------------
<S> <C>
Assets
Current:
Cash and cash equivalents $ 56,345
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 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, 180
1,801,533 shares issued and outstanding
Preferred stock, $.0001 par value; designated as Series B; 2,300,000 shares authorized, 102
1,022,726 shares issued and outstanding
Common stock, $.0001 par value; 15,000,000 shares authorized; 5,535,646 shares issued 553
and outstanding
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-27
<PAGE>
Worlds Inc. - Predecessor
(a development stage enterprise)
Statements of Operations
<TABLE>
Year ended Period ended Period from
December 31, 1996 December 3, 1997(a) April 26, 1994
(inception) to
December 3, 1997(a)
---------------------------------------------------- -------------------- -------------------- --------------------
<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 (83,195) 4,070 (79,125)
equipment
Income from sale of technology (Note 7) - 260,100 260,100
---------------------------------------------------- -------------------- -------------------- --------------------
Loss before income taxes and extraordinary (10,071,954) (2,669,505) (21,505,424)
item
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 - 389,285 389,285
(Note 3)
---------------------------------------------------- -------------------- -------------------- --------------------
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-28
<PAGE>
Worlds Inc. - Predecessor
(a development stage enterprise)
Statements of Stockholders'Deficit
<TABLE>
Common stock Preferred stock Deferred
compen- Additional Accumulated Total
sation paid-in deficit stockholders'
on stock capital deficit
options
Series A Series B
--------- ------ ---------------- ----------------
Shares Amount Shares Amount Shares Amount
--------- ------ --------- ------ --------- ------ --------- ------------ ------------- ------------
<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 - - - - 1,022,726 102 - 8,618,887 - 8,618,989
preferred stock at
$8.80 per share, net
of issuance costs of
$381,000
Compensation related to - - - - - - 24,202 (9,394) - 14,808
stock options
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 - - - - - 16,108 (2,369) - 13,739
stock options
Net loss for the period - - - - - - - (2,285,220) (2,285,220)
ended December 3, 1997
- - -------------------------- --------- ------ --------- ------ --------- ------ --------- ------------ ------------- ------------
Balance, December 3, 1997 5,535,646 $553 1,801,533 $180 1,022,726 $102 $ (5,337) $17,105,103 $(21,236,139) $(4,135,538)
- - -------------------------- --------- ------ --------- ------ --------- ------ --------- ------------ ------------- ------------
</TABLE>
See accompanying summary of accounting policies
and notes to financial statements.
F-29
<PAGE>
Worlds Inc. - Predecessor
(a development stage enterprise)
Statements of Cash Flows
<TABLE>
Year ended Period ended Period from
December 31, December 3, April 26, 1994
1996 1997(a) (inception) to
December 3,
1997(a)
- - -------------------------------------------------------------- ----------------- ---------------- -----------------
<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 8,618,989 - 16,163,766
issuance costs
Advance from Worlds Inc. (formerly Worlds Acquisition - 561,397 561,397
Corp.)
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-30
<PAGE>
Worlds Inc. - Predecessor
(a development stage enterprise)
Summary of Accounting Policies
Nature of Business
Worlds Inc. (the "Predecessor") was incorporated under the
laws of Delaware on April 26, 1994. The Predecessor was
formed to develop and commercialize 3D multi-user tools and
technologies for the Internet market. The Predecessor is in
the development stage and, as such, has not generated
significant revenues from operations.
Basis of Presentation
The accompanying financial statements have been prepared
assuming that the Predecessor will continue as a going
concern. The Predecessor is in the development stage (see
Note 1) and has suffered recurring losses from operations
since its inception that raises substantial doubt about its
ability to continue as a going concern. The financial
statements do not include any adjustments that might result
from the outcome of this uncertainty. As more fully
described in Note 10, on December 3, 1997, the Predecessor
consummated a merger agreement with Worlds Inc. (formerly
Worlds Acquisition Corp.) ("WAC"), a company which had
completed a private placement offering of securities.
The financial statements have been prepared in accordance
with the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 7, "Accounting and Reporting by
Development Stage Enterprises," which requires development
stage enterprises to employ the same accounting principles
as operating companies.
Restructuring of Operations
Due to recurring losses, insufficient revenue, a working
capital deficit and a net stockholders' deficit, the
Predecessor's management made significant reductions in
operations in February 1997 that are reflected in the
Predecessor's financial statements for the period ended
December 3, 1997. In March 1997, the Predecessor engaged an
outside management firm to assist with the downsizing of
operations which has included a major reduction in employees
and a consolidation of all operations to one location in San
Francisco. The Predecessor decided in December 1996 to close
its Seattle operations resulting in a $110,000 charge to
operations for the year ended December 31, 1996.
F-31
<PAGE>
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 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. Maintenance and repairs are expensed as incurred and
improvements are capitalized.
Revenue Recognition
Revenue from technology development and licensing contracts
is recognized upon the attainment of contractual milestones
(approximating the percentage-of-completion method). Cash
received in advance of revenues earned is recorded as
deferred revenue.
Software Development Costs
Software development costs are charged to expense when
incurred until the technological feasibility of the product
has been established. After technological feasibility has
been established, any additional costs would be
capitalizable in accordance with SFAS No. 86. No such costs
have been capitalized to date.
Research and
Development Costs
Research and development costs are expensed as incurred.
F-32
<PAGE>
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 Credit
Risk
The Predecessor derives revenues from corporate customers in
a variety of industries. For the year ended December 31,
1996, five customers accounted for 74% of the Predecessor's
revenues. For the period ended December 3, 1997, no
individual customer accounted for more than 10% of revenues.
New Accounting
Standards
Effective January 1, 1996, the Predecessor adopted the
provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation". Under this standard, companies are
encouraged, but not required, to adopt the fair value method
of accounting for employee stock-based transactions. Under
the fair value method, compensation cost is measured at the
grant date based on the fair value of the award and is
recognized over the service period, which is usually the
vesting period. Companies are permitted to continue to
account for employee stock-based transactions under
Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees," but are required
to disclose pro forma net income and earnings per share as
if the fair value method has been adopted. The Predecessor
has elected to continue to account for stock-based
compensation under APB No. 25 (see Note 5).
F-33
<PAGE>
Worlds Inc. - Predecessor
(a development stage enterprise)
Notes to Financial Statements
1. Going Concern
The accompanying financial statements have been prepared on
a going-concern basis, which contemplates the realization of
assets and the satisfaction of liabilities in the normal
course of business. As shown in the financial statements,
the Predecessor, as of December 3, 1997, had incurred
recurring losses since inception totaling $21,236,139 had a
working capital deficit of $2,368,871 and a stockholders'
deficit of $4,135,538. As discussed in Note 10, on December
3, 1997, the Predecessor consummated a merger agreement with
WAC, a company which had completed a private placement
offering of securities whereby $4,385,000 of gross proceeds
was raised.
The Predecessor anticipates, however, that it currently has
only a portion of the funds necessary to permit it to
complete product development and commercialization. There
can be no assurance that the Predecessor will be able to
obtain the substantial additional capital resources
necessary to permit the Predecessor to pursue its business
plan or that any assumptions relating to its business plan
will prove to be accurate. WAC is pursuing sources of
additional financing and there can be no assurance that any
such financing will be available to WAC on commercially
reasonable terms, or at all. Any inability to obtain
additional financing will have a material adverse effect on
the Predecessor and WAC, including possibly requiring the
Predecessor or WAC to significantly curtail or cease
operations.
These factors raise substantial doubt about the ability of
the Predecessor to continue as a going concern. The
financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
F-34
<PAGE>
Worlds Inc. - Predecessor
(a development stage enterprise)
Notes to Financial Statements
2. Property and
Equipment
A summary of property and equipment as of December 3, 1997
is as follows:
December 3, 1997
- - ------------------------------------------------------- --------
Computers, software and equipment $650,557
Less: Accumulated depreciation and amortization 424,782
- - ------------------------------------------------------- --------
$225,775
- - ------------------------------------------------------- --------
3. Notes Payable December 3, 1997
------------------------------------------------------
Bridge loan payable to stockholders $1,650,000
Technology obligation 186,667
------------------------------------------------------
1,836,667
Less: Current portion 70,000
------------------------------------------------------
$1,766,667
------------------------------------------------------
On December 13, 1996, the Predecessor received a Bridge Loan
totaling $1,000,000 from two preferred stockholders.
Additional advances of $650,000 were made under the Bridge
Loan during the eleven-month period ended December 3, 1997
($500,000 in January 1997 and $50,000 in June 1997 were
received from the same preferred stockholders; and $100,000
was received in May 1997 from an affiliated person of a
stockholder). These advances under the Bridge Loan were
granted in return for convertible promissory notes and
options at $0.88 per share (Predecessor management's
estimate of fair value of common stock as of December 1996)
on 500,000 shares of the Predecessor's common stock held by
a founder and officer of the Predecessor as of December 31,
1996 (825,000 shares at December 3, 1997). Such options
(which had a nominal value at date of issuance) remain
exercisable for 36 months, but terminate immediately upon
the consummation of an initial public offering of the
Predecessor's capital stock or any consolidation or merger
by the Predecessor or any sale, conveyance or disposition of
all or substantially all of the assets of the Predecessor;
such an event occurred on December 3, 1997 when the
Predecessor consummated a merger (Note 10). The noteholders
had the option to convert the outstanding principal balance
and unpaid accrued interest into Predecessor's equity
securities at the closing of Predecessor's next round of
equity financing, at the price per share of such equity
securities. The loan bears interest at a rate of 9% from the
date of the advances. Accrued interest is approximately
$141,000 at December 3, 1997.
F-35
<PAGE>
Worlds Inc. - Predecessor
(a development stage enterprise)
Notes to Financial Statements
In June 1997, the Predecessor renegotiated the terms of the
Bridge Loan to convert it to a three year loan bearing
interest at 7.5% and the option to convert into common stock
based on the conversion price of $4.375, $5.00 and $5.625 in
each of the three years following consummation of the merger
of the Predecessor into Worlds Inc. (formerly Worlds
Acquisition Corp) (see Note 10). The loan will not be
payable until the earlier of maturity or conversion. The
holders of the loan will also receive warrants to acquire an
aggregate of 100,000 shares of common stock at an exercise
price equal to $5.00 per share. There was no conversion
benefit associated with the convertible promissory notes at
date of issuance nor at the date of renegotiation.
On January 3, 1995, the Predecessor purchased technology for
$750,000 under a license agreement with Kinetic Effects,
Inc. ("Kinetic") and Simon Fraser University of British
Columbia ("SFU"). At December 31, 1996, the Predecessor had
an obligation to make monthly payments of $10,000 ($6,667 to
SFU and $3,333 to Kinetic) through November 2000. The
purchased technology was charged to research and development
expense in 1995. This obligation was renegotiated downward
in August 1997 to $186,667, with monthly payments to Kinetic
of $3,333 over 56 months. Kinetic is an entity affiliated
with a prior officer and current shareholder of the
Predecessor. In September 1997, the Predecessor renegotiated
the terms with SFU. In exchange for the removal of
exclusivity rights on the technology, $373,333 of the debt
was forgiven and has been included within the extraordinary
item of $389,285 in the statement of operations for the
period ended December 3, 1997.
F-36
<PAGE>
Worlds Inc. - Predecessor
(a development stage enterprise)
Notes to Financial Statements
Approximate maturities of long-term debt over the next four
years are as follows:
----------------------------------- ----------
1998 $ 70,000
1999 40,000
2000 1,690,000
2001 36,667
----------------------------------- ----------
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'
Deficit
Preferred Stock
Each share of Series A and Series B preferred stock is
convertible, at the option of the holder, into fully paid
shares of common stock. The conversion rate is based upon
the original purchase price, subject to adjustments for
stock dividends, stock splits, and capital reorganizations
and price based anti-dilution, 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.
F-37
<PAGE>
Worlds Inc. - Predecessor
(a development stage enterprise)
Notes to Financial Statements
Holders of Series A and Series B preferred stock are
entitled to receive dividends, prior and in preference to
any declaration or payment of any dividends on common stock,
at the rate of $0.39 for Series A and $0.79 for Series B per
share per annum. Such dividends are not cumulative, except
in the event that the Predecessor does not enter into an
initial public offering of at least $15,000,000 in proceeds
to the Predecessor on or before May 31, 1998, in which case
the dividends are cumulative effective May 31, 1998, and are
payable when and if declared by the Predecessor's Board of
Directors in cash legally available for distribution, or in
stock, if no cash is legally payable. As of December 3,
1997, no dividends have been declared.
In the event of liquidation, consolidation, merger, or
winding up of the Predecessor prior to conversion, holders
of preferred stock are entitled to receive, in preference to
the holders of common stock, an amount equal to their
liquidation amount or a pro rata share of the remaining
assets, based on their ownership of the Predecessor. As of
December 3, 1997, the aggregate liquidation preference was
approximately $16,657,000.
A Series A preferred stock investor also has a stock warrant
which provides the right to purchase shares of Series A
preferred stock sufficient to bring its holdings on a fully
diluted basis to 21% of the Predecessor's shares. The
warrant expires in the event of a qualified public offering
or when the holder of preferred stock no longer chooses to
exercise its existing anti-dilution 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.
F-38
<PAGE>
Worlds Inc. - Predecessor
(a development stage enterprise)
Notes to Financial Statements
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.
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.
F-39
<PAGE>
Worlds Inc. - Predecessor
(a development stage enterprise)
Notes to Financial Statements
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:
Year ended Period ended
December 31,1996 December 3, 1997
------------------ ---------------- ----------------
Net loss:
As reported $(10,186,952) $(2,265,776)
Pro forma (10,242,063) (2,328,421)
------------------ ---------------- ----------------
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:
Options Options outstanding Weighted
available average
for grant price per
share
------------- ------------
Shares Price per
share
- - -------------------------- ------------- ------------- ------------ -----------
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 - - - -
Option exercised - - - -
Options canceled - - - -
- - -------------------------- ------------- ------------- ------------ -----------
Balance, December 31, 1997 986,949 1,389,812 $.20-.88 $ .68
- - -------------------------- ------------- ------------- ------------ -----------
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-40
<PAGE>
Worlds Inc. - Predecessor
(a development stage enterprise)
Notes to Financial Statements
6. Related Party
Revenue
For the year ended December 31, 1996, $1,276,780 of revenues
from technology development contracts were attributable to
three preferred stockholders of Predecessor. There was no
related party revenue for the period ended December 3, 1997.
7. Income from Sale of
Technology
In March 1997, Predecessor sold certain of its internally
developed computer software programs for net proceeds of
$260,100.
8. Income Taxes
From its inception, the Predecessor has generated losses for
both financial reporting and tax purposes. As of December 3,
1997, the Predecessor's net operating losses for Federal
income tax purposes were approximately $19 million, and
expire between the years 2009 and 2012. For state income tax
purposes, as of December 3, 1997, the Predecessor had net
operating loss carryforwards of approximately $14.8 million
for the State of California which will expire 2002. As of
December 3, 1997, the combined Federal and state tax benefit
of the net operating loss carryforwards is approximately
$7.3 million and the deferred tax asset relating to
accounting differences for depreciation, certain accrued
expenses and technology costs was approximately $300,000.
This deferred tax asset totaling $7.6 million has been
completely offset by a valuation allowance since management
cannot determine that it is more likely than not that the
deferred tax asset can be realized. The use of such net
operating loss carryforwards will be subject to annual
limits if the Predecessor has incurred an "ownership
change". In general, an ownership change occurs if, during
any three-year test period, the aggregate of all increases
in percentage ownership by stockholders is more than 50%.
Upon completion of the merger discussed in Note 10, such an
"ownership change" occurred.
F-41
<PAGE>
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:
Year ended Period ended
December 31,1996 December 3, 1997
- - ------------------------------------- ----------------- -----------------
Foreign income taxes withheld (a) $105,000 $ --
State income taxes - current 10,000 5,000
- - --------------------------------------------------------- --------
$115,000 $5,000
- - --------------------------------------------------------- --------
(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 totaling $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-42
<PAGE>
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.
F-43
<PAGE>
Worlds Inc. - Predecessor
(a development stage enterprise)
Notes to Financial Statements
During February 1998, the Predecessor was named as a
defendant in a lawsuit filed by a former employee of
Predecessor seeking damages of approximately $70,000 (plus
interest and fees) relating to termination of an employment
contract. The lawsuit is in the pre-discovery phase.
Management believes that settlement, if any, would not have
a material adverse effect on Predecessor's financial
position or results of operations.
10. Merger
On December 3, 1997, the Predecessor was merged with and
into Worlds Inc. (formerly Worlds Acquisition Corp.) ("WAC")
in a series of related transactions which included the
simultaneous merger with and into Academic Computer Systems,
Inc., a New Jersey corporation ("Academic") (the "Mergers")
and a private offering of WAC's securities (the "Private
Placement"). All of the common and preferred stock of the
Predecessor were exchanged for 1,999,996 shares of WAC. WAC
was incorporated in Delaware on April 8, 1997 to engage in
designing, developing and marketing three-dimensional ("3D")
music oriented Internet sites on the World Wide Web. These
web sites are anticipated to utilize 3D 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.
F-44
<PAGE>
Worlds Inc. - Predecessor
(a development stage enterprise)
Notes to Financial Statements
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-45
<PAGE>
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: 30th day of March, 1999
Pursuant to the requirements of the Securities Exchange Act of
1934, this Report has been signed below by the following persons on behalf of
Registrant and in the capacities indicated.
/s/ Date: March 30, 1999
Thomas Kidrin
President, CEO and Director
(Chief Financial/Accounting Officer)
/s/ Date: March 30, 1999
Michael J. Scharf
Chairman
/s/ Date: March 30, 1999
Kenneth A. Locker
Director
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary information extracted from the financial
statements of Worlds Inc. for the year ended December 31, 1998 and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000001961
<NAME> WORLDS INC.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,581,764
<SECURITIES> 0
<RECEIVABLES> 140,318
<ALLOWANCES> (140,318)
<INVENTORY> 58,516
<CURRENT-ASSETS> 1,693,766
<PP&E> 586,796
<DEPRECIATION> 372,550
<TOTAL-ASSETS> 1,908,012
<CURRENT-LIABILITIES> 1,012,887
<BONDS> 0
0
0
<COMMON> 18,032
<OTHER-SE> (997,925)
<TOTAL-LIABILITY-AND-EQUITY> 1,908,012
<SALES> 29,110
<TOTAL-REVENUES> 29,110
<CGS> 29,279
<TOTAL-COSTS> 29,279
<OTHER-EXPENSES> 3,643,635
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 111,570
<INCOME-PRETAX> (2,821,228)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,821,228)
<DISCONTINUED> 0
<EXTRAORDINARY> 172,547
<CHANGES> 0
<NET-INCOME> (2,648,681)
<EPS-PRIMARY> (.16)
<EPS-DILUTED> (.15)
</TABLE>
