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As filed with the Securities and Exchange Commission on September 10,1999
Registration No. 333-
- - --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM SB-2
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
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WORLDS INC.
(Name of issuer in its charter)
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<S> <C> <C>
New Jersey 7370 22-1848316
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code) Identification Number)
15 Union Wharf Thomas Kidrin, CEO
Boston, Massachusetts 02109 15 Union Wharf
(617)725-8900 Boston, Massachusetts 02109
(Address and telephone number (617) 725-8900
of registrant's principal executive (Name, address and telephone
offices and principal place of number of agent for service)
business)
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Copies to:
David Alan Miller, Esq.
Graubard Mollen & Miller
600 Third Avenue
New York, New York 10016
Telephone: (212) 818-8800
Approximate date of commencement of proposed sale to public: At the discretion
of the selling shareholders.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. /X/
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement of the earlier effective registration statement for the
same offering. /X/ [333-49453]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
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CALCULATION OF REGISTRATION FEE
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Proposed Proposed Amount
Title of Each Amount Maximum Maximum of
Class of Securities to be Offering Price Aggregate Registration
to be Registered Registered Per Securities Offering Price Fee
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Common Stock, par value
$0.001(1)............................. 2,222,700 $3.875(6) $8,612,963 $2,394.40
Common Stock(2)....................... 1,603,375 $0.66(7) 1,058,228 294.19
Common Stock(3)....................... 882,500 $3.875(6) 3,419,688 950.67
Common Stock(4)....................... 441,250 $5.00 (7) 2,206,250 613.34
Common Stock(5)....................... 187,500 $3.875(6) 726,563 201.98
Total........................................................................................... $4,454.58
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(1) Represents shares of common stock to be sold from time to time for the
account of certain shareholders. These shares were previously
registered on behalf of such selling shareholders in a registration
statement on Form SB-2 (No. 333-49453) and a filing fee with respect
thereto has already been paid.
(2) Represents shares of common stock to be sold from time to time for the
account of certain persons. These shares are issuable by us to such
persons upon exercise of options and warrants. These shares were
previously registered in a registration statement on Form SB- 2 (No.
333-49453) and a filing fee with respect thereto has already been paid.
Pursuant to Rule 416 under the Securities Act of 1933, as amended
("Act"), this registration statement also covers any additional shares
which may be issuable by virtue of the anti-dilution provisions
contained in the warrants and options.
(3) Represents shares of common stock to be sold from time to time for the
account of certain shareholders. These shares were issued by us in or
in connection with our private placement in June and August 1999.
(4) Represents shares of common stock to be sold from time to time for the
account of certain persons. These shares are issuable by us to such
persons upon the exercise of warrants issued in or in connection with
our June and August 1999 private placement. Pursuant to Rule 416, this
registration statement also covers any additional shares which may be
issuable by virtue of the anti-dilution provision contained in the
warrants.
(5) Represents shares of common stock to be sold from time to time for the
account of an entity to which we issued such shares in connection with
a strategic relationship.
(6) Represents the last sale price of a share of our common stock as
reported by the OTC Bulletin Board on August 30, 1999, pursuant to Rule
457 under the Act.
(7) Represents the average weighted exercise prices of the options and/or
warrants.
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Subject to completion, dated September 10, 1999
WORLDS INC.
--------------------------------
5,149,825 shares of common stock
This Prospectus covers:
o The sale from time to time of an aggregate of 2,222,700 shares of
common stock by the persons indicated in this prospectus. All of these shares
were issued by us to them in a private placement in December 1997.
o The sale from time to time of an aggregate of 1,603,375 shares of
common stock by the persons indicated in this prospectus. All of these shares
are shares that would be issued by us to them upon the exercise of options and
warrants.
o The sale from time to time of an aggregate of 882,500 shares of
common stock by the persons indicated in this prospectus. All of these shares
were issued by us to them in or in connection with a private placement in June
and August 1999.
o The sale from time to time of an aggregate of 441,250 shares of
common stock by the persons indicated in this prospectus. All of these shares
are shares that would be issued by us to them upon the exercise of warrants
issued in or in connection with the June and August 1999 private placement.
o The sale from time to time of 187,500 shares of common stock by the
persons indicated in this prospectus. These shares were issued by us in
connection with our recent transaction with Freeserve plc.
Our common stock is quoted on the OTC Bulletin Board under the symbol
"WLDI." On August 30, 1999, the last reported sale price of our common stock was
$3.875 per share.
We will not receive any cash proceeds from the sale of any shares by
any person under this prospectus. We will receive proceeds upon the exercise of
the aforementioned options and warrants from time to time and will use such
proceeds for working capital and general corporate purposes. We will bear all
costs, expenses and fees in connection with the registration of the shares
offered by this prospectus. Such expenses are estimated to be approximately
$119,000.
See "Risk Factors" beginning on page 9 of this prospectus for information that
should be considered by prospective investors.
------------------------------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
Prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
The date of the Prospectus is , 1999.
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WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and
other information with the SEC. Our SEC filings are available to the public over
the Internet at the SEC's web site at http://www.sec.gov. You may also read and
copy any document we file at the SEC's public reference room at 450 Fifth
Street, N.W., Washington, D.C. 20549. These documents are also available at the
public reference rooms at the SEC's regional offices in New York, New York and
Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further information
on the public reference rooms. Our SEC filings are also available at the offices
of the Nasdaq National Market in Washington, D.C.
We have filed a registration statement on Form SB-2 under the
Securities Act of 1933 with the SEC. This prospectus is part of that
registration statement and, as permitted by the SEC's rules, does not contain
all of the information included in the registration statement. For further
information about us and our common stock, you may refer to the registration
statement and its exhibits and schedules. You can review and copy these
documents at the public reference facilities maintained by the SEC or on the
SEC's website as described above.
This prospectus may contain summaries of contracts or other documents.
Because they are summaries, they will not contain all of the information that
may be important to you. If you would like complete information about a contract
or other document, you should read the copy filed as an exhibit to the
registration statement or incorporated in the registration statement by
reference.
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PROSPECTUS SUMMARY
General
We design and develop software, content and related technology for the
creation of interactive, three-dimensional Internet sites. Using our proprietary
technology, we create our own Internet sites, as well as sites available through
third-party online service providers, such as Freeserve, the largest Internet
service provider in the United Kingdom, and Road Runner, one of the two largest
cable-modem based Internet service providers in the United States. Sites using
our technology allow numerous simultaneous visitors to enter, navigate and share
interactive "worlds," which are 3D spaces featuring animation, motion and
content. Our 3D Internet sites are designed to promote frequent, repeat and
prolonged visitation by users by providing them with unique online communities
featuring dynamic graphics, highly useful and entertaining information content,
and interactive capabilities. We believe that our sites are highly attractive to
advertisers because they offer access to demographic-specific user bases
comprised of people that visit the site frequently and stay for relatively long
periods of time.
Currently, our premiere site is Worlds Ultimate 3D Chat
(www.worlds.com), an interactive site employing our 3D technology and targeted
towards the music industry. Visitors to Worlds Ultimate 3D Chat adopt an alter
ego in the form of one of hundreds of avatars, which are 3D characters that can
be moved through the many virtual "worlds" of Worlds Ultimate 3D Chat. The user
moves his or her avatar through these worlds using a mouse or keyboard arrow
keys and can:
o engage other avatars in one-on-one text-based or real voice-to-voice
discussions;
o enter theme-based chat rooms featuring group discussions on numerous
music styles, specific recording artists and other topics;
o experience interactive advertising and promotions;
o access information on various recording artists, concert schedules
and other music-related and nonmusic-related information;
o view new music videos by leading recording artists;
o listen to selections from newly released CDs by numerous recording
artists;
o purchase music and recording artist-related merchandise online; and
o enter pay-access areas as a VIP subscriber.
Currently, almost all Internet sites are entirely two-dimensional with
limited graphic and interactive capabilities because existing technological
barriers typically prevent the delivery of high-quality 3D graphics and motion
imagery. Typically, in order for sites to provide users with high-quality 3D
graphics on the Internet, such users must have very
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powerful computers and both users and site providers must have access to
high-capacity communications channels for the movement of the large amount of
data that must be delivered to provide 3D motion. Our technology, however,
circumvents these limitations by delivering a large portion of the necessary
software and data through off-line channels (such as CDs and CD-ROMs), with only
the interactivity information being transmitted online. This allows almost any
home PC with a traditional modem to enjoy our interactive 3D sites.
Our Opportunity and Strategy
A growing number of people access the Internet as a part of their daily
routine. They are embracing the Internet as a point of access for
communications, entertainment and shopping. The emergence of broadband delivery
capabilities, such as that provided by Road Runner to its customers through
cable modems, and other technologies will promote even greater growth in the use
of the Internet by consumers.
The Internet is extending the capabilities of traditional media
products, such as music. By making these products, which were previously used by
consumers on a passive basis, interactive, the Internet can broaden and prolong
their appeal. The Internet also is creating new opportunities for businesses to
reach customers on a cost-efficient, demographic-specific basis. Advertisers are
increasingly giving their online advertising business to sites that can provide
them with access to user bases comprised of repeat users who tend to stay at the
site for meaningful periods of time.
The Internet is currently a flat, 2D media. However, it can be a
robust, immersive, interactive world, with 3D capabilities enhancing the
Internet experience as color enhanced the TV experience. We believe that sites
that provide users with exciting 3D interactivity via the Internet, sense of
community and appealing online purchasing opportunities will garner user bases
that have the characteristics that appeal to users, sponsors and advertisers.
We have a unique opportunity to exploit our technology to create
Internet sites that represent concrete e-commerce revenue generation models
because they are unique, fun and useful to users on a repeat-visitation basis.
In turn, these users can be targeted by advertisers on a demographic-specific
basis to create meaningful revenue opportunities.
Our goal is to become a leading provider of interactive 3D Internet
sites where entertainment content, interactive chat and e-commerce opportunities
converge to provide communities for users and advertisers. Keys to our strategy
to achieve our goal are:
Initially producing interactive, multimedia music related 3D sites. We
believe that music readily lends itself to exploitation through sites utilizing
our technology. Music is a universal theme that appeals to all people and
accordingly music-based sites, such as Worlds Ultimate 3D Chat, have the
capability of drawing a wide range of users. We also believe that the highly
graphic, interactive nature of sites using our technology appeals to users drawn
to music-based sites, differentiates such sites from other music-based sites and
thereby encourages repeat visitation. Because our technology allows for the
creation of multiple worlds accessible from a site, it allows such sites to
segregate users of different tastes and demographics. For example, the various
worlds of Worlds Ultimate 3D Chat focus on
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specific categories of music, such as alternative, jazz, rock, pop, country and
hip-hop. Accordingly, advertisers at Worlds Ultimate 3D Chat are able to place
their online advertisements and e-commerce links in specific worlds, thereby
focusing their advertising efforts on targeted user groups.
Creating effective offline distribution partnerships with recording
artists and their record companies. We regularly seek to enter into alliances
with recording artists and their record companies by which we gain access to the
excess capacity on their music CDs to distribute our Worlds Ultimate 3D Chat and
other software. CDs utilizing such excess capacity in this or similar manner are
commonly referred to as CD+ or enhanced CDs. We believe that the distribution of
music on CD+ is an attractive alternative to recording artists and their record
companies as it creates opportunities for them to expand the sale of their music
(through differentiation of their CDs), creates a new channel of distribution
for the sale of products related to the artists, and aids in the promotion of
the artists in general. We have entered into relationships with companies
representing David Bowie and the group Hanson, and currently we are in
negotiations with several major record companies with respect to the
distribution of our 3D technology and content.
Creating Other Services Using Our Interactive 3D Technology. In
addition to Worlds Ultimate 3D Chat, we seek to create other marketable products
and services based on our technology. During late 1998, we completed development
of our technology tool kit "Gamma." Gamma is our software platform for the
creation and delivery of 3D graphics and multiuser functionality for Internet
sites. Using this technology, we created and commercially released three
products, in addition to Worlds Ultimate 3D Chat, in 1998:
o AnimalHouse.com created for Universal/Hyundai. Our 3D technology was
encoded on a CD+ together with audio tracks of 10 Universal Music Group
recording artists and distributed to college students through a variety of
Universal distribution outlets. AnimalHouse.com allows users to enter into an
entertaining, music-based 3D environment while simultaneously listening to the
recording artists. Our agreement with Universal called for the manufacture and
distribution by Universal of up to 1,000,000 CDs.
o BowieWorld created for David Bowie's BowieNet, the first Internet
Service Provider created and sponsored by a recording artist. Our product allows
members of BowieNet to enter into 3D environments based on David Bowie and his
music. We also reached an agreement with BowieNet to have Worlds Ultimate 3D
Chat software distributed on a CD-ROM to BowieNet members.
o Hanson CD+ created for recording artist Hanson. Using our technology
we created a special CD+ for distribution to the Hanson fan club during June and
July 1999;
Pursuing Alliances and Cross Promotional Opportunities. We are also
pursuing opportunities to provide our 3D Internet technology and content to
other companies. In this regard, we recently entered into agreements with:
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o Road Runner, pursuant to which we provide them with a co-branded area
on the Road Runner music channel which allows their subscribers to access 3D
interactive chat and music-related content;
o Freeserve, pursuant to which we are creating co-branded traditional
2D and proprietary 3D chat sites which are accessible by Freeserve's members;
and
o Polygram Merchandising, pursuant to which we market and sell Polygram
Merchandising's recording-artist merchandise on our sites.
Creating Brand Identity for Worlds.com. Public awareness of our site
and products is critical to our success. We will build this awareness through a
high-profile public relations and marketing effort and by building relationships
with other Internet companies and music companies. Worlds Ultimate 3D Chat and
our other products will be marketed through online and other efforts.
Ultimately, we seek to build a reputation as a leader in 3D technology and
content for the Internet. In connection with our brand building efforts, upon
obtaining shareholder approval, we will change our corporate name to "Worlds.com
Inc."
Recent Developments
Appointment of Chairman
In April 1999, we named Steven G. Chrust, a long-time
telecommunications executive and Wall Street analyst, as chairman of Worlds and
engaged his company as a consultant. Mr. Chrust, who was a co-founder and most
recently vice chairman of WinStar Communications, brings more than 25 years of
experience to his new position at Worlds.
Agreement with Road Runner
In April 1999, we entered into an agreement with Road Runner, the
high-speed Internet service owned by Time Warner, MediaOne, Microsoft, Compaq
Computer and Advance/Newhouse. Pursuant to this agreement, we have designed and
operate a 3D environment accessible by Road Runner subscribers through the Road
Runner music channel. This interactive environment premiered in August 1999 and
is co-branded with the Worlds and Road Runner names.
Agreement with Freeserve
In June 1999, we entered into two agreements with Freeserve, the
largest Internet service provider in the United Kingdom and a subsidiary of
Dixons Group. Pursuant to these agreements, we are serving as the official and
exclusive 2D and 3D Internet chat service and broadband chat content provider
for Freeserve.
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1999 Private Placement
In June and August 1999, we consummated tranches of a private placement
in which we sold an aggregate of 57.5 units. Each unit cost $60,000 and
consisted of 15,000 shares of common stock and warrants to purchase 7,500 shares
of common stock for $5.00 a share. We also issued an aggregate of 1.33 units in
consideration of professional services rendered to our company. The shares of
common stock (including the shares underlying the warrants) are registered for
resale by the holders thereof under the registration statement of which this
prospectus is a part.
Corporate Background
Our predecessor company, Worlds Inc., was formed under the laws of
Delaware in April 1994 to create and market 3D graphic technologies. Worlds
Acquisition Corp. was formed under the laws of Delaware in April 1997 to acquire
Worlds Inc. Immediately after the merger in December 1997, the combined entities
were merged into Academic Computer Systems, Inc., a corporation formed under the
laws of New Jersey in May 1968, a dormant public company. After the mergers, the
combined entity changed its name to Worlds Inc., a New Jersey corporation, and
having secured certain equity-based financing, continued the development of the
3D Internet software and related platforms which were to become our core
technology.
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SUMMARY HISTORICAL FINANCIAL INFORMATION
The following sets forth our selected financial operations data for the
year ended December 31, 1998 and the six months ended June 30, 1999, and the
selected financial operations data of Worlds Inc. (formerly World's Acquisition
Corp.) for the period April 8, 1997 (inception) through December 31, 1997, for
the year ended December 31, 1998, for the six months ended June 30, 1998 and
1999, and of our predecessor, Worlds Inc. (and Academic Computer Systems, Inc.)
for the year ended December 31, 1996 and for the period of January 1, 1997
through December 3, 1997 (the date we acquired our predecessor). The following
also sets forth our selected balance sheet data at June 30, 1999. All data,
other than for the six months ended June 30, 1999, is derived from the audited
financial statements included in this prospectus (in which the independent
certified public accountants reports contained explanatory paragraphs regarding
the Companys' ability to continue as a going concern). The following data should
be read in conjunction with these financial statements.
Statement of Operations Data
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Worlds Inc. (formerly Worlds Acquisition Corp.) Predecessor
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Six Months ended June 30, From 4/8/97 For the Year
(unaudited) Year Ended (Inception) For the Period Ended
1998 1999 12/31/98 to 12/31/97 Ended 12/3/97 12/31/96
----------------------------------- -------- ----------- ------------- ---------
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Net revenues............ $ 92,925 $ 16,132 $ 29,110 $ 1,420 $ 80,720 $ 3,784,019
Total cost and expense.. $ 1,960,850 $ 1,867,054 $ 3,672,914 $ 6,810,568(b) $ 2,885,088 $ 13,871,984
Operating loss.......... $ (1,867,925) $ (1,850,922) $ (3,643,804) $ (6,809,148) $ (2,804,368) $(10,087,965)
Other income and
(expenses)............ $ (50,956) $ 4,880 $ 822,576(a) $ (3,099) $ 134,863 $ 16,011
Net loss before taxes
and extraordinary item $ (1,918,881) $ (1,846,042) $ (2,821,228) $ (6,812,247) $ (2,669,505) $(10,071,954)
Income taxes............ $ -0- $ -0- $ -0- $ -0- $ (5,000) $ (115,000)
Net loss before
extraordinary item.... $ (1,918,881) $ (1,846,042) $ (2,821,228) $ (6,812,247) $ (2,674,505) $(10,186,954)
Extraordinary item -
gain on debt settlement $ -0- $ 151,654 $ 172,547 $ 125,776 $ 389,285 $ -0-
Net loss................ $ (1,918,881) $ (1,694,388) $ (2,648,681) $ (6,686,471) $ (2,285,220) $(10,186,954)
Loss per share - before
extraordinary item
(basic and diluted)... $ (0.11) $ (0.11) $ (0.16) $ (0.73)
Loss per share $ (0.11) $ (0.10) $ (0.15) $ (0.72)
(basic and diluted)...
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Balance Sheet Data
June 30, 1999
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Working capital.................................. $ 1,179,631
Total assets..................................... $ 3,752,326
Total liabilities................................ $ 3,359,986
Stockholders' equity............................. $ 392,340
- - ------------------------
(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.
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RISK FACTORS
You should carefully consider the risks described below before making a
decision to invest in our company. The risks described below are not the only
ones we face. Additional risks that are not presently known to us or which we
currently believe are immaterial may also impair our business operations. Our
business, financial conditions or results of operation could be materially
adversely affected by any of these risks.
We are a development-stage company with only a limited history of operations.
We are a development stage company. We have limited experience in
developing and commercializing new products based on innovative technologies and
there is limited information available concerning our financial performance or
the market acceptance of our existing and proposed products.
Our business prospects are subject to all the risks, expenses and
uncertainties encountered by any new company, as well as those encountered by
companies operating in the rapidly evolving markets for Internet products and
services. These risks include:
o the failure to develop brand name recognition and reputation;
o the failure to achieve market acceptance of our services;
o a slow down in general consumer acceptance of the Internet as
a vehicle for commerce; and
o an inability to grow and adapt our business and technology to
evolving consumer demand
We may not be successful in addressing these risks or the other risks
set forth herein.
We have significant and continuing losses and our auditors have expressed
concern about or ability to continue as a going concern.
Since inception, Worlds (including our predecessor company) has
incurred significant net losses. Our predecessor company incurred losses of
$1,181,133, $7,582,832 and $10,186,954 for the years ended December 31, 1994,
1995, and 1996, respectively, and $2,285,220 for the period ended December 3,
1997, with an accumulated deficit from inception in April 1994 to December 3,
1997 of $21,236,139. We incurred additional losses of $6,686,471 from inception
in April 1997 through December 1997, $2,648,681 for the year ended December 31,
1998 and $1,918,881 for the six months ended June 30, 1999, with an accumulated
deficit of $11,254,033 from inception through June 30, 1999.
We anticipate that we will continue to incur significant losses until,
at the earliest, we generate sufficient revenues to offset the substantial
up-front expenditures and operating costs associated with developing and
commercializing our products. We will not generate any meaningful revenues until
after we successfully attract and retain a significant number of advertisers and
users to our 3D sites and other customers for our 3D technology. We may not
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be able to attract and retain a sufficient number of advertisers, users and
customers to generate meaningful revenues or achieve profitable operations.
Further, 3D sites based on our technology may prove to not be commercially
viable and superior technology to create and deliver 3D sites may exist or may
be developed by our competitors. Our independent auditors have included an
explanatory paragraph in their report for the year ended December 31, 1998,
stating that recurring losses during our development stage raise substantial
doubt about our ability to continue as a going concern.
We expect to spend a large amount of money in advance of profits as we introduce
our products and expect to seek to raise additional capital through equity
and/or debt offerings.
Our capital requirements for the development and commercialization of
our technology, creation of our 3D sites and our general operations have been
and will continue to be significant. Historically, we have been dependent on
financings to fund our development and working capital needs.
We expect to continue to incur significant operating expenses and make
relatively high capital expenditures as we roll out our Internet business and
expand our product offerings. These operating expenses and capital expenditures
will initially outpace revenues and result in significant losses in the near
term. During the periods that we experience net losses, we expect to be
dependent upon sales of our capital stock and debt securities to finance our
working capital requirements. Based upon our current plans and assumptions
relating to our business plan, we anticipate that our existing capital resources
will satisfy our capital requirements through at least March 2000. However, if
our plans change or our assumptions prove to be inaccurate, we may need to seek
additional financing sooner than currently anticipated or curtail our
operations.
We will need to raise additional capital during 2000, which may be in
the form of equity or debt financing. Any issuance of equity securities would
dilute the interest of our shareholders. Additionally, if we incur debt, our
company will become subject to risks that interest rates may fluctuate and cash
flow may be insufficient to pay the principal and interest on any such debt. If
financing is not available when as we require, we could be forced to slow down
the growth of our business or suspend operations entirely.
We may not be able to successfully develop marketable products based upon our
technology.
Although we recently have introduced the first commercial applications
based on our technology, we may encounter problems in our continuing efforts to
refine our technology and to utilize this technology in other commercial
applications. In connection with these efforts, we may experience unanticipated
delays, expenses, technical problems or other difficulties. It is also possible
that we will not have access to the funds necessary to satisfactorily complete
any development efforts we undertake, which could result in abandonment or
substantial change in product commercialization. In addition, there can be no
assurance that we will be able to successfully adapt our technology to satisfy
specific requirements of potential customers.
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Upon completion and introduction of any commercial application, there
can be no assurance that such application will perform all of the functions for
which it has been designed or prove to be sufficiently reliable in widespread
commercial use. Applications based on complex technologies such as ours may
contain errors which only become apparent subsequent to commercial introduction.
If we introduce commercial applications which prove to contain errors or which
otherwise do not perform as intended, we would have to remedy such errors, which
could delay our plans with respect to other applications and which could cause
us to incur substantial, unanticipated additional expense.
We may not be able to develop and maintain marketing relationships with other
Internet companies.
Our strategy for expanding brand recognition through online advertising
depends to some extent on our relationship with other Internet companies. We
plan to enter into marketing agreements with these companies that will permit us
to advertise our products and services on their Web pages. There can be no
assurance that we will be able to negotiate these agreement on favorable terms
or at all. Additionally, other e-commerce and music-related sites, which
advertise on popular websites, may have exclusive advertising relationships with
such sites or may otherwise object to our attempts to enter into marketing
agreements or relationships with such sites. If we cannot secure or maintain
these marketing agreements on favorable terms, our business prospects could be
substantially harmed.
In addition to our own technology, we use the technology of others in the
creation of our products.
Although our proprietary technology is the foundation of our products,
we also use the technology of other companies in the creation and delivery of
our products. Accordingly, any delay or termination by any of these third-party
providers in the provision of their technologies to us could cause a disruption
in the commercial distribution of our own products. Further, any material
increases in the prices these providers charge us for use of their technologies
could force us to increase the prices we charge for our own products or possibly
make the creation and distribution of our products no longer economically
feasible or desirable. We cannot assure you that any of these companies will
continue to provide their technology to us in an efficient and cost-effective
manner. An interruption in or termination in our access to any necessary third
party technologies, and our subsequent inability to make alternative
arrangements in a timely manner, if at all, would have a material adverse effect
on our business and financial condition.
The market may not readily accept our products.
Demand and market acceptance for new products, such as 3D Ultimate
Chat, are subject to a high level of uncertainty. The successful introduction of
any new product requires a focused, efficient strategy to create awareness of
and desire for the products. For example, in order to achieve market acceptance
for 3D Ultimate Chat, we will need to educate the members of the music industry,
such as record companies, record labels and recording artists, about the
marketing benefits this product could provide them. Similarly, we will have to
make music buyers and Internet consumers aware of this product's existence, draw
users to the site and to compel them to return to the site for repeat
visitations. We have conducted
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only limited marketing activities to date and only have limited experience and
limited financial, technical, personnel and other resources to independently
undertake extensive marketing activities.
Our marketing strategy may be unsuccessful and is subject to change as
a result of a number of factors, including changes in market conditions
(including the emergence of market segments other than music which in our
judgment can be readily exploited through the use of our technology), the nature
of possible license and distribution arrangements and strategic alliances which
may become available to us in the future and general economic, regulatory and
competitive factors.
There can be no assurance that our strategy will result in successful
product commercialization or that our efforts will result in initial or
continued market acceptance for our proposed products.
We operate in very competitive markets characterized by the existence of large
competitors and rapidly changing technology.
The markets for our products are characterized by intense competition
and increasing numbers of new market entrants who have developed or are
developing potentially competitive products.
We face competition from a growing number of companies, including
online and Internet service providers, online shopping malls, online direct
music retailers, online music and books sites and traditional music retailers.
In addition, the very companies with which we do business, such as the record
labels, may determine to create and distribute their own 3D Internet sites. Many
of our competitors have advantages over us, including:
o longer operating histories and greater financial, technical,
marketing and other resources;
o a wider range of services and financial products;
o greater name recognition and larger customer base;
o more extensive promotional activities; and
o cooperative relationships among themselves and with third
parties to enhance services and products.
Our products are based upon our proprietary technology. Competitors may
develop superior technology or determine as a group to adopt standards with
which our technology is not compatible. Currently, there are many companies
collaborating to establish standardization of the Virtual Reality Modeling
Language for 3D usage on the Internet, the adoption of which may require changes
to our technology. The markets in which we compete are characterized by rapidly
changing technology and evolving industry standards which could result in
product obsolescence or short product life cycles. Accordingly, our ability to
compete will be dependent upon our ability to develop and successfully introduce
new
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products into the marketplace in a timely manner and to continually enhance and
improve our technology (including to conform to any industry standards).
We will need to introduce new services and products in a timely manner in order
to remain competitive.
The markets for products sold through the Internet are characterized by
rapid changes in customer requirements, frequent new service and product
introductions and evolving industry standards. Accordingly, we must be able to
develop new services and products that address the increasingly sophisticated
and varied needs of our users and prospective users.
The development and enhancement of services and products entails
significant risks, including:
o the inability to effectively adapt new technologies to our
business;
o the failure to conform our services and products to evolving
industry standards;
o the inability to develop, introduce and market service and
product enhancements or new services and products on a timely basis; and
o the nonacceptance by the market of such new service and
products.
If we fail to recognize or address the need for new service or product
introductions, or if we encounter any of the foregoing problems, our business
and financial condition could be materially adversely effected.
Disruption in any element of our technology backbone could harm our business or
limit our growth.
We are highly dependent on our systems to process, on a daily basis, a
large and growing number of transactions. We rely heavily on our web service
providers, data processing systems and telecommunications systems. If any of
these systems do not operate properly or are unavailable due to problems with
our physical infrastructure, we could suffer disruptions of our business and
damage to our reputation and the development of our brand name, any and all of
which could have a material adverse effect on our business and limit our ability
to grow.
We also must ensure that users do not experience significant or
frequent disruptions in their access to our web sites. Our web sites could
become inaccessible for numerous reasons, including as a result of failure by
our servers and/or software glitches. Web site failures could result in loss of
existing users and missed opportunities to garner additional users. Accordingly,
any failure to have adequate systems in place to ensure the constant monitoring
and maintenance of, and accessibility to, our sites could have a material
adverse effect on our business and financial results.
Access to our sites is also directly dependent on the operating
condition of the Internet in general. Our success, therefore, will depend in
part upon the development and maintenance
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of the Internet's infrastructure to cope with increased user traffic. This will
require a reliable network backbone possessing the necessary bandwidth, and the
timely development of complementary products, such as high-speed modems, for
providing reliable Internet access and services to users. The Internet has
experienced a variety of outages and other delays as a result of damage to
portions of its infrastructure and could face similar outages and delays in the
future, which could have a material adverse effect on our business and financial
condition.
We cannot be certain that our network security systems won't be circumvented.
The need to securely transmit confidential information over the
Internet has been a significant barrier to electronic commerce and
communications. We are potentially vulnerable to attempts by unauthorized
computer users to penetrate our network security. If successful, those
individuals could misappropriate proprietary information or cause interruptions
in our services. We may be required to expend significant capital and resources
to protect against the threat of such security breaches or to alleviate
resulting problems. In addition to security breaches, inadvertent transmission
of computer viruses could expose us to the risk of disruption of our business,
loss and possible liability. Continued concerns over the security of Internet
transactions and the privacy of its users may also inhibit the growth of the
Internet generally as a means of conducting commercial transactions.
We rely upon encryption and authentication technology, including public
key cryptography technology licensed from third parties, to provide the security
and authentication necessary to effect secure transmission of confidential
information over the Internet. Advances in computer capabilities, new
discoveries in the field of cryptography or other developments could result in a
compromise or breach of the procedures we use to protect customer transaction
data. If any such compromise of our security occurs, our business, financial
condition and operating results could be materially adversely affected.
We are subject to the risks associated with fluctuations in the sales of
prerecorded music and related products.
The recorded music industry has experienced an overall slowdown during
the late 1990s relative to the early 1990s, a trend which is expected to
continue. During the mid- 1990s, several of the country's largest record store
chains and many independent music shops either declared bankruptcy or went out
of business as sales of prerecorded music experienced this slowdown. Industry
analysts suggest several causes for this trend, including a glut of products on
the market. In addition, each recording is an individual artistic work, and its
commercial success is primarily determined by consumer taste, which is
unpredictable and constantly changing. Generally, in the record industry,
prerecorded music is shipped to wholesalers and/or retailers on a returnable
basis. Accordingly, there can be no assurance as to the financial success of any
particular release, the timing of such success or the popularity of any
particular artist. There can be no assurance that any of the prerecorded music
producers, artists or distributors that may use our technology or our sites will
be able to generate any significant revenue through such use or, if they do,
that such revenue will be sufficient to recoup costs.
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We are dependent on the success of the Internet as a commercial market place.
Consumers have started to use the Internet only recently and market
acceptance of the Internet as a medium for commerce and advertising is therefore
still uncertain. The rapid growth of global commerce and the exchange of
information on the Internet and other online networks is relatively new and
still evolving, making it difficult to predict whether the Internet will prove
to be a viable commercial marketplace. We believe that our future success may
depend on our ability to significantly increase revenues which may require the
development and widespread acceptance of the Internet and online services as a
medium for commerce and advertising.
The Internet may not prove to be a viable commercial marketplace
because of inadequate development of the necessary infrastructure, such as
reliable network backbones, or complementary services, such as high speed modems
and security procedures for financial transactions. Consumer concern over
Internet security has been, and could continue to be, a barrier to commercial
activities requiring consumers to send their credit card information over the
Internet. The Internet has experienced, and is expected to continue to
experience, significant growth in the number of users and amount of traffic.
There can be no assurance that the Internet infrastructure will continue to be
able to support the demands placed on it by sustained growth. In addition, the
viability of the Internet may prove uncertain due to delays in the development
and adoption of new standards and protocols, the inability to handle increased
levels of Internet activity or due to increased government regulation. If use of
the Internet does not continue to grow, or if the necessary Internet
infrastructure or complementary services are not developed to effectively
support growth that may occur, our business, result of operations and financial
condition would be materially adversely affected.
We face potential liability for the content delivered over our sites.
While we intend to acquire all licenses and other rights necessary to
conduct our business without violating any copyrights, there can be no assurance
that we will be able to do so. Due to the nature of our business, we could
become involved in litigation regarding the music, video and other content
transmitted over our sites which could force us to incur significant legal
defense costs, could result in substantial damage awards against us and could
otherwise damage our brand name and reputation.
In addition, because music materials may be downloaded from our sites
and may be subsequently distributed to others, claims could be made against us
for "pirating" and copyright or trademark infringement. Claims also could be
made against us if material deemed inappropriate for viewing by children is
accessed or accessible through our sites. While we carry insurance policies, our
insurance may not cover these types of claims or may not be otherwise adequate
to cover liability that may be imposed. Any partially or completely uninsured
claim against us, if successful and of sufficient magnitude, would have a
material adverse effect on us.
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Government regulation may impact our operations.
Notwithstanding the U.S. Supreme Court's decision upholding the
principle that the Constitutional protections relating to freedom of speech
extend to content delivered on the Internet, there are currently few laws or
regulations directly applicable to the Internet and the content thereon. As a
result of the increasing popularity and use of the Internet, it is possible that
laws and regulations covering user privacy, responsibility for content, service
pricing and quality and other issues may be adopted, modified, or changed. The
adoption of any such laws or regulations may limit the growth of the Internet,
which could in turn decrease the demand for our products and services and
increase our cost of doing business. Inasmuch as the applicability to the
Internet of the existing laws governing issues such as property ownership, libel
and personal privacy is uncertain, any such new legislation or regulation or the
application of existing laws and regulations to the Internet could have an
adverse effect on our business and prospects.
We are dependent on certain technology we deem proprietary and may not be able
to protect this technology or defend our right to use it.
We regard our technology and various elements relating thereto as
proprietary. We have not determined whether we will attempt to protect our
technology with copyrights, trade secret laws, proprietary rights agreements,
internal nondisclosure agreements or other intellectual property safeguards.
Even if we do use such safeguards, they ultimately may not afford us complete
protection and we may not be able to prevent others from independently
developing know-how or accessing our know-how or software codes, concepts, ideas
and related documentation.
Although we believe that our products do not violate the proprietary
right of others, it is possible that infringement of existing or future
proprietary rights of others have occurred or may occur. If our products
infringe on the proprietary rights of others, we may be required to modify the
design of our products or obtain licenses from the owners of the proprietary
rights involved. In the event we are required to obtain any such license, there
can be no assurance that we will be able to do so in a timely manner, upon
acceptable terms and conditions or at all.
There can be no assurance that we will have the financial or other
resources to enforce our proprietary rights or to defend a patent infringement
action against us.
Our growth may be difficult to manage.
Growth of our business may place a significant strain on our management
systems and resources and may require us to implement new operational and
financial systems, procedures and controls. Our failure to manage our growth and
expansion could adversely affect our business, results of operations and
financial condition. Moreover, our present systems may not be adequate to
accommodate rapid growth in user demand. Our inability to add additional
hardware and software to upgrade our existing technology or network
infrastructure to accommodate increased traffic may cause decreased levels of
customer service and satisfaction. Failure to implement new systems effectively
or within a reasonable period of time could adversely affect our business,
results of operations and financial condition. We also
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intend to introduce additional or enhanced features and services to retain
current users and attract new users to our web site. If we introduce a feature
or a service that is not favorably received, our current users may not use our
web site as frequently and we may not be successful in attracting new users. We
also may experience difficulties that could delay or prevent us from introducing
new services and features. Furthermore, these new services or features may
contain errors that are discovered only after they are introduced. We may need
to significantly modify the design of these services or features to correct
errors. If users encounter difficulty with or do not accept new services or
features, our business, results of operations and financial condition could be
adversely affected.
It is important that we build awareness of our brand and business.
Although we intend to devote increased amounts of capital to creating
and maintaining brand loyalty and raising awareness of our products and
services, our failure to advertise and market our products and services or brand
effectively could cause our business to suffer. Our success in promoting our
brand also will depend on our success in providing our customers high-quality
products and services and a high-level of customer satisfaction.
Our business could be significantly disrupted if our systems and the systems of
others prove not to be year 2000 compliant.
We may realize exposure and risk if the systems on which we are
dependent to conduct our operations are not Year 2000 compliant. Because we are
largely dependent on our ability to conduct our operations through the Internet,
any significant disruption of this computer infrastructure caused by the Year
2000 problem could significantly interfere with our business operations. Our
potential areas of exposure include products purchased from third parties,
computers, software, telephone systems and other equipment used internally. If
our present efforts to address Year 2000 compliance issues are not successful,
or if vendors with whom we conduct business do not successfully address such
issues, our business, operating results and financial position could be
materially and adversely affected.
We are dependent on key personnel and need to hire and retain other talented
employees.
Our success is dependent, in part, on the personal efforts of Steven
Chrust, our Chairman of the Board, and Thomas Kidrin, our Chief Executive
Officer, and other key personnel. We have a consulting agreement with Mr. Chrust
through April 2002, but this agreement does not require Mr. Chrust to devote any
specified amount of time with respect to our company. We currently have no
employment agreement with Mr. Kidrin, although, we maintain "key-man" insurance
on his life in the amount of $1,000,000. The loss of either Mr. Chrust's or Mr.
Kidrin's services could have a material adverse effect on our business and
prospects. Our success is also dependent upon our ability to hire and retain
additional qualified management, marketing, technical, financial, and other
personnel. We do not currently have a Chief Financial Officer or other personnel
to fill key management and marketing positions. Competition for qualified
personnel is intense and we may not be able to hire or retain additional
qualified personnel. Any inability to attract and retain qualified management
and other personnel would have a material adverse effect on our business and
operations.
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Possible issuances of common stock would cause dilution to our existing
shareholders.
While we currently have approximately 19,000,000 shares of common stock
outstanding, we are authorized to issue up to 30,000,000 shares. Therefore, we
will be able to issue a substantial number of additional shares without
obtaining shareholder approval. In the event we elect to issue additional shares
of common stock in connection with any financing, acquisition or otherwise,
current shareholders could find their holdings substantially diluted, which
means they will own a smaller percentage of the our company.
Certain shareholders control a substantial portion of our outstanding common
stock.
Our executive officers, directors and principal shareholders own
approximately 42% of the outstanding shares of common stock. Accordingly, these
persons, acting together, will be able to influence the election of our
directors and thereby influence or direct our policies. Further, two directors
and a principal shareholder owning in the aggregate approximately 40% of the
currently outstanding common stock have agreed to vote all of their shares for
the election of Mr. Steven Chrust, our Chairman of the Board, as a director
through April 2002.
No dividends have been paid on our common stock.
To date, we have not paid any cash dividends on our common stock and we
do not expect to declare or pay dividends on the Common Stock in the foreseeable
future. In addition, the payment of cash dividends may be limited or prohibited
by the terms of any future loan agreements.
The market price of our common stock is very volatile.
The price of our common stock historically has been subject to wide
price fluctuations. In addition, the daily volume of our shares traded on the
OTC Bulletin Board has been relatively small. Therefore, our shareholders may
not always be able to sell their shares of common stock at the time they want or
at the most advantageous price.
We are subject to "penny stock" regulations.
Broker-dealer practices in connection with transactions in "penny
stocks" are regulated by certain penny stock rules adopted by the SEC. Penny
stocks generally are equity securities with a price of less than $5.00 (other
than securities registered on certain national securities exchanges or quoted on
the Nasdaq system). The penny stock rules require a broker-dealer, prior to a
transaction in a penny stock not otherwise exempt from the rules, to deliver a
standardized risk disclosure document that provides information on penny stocks
and the nature and level of risks in the penny stock market. The broker-dealer
also must provide the customer with current bid and offer quotations for the
penny stock, the compensation of the broker-dealer and its salesperson in the
transaction, and if the broker-dealer is the sole market-maker, the
broker-dealer must disclose this fact and the broker-dealer's presumed control
over the market, and monthly account statements showing the market value of each
penny stock held in the customer's account. In addition, broker-dealers who sell
such securities to persons other than established customers and accredited
investors (generally, those persons with assets in excess of $1,000,000 or
annual income exceeding $200,000 or $300,000 together with their
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spouse), the broker-dealer must make a special written determination that the
penny stock is a suitable investment for the purchaser and receive the
purchaser's written agreement to the transaction.
These requirements may reduce the level of trading activity, if any, in
the secondary market for our common stock. As a result of the foregoing, our
shareholders may find it more difficult to sell their shares. We intend to apply
for inclusion of our securities in the Nasdaq Stock Market as soon as we meet
the applicable requirements. We may not meet such requirements in the near
future or at any time.
Effect of Outstanding Options and Warrants - The exercise or conversion of these
securities into common stock will dilute the percentage ownership of our other
stockholders. The sale of such common stock in the open market could adversely
affect the market price of our common stock.
There are outstanding options and warrants to purchase an aggregate of
2,999,125 shares of our common stock and more options will be granted in the
future under our employee benefit plans. Substantially all of the shares of
common stock underlying such securities are or will be registered for resale
under the Securities Act. The exercise or conversion of outstanding stock
options, warrants or other convertible securities will dilute the percentage
ownership of our other stockholders. In addition, any sales in the public market
of shares of our common stock issuable upon the exercise or conversion of such
stock options or warrants, or the perception that such sales could occur, may
adversely affect the prevailing market price of our common stock.
Shares Eligible for Future Sale - The sale of a substantial number of shares of
our common stock in the public market could adversely affect the market price of
our common stock.
Substantially all of our currently outstanding shares of common stock
have been registered for sale under the Securities Act, are eligible for sale
under an exemption from the registration requirements or are subject to
registration rights pursuant to which holders may require Worlds to register
such shares in the future. Sales or the expectation of sales of a substantial
number of shares of our common stock in the public market could adversely affect
the prevailing market price of our common stock.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and elsewhere in this prospectus are forward-looking
statements that involve risks and uncertainties. These forward-looking
statements include statements about our plans, objectives, expectations,
intentions and assumptions and other statements contained in this prospectus
that are not statements of historical fact. You can identify these statements by
words such as "may," "will," "should," "estimates," "plans," "expects,"
"believes," "intends" and similar expressions. We cannot guarantee future
results, levels of activity, performance or achievements. Our actual results and
the timing of certain events may differ significantly from the results discussed
in the forward-looking statements. Factors that might cause such a discrepancy
include those discussed in "Risk Factors" and elsewhere in this prospectus. You
are cautioned not to place undue reliance on any forward-looking statements.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
financial statements and related notes which are included elsewhere in this
prospectus. Statements made below 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,
our ability to complete development and then market our products, competitive
factors and other risk factors detailed herein. See "Risk Factors" and "Special
Note Regarding Forward-Looking Statements."
Background
Our 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, our 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, our 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 nominal. In October 1996, our
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, our predecessor became insolvent and terminated most of its
personnel, and management sought to sell the Company and/or its technology.
Our predecessor did not generate significant revenues.
While we have completed development and market testing of our base
technology and have introduced our first Internet sites, we will not generate
significant revenues until after we successfully attract and retain a
significant number of paying community members, sponsors, advertisers and
e-commerce customers. We anticipate continuing to incur significant losses
until, at the earliest, we generate sufficient revenues to offset the
substantial up-front expenditures and operating costs associated with developing
and further commercializing our proposed products. There can be no assurance
that we will be able to attract and retain a sufficient number of paying
subscribers and advertisers to generate significant revenues or achieve
profitable operations or that our products and services will prove to be
commercially viable.
We classify our expenses into three broad groups: (1) research and
development; (2) cost of revenues; and (3) selling, general and administration.
Historical revenues prior to 1998 were generated primarily through production
service activities and sales of technology licenses. Current revenues are
generated primarily through VIP membership sign-ups and e-commerce sales from
our online recording artist merchandise stores.
Software development costs, consisting primarily of salaries and
related expenses, incurred prior to establishing technological feasibility are
expensed in accordance with Financial Accounting Standards Board (FASB)
Statement No. 86. In accordance with FASB 86, we will capitalize software
development costs at such time as the technological feasibility of the product
has been established. We began capitalizing our software in the fourth quarter
of 1998 with the commercial release of three products, Animal House.com,
BowieWorld and
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Worlds Ultimate 3D Chat. For the first six months of 1999, approximately
$439,000 of such expenditures were capitalized.
Plan of Operation
During the fourth quarter of 1998, we successfully completed the
development of our Gamma development tool kit. This technology is the foundation
of our existing and planned product offerings. To date, we have introduced four
products based on this technology:
o Our first product release was AnimalHouse.com, a 3D environment
created for Universal/Hyundai, targeting the college market. Our 3D technology
is 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. Our agreement with Universal called for the manufacture and
distribution by Universal of up to 1,000,000 CDs.
o Our second product release was for David Bowie's BowieNet, the first
artist created ISP, or Internet service provider. Our product is named
BowieWorlds and has been released in the US as well as the U.K. by UltraStar
Internet Services LLP, the owners of BowieNet.
o Our third product release was Worlds Ultimate 3D Chat which is being
primarily marketed via our web site, Worlds.com, and our e-commerce site,
WorldsStore.com. Worlds Ultimate 3D Chat is built on our Gamma platform and
incorporates e-commerce, voice-to-voice chat, articulated, customizable avatars
and video and audio streaming. We also reached an agreement with BowieNet, to
have Worlds Ultimate 3D Chat software distributed on CD-ROM to BowieNet members.
Our fourth product release was made pursuant to our agreement with
Hansonopoly Inc. We integrated our 3D technology on a CD+ that was distributed
in June and July 1999 to members of the Hanson fan club.
We have also been actively pursuing strategic alliances with a number
of companies that can provide exposure and distribution of our products and
technology. We recently entered into agreements with three major companies in
the Internet arena. These companies are:
o Excite, the number three portal site on the Internet. We provide
Excite with select e-commerce content;
o Road Runner, the high-speed online service owned by Time Warner,
MediaOne Group, Microsoft, Compaq Computers and Advance/ Newhouse. We provide
Road Runner with a co-branded 3D environments accessible by Road Runner
subscribers through its music channel; and
o Freeserve, the leading Internet service provider in the United
Kingdom. We provide Freeserve with co-branded 2D and 3D interactive chat
environments accessible by Freeserve subscribers.
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We currently have eleven full-time employees and are working with five
independent software contractors who were former employees of our predecessor.
We do 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 Our Operations
Six Months Ended June 30, 1999 Compared to the Six Months Ended June
30, 1998
The following data extracted from the attached unaudited financial
statements compares the results of our operations for the six months ended June
30, 1999 to the six months ended June 30, 1998.
<TABLE>
<CAPTION>
Six months ended June 30,
-------------------------
(unaudited)
1999 1998
---- ----
<S> <C> <C>
Net Revenue....................................................... $ 92,925 $ 16,132
Costs & Expenses:
- - -----------------
Cost of revenues......................................... (70,355) (25,101)
Selling, general & administrative........................ (1,890,495) (1,307,525)
Research & development................................... -- (534,428)
--------------------- --------------------
Operating Loss.................................................... $ (1,867,925) $ (1,850,922)
--------------------- --------------------
Other Income (Expense):
- - -----------------------
Interest income.......................................... 17,966 76,992
Interest expense......................................... (68,922) (72,112)
--------------------- --------------------
Loss before taxes & extraordinary item............................ (1,918,881) (1,846,042)
Extraordinary item - gain on debt settlement...................... -- 151,654
--------------------- --------------------
Net Loss.......................................................... $ (1,918,881) $ (1,694,388)
--------------------- --------------------
</TABLE>
In the first half of 1999, we continued to upgrade our core technology
and began production on new projects in anticipation of reaching agreements with
other entities with whom we are in negotiation. No assurance can be given that
any negotiations will lead to the consummation of any additional agreements. In
the first six months of 1999, we continued the implementation of our new
business plan. Significant expenditure was incurred towards completion of the
Gamma technology and also with legal and professional fees.
Revenues are nominal and are derived from our agreements with companies
such as Road Runner and Freeserve, our Worlds Ultimate 3D Chat product and the
operation of our e-commerce web site featuring artist related Internet stores
such as DavidBowieStore.com, NinetyEightDegreesStore.com and EltonJohnStore.com.
Revenue was $92,925 and had
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associated direct costs of $70,355 for the six months ended June 30, 1999,
compared to $16,132 in revenue and $25,101 of direct costs for the same period
in 1998.
Selling, general and administrative expenses were $1,890,495 for the
six months ended June 30, 1999. This represented an increase of $582,970 from
$1,307,525 compared to the six months ended June 30, 1998. This increase was
directly attributable to the higher costs associated with maintaining our new
e-commerce site, retaining expert software developers to improve and upgrade our
existing products, costs involved in beginning work on some of the new projects
discussed above in anticipation of reaching final agreements and a charge of
$465,000 for consulting fees with respect to the agreement signed with a firm
controlled by our chairman.
We incurred no research and development costs during the six months
ended June 30, 1999 as compared to $534,428 for the six months ended June 30,
1998. This is directly attributable to the fact that since our technology is now
technologically feasible, (i.e., it works), all expenses for research and
development are now capitalized. For the first six months of 1999, $439,000 of
such expenditures were capitalized.
Other income included $17,966 of interest income in the six months to
June 30, 1999 earned from the remainder of the proceeds of our share offerings
as compared to $76,992 in the six months ended June 30, 1998. Other expenses
included interest expense of $68,922 directly attributable to our predecessor's
notes payable in the six months to June 30, 1999. Interest expense in the six
months to June 30, 1998 was $72,112.
As a result of the foregoing we incurred a net loss of $1,918,881 for
the six months ending June 30, 1999, compared to a loss of $1,694,388 for the
six months ending June 30, 1998, an increase of $224,493. The loss in the 1998
period was after an extraordinary gain of $151,654.
Fiscal Year Ended December 31, 1998 Compared With Period from April 8, 1997
through December 31, 1997.
Our primary activities during 1998 were
o signing several contracts to produce content for music related
web sites,
o completing a small financing and attempting a merger for
additional financing,
o completing development of Worlds Gamma,
o releasing a new version of Worlds Chat, and
o developing and operating a web site for the sale of music
related merchandise.
Our primary activities during the period from April 8, 1997 through
December 31, 1997 were
o the formation of Worlds Acquisition Corp., one of the parties
to the mergers,
o negotiating and consummating the mergers,
o attending to post-merger administrative and legal matters,
o the completion of a private placement, and
o the negotiation and compromise of debts of Predecessor.
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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
our WorldsStore.com web site was not operational until November 1998.
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 our web site and content for the
contracts within the music industry, professional fees and other expenses
incurred in connection with the mergers and the 1998 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 our predecessor, being the sum of the negative
net worth of predecessor, plus the value of the 1,999,996 shares of our common
stock given in exchange for all the outstanding stock of predecessor at the time
of the mergers. We invested $992,932 during 1998 in research and development as
we completed development of our Gamma technology.
We 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 our financings than accumulated on predecessor's notes payable.
We also realized an extraordinary gain of $172,547 during 1998 as
compared to $125,776 during 1997, by settling some of our debts 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, our 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.
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 our predecessor was insolvent and had
failed to raise any additional capital. In January and February 1997 the
majority of our predecessor's personnel were released and most of its management
team resigned. Normal operations of our predecessor ceased and significant wind
down costs were incurred. In March 1997, our predecessor's board of directors
appointed Regent Pacific, a firm with experience in crisis management, as acting
general manager. Our predecessors elected to sell certain assets, including
early generations of its technology for approximately $260,000.
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
sales and web site hosting at our Predecessor's operations center in Seattle
Washington.
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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 our predecessor ceased normal operations.
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 our predecessor.
In 1997, our 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, our 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 a net loss of $10,186,954 for the fiscal
year ended December 31, 1996.
Liquidity and Capital Resources of Worlds Inc.
In June and August 1999, we consummated two tranches of a private
placement, selling an aggregate of 57.5 units. Each unit cost $60,000 and
consisted of 15,000 shares of common stock and warrants to purchase 7,500 shares
of common stock. We had raised gross proceeds of $2,376,114 through June 30,
1999, and additional gross proceeds of $1,073,886 thereafter through August 31,
1999, in the private placement. At June 30, 1999, we had a working capital of
$1,179,631 and cash and cash equivalents in the amount of $2,537,617.
Our capital requirements relating to the commercialization of our
technology and the development of our web sites and related content have been
and will continue to be significant. During the periods that we experience net
losses, we expect to be dependent upon sales of our capital stock and debt
securities to finance our working capital requirements. Based upon our current
plans and assumptions relating to our business plan, we anticipate that our
existing capital resources will satisfy our capital requirements through at
least March 2000. However, if our plans change or our assumptions prove to be
inaccurate, we may need to seek additional financing sooner than currently
anticipated or curtail our operations.
We will need to raise additional capital during 2000, which may be in
the form of equity or debt financing. Any issuance of equity securities would
dilute the interest of our shareholders. Additionally, if we incur debt, our
company will become subject to risks that interest rates may fluctuate and cash
flow may be insufficient to pay the principal and interest
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on any such debt. If financing is not available when as we require, we could be
force to slow down the growth of our business or suspend operations entirely.
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. We do not presently
enter into any transactions involving derivative financial instruments and,
accordingly, do not anticipate the new standard will have any effect on its
financial statements.
Year 2000 Disclosure
We are Year 2000 compliant and we do not anticipate any internal
problems. In the event any internal problems should arise, we have many expert
computer technicians on our payroll and we believe that we will be able to
satisfactorily address any such problems. However, we are dependent on the
integrity of the Internet being maintained to derive income from the sale of
merchandise on our own e-commerce site and through links to the products we
create. We have employed a redundancy system as a safeguard to protect the
viability of our site by having our site hosted by two of the larger Internet
Service Providers. Thus, in the event one of our hosts should fail, we could
continue uninterrupted on the other Internet Service Provider. We have been
advised that our hosts are addressing the Year 2000 issue and hope to be
compliant. We use Wells Fargo to process our e-mail transactions. Wells Fargo
processes a significant portion of all Internet e-commerce transactions and if
it fails due to Year 2000 problems we will be negatively impacted, but not
likely more than many other e-commerce vendors. In summary, we are totally
dependent upon third parties for hosting and processing our e-commerce
activities and while we cannot control the actions of these third parties, we
believe that given our redundant safeguards, the availability of other hosts and
processors to switch to in the event our current hosts and/or processor crashes
and the fact that we only see nominal revenue from our e-commerce at this time,
we do not believe that our profitability or operations will be materially
affected by the Year 2000 problem.
Change in Accountants
On January 31, 1998 we dismissed Lipner, Gordon & Co. LLP as our
independent accountants. This action was approved by our Board of Directors.
During the past three years, Lipner, Gordon & Co. LLP did not issue a report on
our 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
us and Lipner, Gordon & Co. LLP 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 Lipner, Gordon & Co. LLP,
would have caused them to make reference to the subject matter of the
disagreement in connection with its opinion.
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On January 31, 1998 the Board of Directors appointed BDO Seidman, LLP
("BDO") as independent accountants. Prior to such engagement, BDO was the
independent auditor of Predecessor and Worlds Acquisition Corp., two Delaware
corporations which merged into us. BDO provided written reports of these two
corporations which was included in offering materials for a private financing
continued by us after the mergers. BDO was also consulted regarding filing
obligations pursuant to the change in our fiscal year. Finally, BDO was
consulted regarding the nature of the financial statements required to be
included in our 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, we 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 our financial statements.
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BUSINESS
General
We design and develop software, content and related technology for the
creation of interactive, three-dimensional Internet sites. Using our proprietary
technology, we create our own Internet sites, as well as sites available through
third-party online service providers, such as Freeserve, the largest Internet
service provider in the United Kingdom, and Road Runner, one of the two largest
cable-modem based Internet service providers in the United States. Sites using
our technology allow numerous simultaneous visitors to enter, navigate and share
interactive "worlds," which are 3D spaces featuring animation, motion and
content. Our 3D Internet sites are designed to promote frequent, repeat and
prolonged visitation by users by providing them with unique online communities
featuring dynamic graphics, highly useful and entertaining information content,
and interactive capabilities. We believe that our sites are highly attractive to
advertisers because they offer access to demographic-specific user bases
comprised of people that visit the site frequently and stay for relatively long
periods of time.
Currently, our premiere site is Worlds Ultimate 3D Chat
(www.worlds.com), an interactive site employing our 3D technology and targeted
towards the music industry. Visitors to Worlds Ultimate 3D Chat adopt an alter
ego in the form of one of hundreds of avatars, which are 3D characters that can
be moved through the many virtual "worlds" of Worlds Ultimate 3D Chat. The user
moves his or her avatar through these worlds using a mouse or keyboard arrow
keys and can:
o engage other avatars in one-on-one text-based or real
voice-to-voice discussions;
o enter theme-based chat rooms featuring group discussions on
numerous music styles, specific recording artists and other topics;
o experience interactive advertising and promotions;
o access information on various recording artists, concert
schedules and other music-related and nonmusic-related information;
o view new music videos by leading recording artists;
o listen to selections from newly released CDs by numerous
recording artists;
o purchase music and recording artist-related merchandise
online; and
o enter pay-access areas as a VIP subscriber.
Currently, almost all Internet sites are entirely two-dimensional with
limited graphic and interactive capabilities because existing technological
barriers typically prevent the delivery of high-quality 3D graphics and motion
imagery. Typically, in order for sites to provide users with high-quality 3D
graphics on the Internet, such users must have very powerful computers and both
users and site providers must have access to high-capacity
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communications channels for the movement of the large amount of data that must
be delivered to provide 3D motion. Our technology, however, circumvents these
limitations by delivering a large portion of the necessary software and data
through off-line channels (such as CDs and CD-ROMs), with only the interactivity
information being transmitted online. This allows almost any home PC with a
traditional modem to enjoy our interactive 3D sites.
The Market
A growing number of people access the Internet as a part of their daily
routine. They are embracing the Internet as a point of access for
communications, entertainment and shopping. The emergence of broadband delivery
capabilities, such as that provided by Road Runner to its customers through
cable modems, and other technologies will promote even greater growth in the use
of the Internet by consumers.
The Internet is extending the capabilities of traditional media
products, such as music. By making these products, which were previously used by
consumers on a passive basis, interactive, the Internet can broaden and prolong
their appeal. The Internet also is creating new opportunities for businesses to
reach customers on a cost-efficient, demographic-specific basis. Advertisers are
increasingly giving their online advertising business to sites that can provide
them with access to user bases comprised of repeat users who tend to stay at the
site for meaningful periods of time.
The Internet is currently a flat, 2D media. However, it can be a
robust, immersive, interactive world, with 3D capabilities enhancing the
Internet experience as color enhanced the TV experience. We believe that sites
that provide users with exciting 3D interactivity via the Internet, sense of
community and appealing online purchasing opportunities will garner user bases
that have the characteristics that appeal to users, sponsors and advertisers.
We have a unique opportunity to exploit our technology to create
Internet sites that represent concrete e-commerce revenue generation models
because they are unique, fun and useful to users on a repeat-visitation basis.
In turn, these users can be targeted by advertisers on a demographic-specific
basis to create meaningful revenue opportunities.
Our Strategy
Our goal is to become a leading provider of interactive 3D Internet
sites where entertainment content, interactive chat and e-commerce opportunities
converge to provide communities for users and advertisers. Keys to our strategy
to achieve our goal are:
Initially producing interactive, multimedia music related 3D sites. We
believe that music readily lends itself to exploitation through sites utilizing
our technology. Music is a universal theme that appeals to all people and
accordingly music-based sites, such as Worlds Ultimate 3D Chat, have the
capability of drawing a wide range of users. We also believe that the highly
graphic, interactive nature of sites using our technology appeals to users drawn
to music-based sites, differentiates such sites from other music-based sites and
thereby encourages repeat visitation. Because our technology allows for the
creation of multiple worlds accessible from a site, it allows such sites to
segregate users of different tastes and demographics. For example, the various
worlds of Worlds Ultimate 3D Chat focus on
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specific categories of music, such as alternative, jazz, rock, pop, country and
hip-hop. Accordingly, advertisers at Worlds Ultimate 3D Chat are able to place
their online advertisements and e-commerce links in specific worlds, thereby
focusing their advertising efforts on targeted user groups.
Creating effective offline distribution partnerships with recording
artists and their record companies. We regularly seek to enter into alliances
with recording artists and their record companies by which we gain access to the
excess capacity on their music CDs to distribute our Worlds Ultimate 3D Chat and
other software. CDs utilizing such excess capacity in this or similar manner are
commonly referred to as CD+ or enhanced CDs. We believe that the distribution of
music on CD+ is an attractive alternative to recording artists and their record
companies as it creates opportunities for them to expand the sale of their music
(through differentiation of their CDs), creates a new channel of distribution
for the sale of products related to the artists, and aids in the promotion of
the artists in general. We have entered into relationships with companies
representing David Bowie and the group Hanson, and currently we are in
negotiations with several major record companies with respect to the
distribution of our 3D technology and content.
Creating Other Services Using Our Interactive 3D Technology. In
addition to Worlds Ultimate 3D Chat, we seek to create other marketable products
and services based on our technology. During late 1998, we completed development
of our technology tool kit "Gamma." Gamma is our software platform for the
creation and delivery of 3D graphics and multiuser functionality for Internet
sites. Using this technology, we created and commercially released two products,
in addition to Worlds Ultimate 3D Chat, in 1998:
o AnimalHouse.com created for Universal/Hyundai. Our 3D technology was
encoded on a CD+ together with audio tracks of 10 Universal Music Group
recording artists and distributed to college students through a variety of
Universal distribution outlets. AnimalHouse.com allows users to enter into an
entertaining, music-based 3D environment while simultaneously listening to the
recording artists. Our agreement with Universal called for the manufacture and
distribution by Universal of up to 1,000,000 CDs.
o BowieWorld created for David Bowie's BowieNet, the first Internet
Service Provider created and sponsored by a recording artist. Our product allows
members of BowieNet to enter into 3D environments based on David Bowie and his
music. We also reached an agreement with BowieNet to have Worlds Ultimate 3D
Chat software distributed on a CD-ROM to BowieNet members.
Pursuing Alliances and Cross Promotional Opportunities. We are also
pursuing opportunities to provide our 3D Internet technology and content to
other companies. In this regard, we recently entered into agreements with:
o Road Runner, pursuant to which we provide them with a co-branded area
on the Road Runner music channel which allows their subscribers to access 3D
interactive chat and music-related content;
o Freeserve, pursuant to which we are creating co-branded traditional
2D and proprietary 3D chat sites which are accessible by Freeserve's members;
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o Recording artist Hanson, pursuant to which we used our technology to
create a special CD+ for distribution to the Hanson fan club during June and
July 1999; and
o Polygram Merchandising, pursuant to which we market and sell Polygram
Merchandising's recording-artist merchandise on our sites; and
o Excite, pursuant to which we will provide Excite with high-quality
e-commerce content.
Creating Brand Identity for Worlds.com. Public awareness of our site
and products is critical to our success. We will build this awareness through a
high-profile public relations and marketing effort and by building relationships
with other Internet companies and music companies. Worlds Ultimate 3D Chat and
our other products will be marketed through online and other efforts.
Ultimately, we seek to build a reputation as a leader in 3D technology and
content for the Internet. In connection with our brand building efforts, upon
obtaining shareholder approval, we will change our corporate name to "Worlds.com
Inc."
Our Technology
During 1998, we directed our efforts toward completing development of
our Gamma development tool kit. Our development efforts are now focused on
adapting Gamma to produce music-oriented websites.
The Gamma Development Kit is our third generation and newest 3D
toolset, and was completed in the second half of 1998. We believe that Gamma
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. We have successfully utilized the
Gamma tool kit in the development of 3D content for David Bowie's 3D on-line
environment, BowieWorld, as well as our recently released Worlds Ultimate 3D
Chat. A major part of the Gamma platform was also utilized in the 3D AnimalHouse
project which we created for Universal/Hyundai and in our e-commerce site,
WorldsStore.com.
The Gamma has substantial elements written in Sun Microsystem's
programming language, Java, including the WorldsBrowser Gamma and the
WorldsShaper Gamma so we expect that it can be made portable across Windows and
UNIX Platforms because of Java's platform independence.
The Gamma technologies include:
o WorldsShaper Gamma: The WorldsShaper Gamma 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 Gamma a tool well-suited for rapid world
creation. Additional Application Programming Interfaces for more sophisticated,
programmatic control of the
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spaces will also be included. Initially, the WorldsShaper Gamma will only output
in our proprietary file format.
o WorldsServer Gamma: The WorldsServer Gamma is the server software
that we anticipate using to control and operate its on-line virtual community,
Worlds of Worlds. The WorldsServer Gamma manages the registration and
authentication of users, the locations of users within the 3D environment, the
physical structure of the 3D environment, all information regarding objects that
are "shared" by the participants and any of the interactions between the users,
such as text chat.
o WorldsBrowser Gamma: The WorldsBrowser Gamma is used to access the 3D
environments created with the Worlds Gamma Development Kit. The browser is
optimized for speed, delivering relatively fast frame rates per second in highly
textured virtual 3D worlds.
o Worlds Gamma Libraries: The Worlds Gamma Libraries are composed of
sample worlds, textures, models, avatars, actions, sensors, sounds, motion
sequences, and other behaviors.
The markets for our products are characterized by rapidly changing
technology and evolving industry standards, often resulting in product
obsolescence or short product life cycles. Accordingly, our ability to compete
will be dependent on our ability to enhance and upgrade Worlds Gamma in a timely
manner. There can be no assurance that competitors will not develop technologies
or products that render our products obsolete or less marketable or that we will
be able to successfully enhance our products or develop new products.
Our Products
Worlds Ultimate 3D Chat
We own a proprietary online 3D Internet chat site known as Worlds
Ultimate 3D Chat. Originally launched as Worlds Chat, another proprietary 3D
chat site we still operate, it is an upgraded version using our newest
technology. The 3D environment was originally created by our predecessor and
launched in 1996 to test its technologies and to learn about user behaviors and
preferences in 3D environments. Our 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 our library. Users communicate with each other through both
text chat, as well as voice-to-voice 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 with over 500 rooms, compared to 100
available in the free demo version.
We believe that the user base to the Worlds Ultimate 3D Chat site will
develop into a valuable asset. Although we have no plans to build advertising or
subscription revenues through the original Worlds Chat site, such revenues may
be generated in the future. We are also attempting to market a customized
version of this product for intranet applications by
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corporations. Currently, we collect a name and an e-mail address from our Worlds
Ultimate 3D Chat users and a complete name, address, and credit card information
from our direct customers. Worlds Ultimate 3D Chat also contains an e-commerce
component, which we believe is the first commercial real 3D virtual store
online, selling music merchandise of major recording artists including Elton
John, David Bowie, Spice Girls, U2, Hanson, John Mellencamp, Shania Twain and
others.
In order to rapidly increase the number of potential subscribers to our
3D music sites, we recently began to offer a modified demo version of 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, we may generate new
members to our Chat service. These new members may be matriculated to the 3D
music sites when launched and to our e-commerce website. The proliferation of
Worlds Ultimate 3D Chat may also 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.
We believe that there is an opportunity to further exploit the Worlds
Ultimate 3D Chat product in modified form. We are 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 us with an ongoing
revenue stream based on the licensing fees for our server technology, as well as
a per employee annual subscription fee.
David Bowie
We have entered into an agreement with UltraStar Internet Services LLP
to create and operate 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 we have the exclusive rights to create
the 3D DavidBowieStore.com to sell selected Bowie merchandise and the
non-exclusive rights to operate a traditional HTML, or 2D, DavidBowieStore.com.
A direct link from David Bowie's official site, DavidBowie.com, has recently
been placed on the home page of David Bowie.com that directs the user to our
David Bowie Internet store.
Universal/Hyundai - Animal House.com
We 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. We currently have the 3D Animal House site created
for this project encoded on the Worlds Ultimate 3D Chat CD.
We also entered into an agreement with Polygram merchandising to
develop and maintain the SuperStarSuperstore.com Internet site employing an
e-commerce engine to sell music merchandise of major recording artists including
Elton John, Hanson, U2, Spice Girls, Sting, Shania Twain and others. We
developed the 3D stores for these artists and they are
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included on the Worlds Ultimate 3D Chat CD. 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 Internet sites to consumers who wish to access
these artists stores through traditional HTML pages on the Internet.
Road Runner
We recently entered into an agreement with Road Runner to create Road
Runner/Worlds.com, a co-branded area on the Road Runner service. Road Runner is
the high-speed online service owned by Time Warner, MediaOne Group, Microsoft
Corp., Compaq, and Advance/Newhouse. Our agreement with Road Runner will permit
all Road Runner subscribers to participate in an entirely new, interactive
online experience. The cobranded area we create will highlight the latest
technology in the Road Runner music channel. Road Runner's agreement with us is
the first entered into by Road Runner with a 3D technology and broadband content
provider for the Road Runner music channel.
Hanson
We recently entered into an agreement with Hansonopoly Inc. to create a
special CD with our 3D Internet technology and content. This CD includes various
3D environments for the Hanson's fan club. Hanson is a platinum recording group
who has sold more than 10 million CDS worldwide since 1997.
The CD allows the members of the Hanson's fan club "MOE," to enter,
explore, and meet and greet each other in a visually rich environment. This fan
club CD also includes several songs by Hanson as well as video footage. The CD
was distributed in June and July 1999.
Freeserve
In June 1999, we entered into two agreements with Freeserve, the
largest Internet service provider in the United Kingdom and a subsidiary of
Dixons Group. Pursuant to these agreements, we are serving as the official and
exclusive 2D and 3D Internet broadband chat service and content provider for
Freeserve. The agreement calls for a sharing of advertising and related revenues
generated by these sites.
Competition
The markets in which we currently operate and those we intend to enter
are characterized by intense competition and an increasing number of new market
entrants which have developed or are developing competitive products. We 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. We believe that
competition will be based primarily on ease of use, price and features,
including communications capabilities and content.
In addition, certain companies have developed or may be expected to
develop technologies or products in related market segments which could compete
with certain
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technologies or products we are developing. We expect 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 us, permitting such companies to
implement extensive marketing campaigns.
Technologically, our target market 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. Our 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 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. VRML
is an early industry attempt to provide standard protocols for 3D Internet
experiences.
Many companies now compete with us in one way or another and new ones
may emerge in the future that might compete with us. The competition may be
through entry into the same markets, or through technology that either obviates
our advantages or lowers the barrier to entry in one of our markets.
Besides technological competition, we 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 our resources.
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 our knowledge, no other
company is currently offering a product that integrates 3D Internet technology
with a music industry content application similar to that which we are now
offering.
Employees
We currently have 11 full time employees. Five of our employees are
engaged in product development, one is engaged in financial activities and five
are engaged in marketing activities. We have also have relationships with six
independent contractors that are software developers/programmers, who until
early 1997 were performing technological development work for our predecessor.
Additional financing permitting, we intend to hire up to seven
additional employees, at least two of whom will be in the area of
artist/integration production of music sites, and up to five 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.
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None of our employees are represented by a labor union. We believe that
relations with our employees are good.
Community Leaders Monitoring Program
We recently implemented a program through which certain users of Worlds
Ultimate 3D Chat are given the opportunity to volunteer as online Community
Leader Monitors. These volunteers monitor our community chat rooms, making sure
that users comply with our terms of service and otherwise refrain from obscene
or inappropriate behavior. We reward each of these volunteers with grants of
options to purchase shares of our common stock for each full month of service as
a Community Leader Monitor.
Properties
Our facilities are located in approximately 2,500 square feet of leased
office space in San Francisco, California and 2,500 square feet of leased office
space in Boston, Massachusetts. The lease in San Francisco is on a month by
month basis at $2,500 per month and in Boston the lease expires in September
2000 and provides for an annual rental of approximately $50,000. We have only
negligible costs relating to environmental compliance laws.
Legal Proceedings
We are not involved in any material legal proceedings.
36
<PAGE>
MANAGEMENT
Officers and Directors
Our officers and directors are as follows:
Name Age Position
---- --- --------
Steven G. Chrust 50 Chairman of the Board
Thomas Kidrin 47 President, Chief Executive Officer,
Treasurer and Director
Michael J. Scharf 56 Director
Kenneth A. Locker 49 Director
Steven Chrust has been Chairman of the Board since April 1999. Mr.
Chrust was the Vice Chairman of WinStar Communications, Inc., and a member of
its Board of Directors from 1994 through December 1998. At WinStar he was
responsible for corporate development, strategic and capital planning, and
acquisitions. Mr. Chrust has been involved with the telecommunications and
financial services industries for 25 years. He was formerly a Chairman and Chief
Executive Officer of AMNEX, Inc., an operator services long distance company,
and was Executive Vice President of Executone Information Services, Inc. Prior
to becoming an executive in the telecommunications industry, Mr. Chrust was
Director of Technology Research at Sanford C. Bernstein & Co. where he was named
a top telecommunications analyst each year for more than a decade by
Institutional Investor and ranked #1 analyst in the sector for five consecutive
years in their all-star ranking. Mr. Chrust is Chairman of the Association for
Local Telecommunications Services (ALTS), the national organization representing
facilities-based competitive local exchange carriers and is the Founder and
President of SGC Advisory Services Inc., a discretionary money-management
service firm specializing in telecommunications and technology. Mr. Chrust is a
graduate of Baruch College in New York.
Michael J. Scharf was Chairman of the Board from December 3, 1997 until
April 4, 1999. Prior to the mergers, Mr. Scharf was Chairman and Secretary of
Worlds Acquisition Corp. 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 Worlds Acquisition Corp. since its inception, Treasurer since June
1997 and a Director since inception. From 1996 to 1997 he was Chairman and
President of Datastream Corporation, a designer and developer of interactive
products and services. 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
37
<PAGE>
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 June 1998 he has
been a Senior Consultant to the Intel Corporation on entertainment industry
strategies and has also served as an advisor to Ziff Davis and to Digital
Evolution, a company funded in part by Paul Allen. From June 1996 he was the
General Manager and 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.
Indemnification of Directors and Officers
Our By-Laws includes certain provisions permitted pursuant to the New
Jersey Business Corporation Act whereby our officers and directors 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. We believe that these provisions will facilitate our ability
to continue to attract and retain qualified individuals to serve as our
directors and officers.
At present, there is no pending litigation or proceeding involving any
of our directors, officers, employee or agents where indemnification might be
required or permitted. We are unaware of any threatened litigation or proceeding
that might result in a claim for such indemnification.
Compensation of Directors
Non-employee directors, excluding Messrs. Scharf and Chrust, 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.
Consulting Agreement
The Company has entered into a month-to-month consulting agreement with
Steven A. Greenberg, a founder of Worlds Acquisition Corp. The agreement
provides for monthly compensation of $15,000 plus reimbursement of reasonable
expenses actually incurred. In addition to providing consulting services, Mr.
Greenberg also makes his offices available to our employees at no extra cost.
38
<PAGE>
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of August 30, 1999, information
regarding the beneficial ownership of our common stock based upon the most
recent information available to us for (i) each person known by us to own
beneficially more than five (5%) percent of our outstanding common stock, (ii)
each of our executive officers and directors and (iii) all of our executive
officers and directors as a group.
Number of
Shares Owned
Name Beneficially % of Total
- - ---- ------------ ----------
Steven Chrust(1) 1,136,000 6.5%
Michael J. Scharf 1,381,250 7.9%
Thomas Kidrin 1,290,000 7.5%
Kenneth A. Locker(2) 100,000 *
Steven A. Greenberg 3,818,750 21.9%
All Officers and Directors 3,907,250 20.8%
as a Group (4 persons)
- - ------------------
* less than 1%
(1) Includes 1,000,000 shares underlying currently exercisable warrants
owned by SGC Advisory Services, Mr. Chrust's company, these warrants
are exercisable at a per-share price of $0.50.
(2) Represents shares of common stock issuable upon exercise of currently
exercisable stock options, at a per-share exercise price of $0.50
(60,000 shares) and $1.00 (40,000 shares), respectively.
39
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid or accrued during
the two fiscal years ended December 31, 1998 to its Chief Executive Officer. No
other executive officers accrued compensation in excess of $100,000 per year in
any such year. Prior to the mergers, we had not paid any compensation to our
executive officers or directors.
<TABLE>
<CAPTION>
Long-Term
Annual Compensation(1)(2) Compensation
(a) (b) (c) (d) (e)
<S> <C> <C> <C> <C>
Name/Principal Year Ended Restricted
Position December 31, Salary ($) Bonus ($) Stock Awards
Thomas Kidrin 1998 175,000 -0- -0-
President and CEO 1997 21,903(3) -0- -0-
</TABLE>
- - --------------------
(1) The above compensation does not include other personal benefits, the
total value of which do not exceed, as to any named officer or director
or group of executive officers, the lesser of $50,000 or 10% of such
person's or persons' cash compensation.
(2) Pursuant to the regulations promulgated by the SEC, the table omits
columns reserved for types of compensation not applicable to us.
(3) Covers the period from effective date of the mergers, December 3, 1997,
through December 31, 1997.
1997 Stock Option Plan and Other Options
The Board of Directors and our shareholders have adopted a Stock Option
Plan as an incentive for, and to encourage share ownership by our officers,
directors and other key employees and/or consultants and 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. Our board of directors has approved an increase
in the number of shares of common stock available under our plan. Accordingly,
upon approval of such increase by our shareholders at the annual meeting of
shareholders for 1999, the number of shares of our common stock available under
our plan will be increased to 3,000,000 shares. The Option Plan also allows for
the granting of stock appreciation rights in tandem with, or independently of,
stock options. Any stock appreciation rights granted will not be counted against
the plan limit.
The purpose of the Option Plan is to make both "incentive stock
options" within the meaning of Section 422A of the Internal Revenue Code of
1986, as amended, and non-qualified options and stock appreciation rights
available to our officers, directors and other key employees and/or consultants
in order to give such individuals a greater personal interest in our success
and, in the case of employees, an added incentive to continue and advance in
their employment.
40
<PAGE>
The Option Plan is currently administered by the majority vote of a
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 is
intended that this plan 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 designates those persons to receive grants under the
Option Plan and determines the number of options and/or stock appreciation
rights, 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
underlying 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% 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 stock appreciation
rights granted, provided that no option may be exercisable later than ten years
after the date of grant. 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 137,500 stock options outstanding at an exercise
price of $0.50, including 60,000 to one of our outside directors, that were
granted in 1997, 817,000 options at an exercise price of $1.00, including
40,000 to one of our outside directors, that were granted during 1998, 60,000
options at an exercise price of $2.48 and 9,000 options at an exercise price of
$4.00. 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 our
officers and directors, and persons who own more than ten percent of a
registered class of our 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 us 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 20,000 stock options.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We have entered into a Financial Advisory and Consulting Agreement with
SGC Advisory Services, Inc. Mr. Chrust, our Chairman, is the President and sole
shareholder of SGC Advisory Services, Inc. The agreement is through March 2002
and provides for an annual fee of $120,000. The annual fee will rise to $300,000
annually if we raise $5 million in cash and the market value of our issued and
outstanding common stock is at least $100 million. In addition, we granted
warrants to SGC Advisory Services, Inc. to purchase 1,000,000 of shares of
common stock at $.50 per share. Such warrants were valued at $465,000 and
charged to selling, general and administrative expenses in the quarter ended
June 30, 1999. The warrants are exercisable through April 13, 2006 and contain
anti-dilution provisions and both "demand" and "piggy-back" registration rights.
41
<PAGE>
By agreements dated April 13, 1999, executed in connection with Mr.
Chrust's engagement, Messrs. Scharf, Kidrin and Greenberg agreed (i) to
contribute to capital for cancellation 318,750, 300,000 and 881,250 shares,
respectively, and (ii) during the term of the SGC Consulting Agreement referred
to above, to vote any shares of common stock owned by them for the election of
Mr. Chrust as a Director.
In June and August 1999, we consummated a closing on 57.5 units in a
private placement. Each unit cost $60,000 and consisted of 15,000 shares of
common stock and warrants to purchase 7,500 shares of common stock (at an
exercise price of $5.00 per share). Mr. Chrust purchased two units in this
private placement.
We entered into a month-to-month consulting agreement with Steven A.
Greenberg, a founder of Worlds Acquisition Corp. commencing December 1997. The
agreement provides for monthly compensation of $15,000 plus reimbursement of
reasonable expenses actually incurred. In addition to providing consulting
services, Mr. Greenberg also makes his offices and support staff available to
our employees at no extra cost. During 1997, Mr. Greenberg loaned $77,000 to
Worlds Acquisition Corp. on an interest free basis which was repaid as of June
30, 1999.
DISCLOSURE OF COMMISSION POSITION ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Section 14A:3-5 of the New Jersey Business Corporation Act, as amended,
authorizes us to indemnify any director or officer under certain prescribed
circumstances and, subject to certain limitations, against certain costs and
expenses, including attorneys' fees actually and reasonably incurred in
connection with any action, suit or proceeding, whether civil, criminal,
administrative or investigative, to which such person is a party by reason of
being one of our directors or officers if it is determined that such person
acted in accordance with the applicable standard of conduct set forth in such
statutory provisions. Our By-Laws contains provisions providing for the
indemnification of directors and officers to the full extent permitted by New
Jersey Law.
We may also purchase and maintain insurance for the benefit of any
director or officer which may cover claims for which we could not indemnify such
person.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons
pursuant to the foregoing provisions, or otherwise, we have been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore
unenforceable.
42
<PAGE>
DESCRIPTION OF SECURITIES
Common Stock
The holders of our common stock are entitled to one vote per share on
all matters to be voted upon by our shareholders. The holders of common stock do
not have cumulative voting rights, which means that the holders of more than 50%
of such outstanding shares can elect all of our directors. The holders of our
common stock are entitled to receive such dividends, if any, as may be declared
from time to time by the Board of Directors out of funds legally available
therefor. In the event we are liquidated or dissolved, the holders of our common
stock are entitled to receive all assets available for distribution to the
shareholders. The holders of common stock have no preemptive or other
subscription rights, and there are no conversion rights or redemption or sinking
fund provisions with respect to the common stock. All outstanding shares of
common stock are, and the shares offered hereby are, validly issued, fully paid
and nonassessable.
Shares Available for Future Sale
A large majority of our outstanding common stock may be deemed
"restricted securities," as that term is defined under Rule 144 promulgated
under the Securities Act. Such shares may be sold to the public, subject to
volume restrictions, as described below. Commencing at various dates, these
shares may be sold to the public without any volume limitations. The remaining
outstanding shares of common stock are freely tradable.
In general, under Rule 144 as currently in effect, subject to the
satisfaction of certain other conditions, a person, including one of our
affiliates, or persons whose shares are aggregated with affiliates, who has
owned restricted shares of common stock beneficially for at least one year is
entitled to sell, within any three-month period, a number of shares that does
not exceed 1% of the total number of outstanding shares of the same class. In
the event our shares are sold on an exchange or are reported on the automated
quotation system of a registered securities association, you could sell during
any three-month period the greater of such 1% amount or the average weekly
trading volume as reported for the four calendar weeks preceding the date on
which notice of your sale is filed with the SEC. Sales under Rule 144 are also
subject to certain manner of sale provisions, notice requirements and the
availability of current public information about us. A person who has not been
one of our affiliates for at least the three months immediately preceding the
sale and who has beneficially owned shares of common stock for at least two
years is entitled to sell such shares under Rule 144 without regard to any of
the limitations described above.
Transfer Agent
Continental Stock Transfer & Trust Company, 2 Broadway, New York, New
York 10004, acts as Transfer Agent for our common stock.
43
<PAGE>
Market for the Company's Securities
Our common stock has been quoted on the OTC Bulletin Board since
October 1998 under the symbol "WLDI."
The following table sets forth, for the fiscal periods indicated, the
high and low last sale prices of our common stock as reported on the OTC
Bulletin Board. The quotes represent "inter-dealer" prices without adjustment or
mark-ups, mark-downs or commissions and may not necessarily represent actual
transactions.
Period Ended High Low
- - ------------ ---- ---
December 31, 1998..................................... $2.50 $0.75
March 31, 1999........................................ 1.63 0.75
June 30, 1999......................................... 6.63 1.25
July 1, 1999 through August 30, 1999.................. 4.63 2.46
The last sale price of our common stock on August 30, 1999 was $3.875
per share. As of August 30, 1999, our common stock were outstanding and held by
more than 1,000 beneficial holders.
We have never paid a dividend on common stock and do not anticipate
paying any dividends in the near future.
SELLING SHAREHOLDERS
This Prospectus covers:
o The sale from time to time of an aggregate of 2,222,700 shares of
common stock by the persons indicated in this prospectus. All of these shares
were issued by us to them in a private placement in December 1997.
o The sale from time to time of an aggregate of 1,603,375 shares of
common stock by the persons indicated in this prospectus. All of these shares
are shares that would be issued by us to them upon the exercise of options and
warrants.
o The sale from time to time of an aggregate of 882,500 shares of
common stock by the persons indicated in this prospectus. All of these shares
were issued by us to them in a private placement in June 1999.
o The sale from time to time of an aggregate of 441,250 shares of
common stock by the persons indicated in this prospectus. All of these shares
are shares that would be issued by us to them upon the exercise of warrants
issued in the June 1999 private placement.
o The sale from time to time of 187,500 shares of common stock by the
persons indicated in this prospectus. These shares were issued by us in
connection with our recent transaction with Freeserve plc.
44
<PAGE>
The following tables set forth relevant information about the selling
shareholders:
Shares Issued in 1997 Private Placement
<TABLE>
<CAPTION>
Shares
Shares Shares Owned
Name Held Offered After Sale
---- ---- ------- ----------
<S> <C> <C> <C>
Ian Barnett 2,700 2,700 0
Jerome Baron 7,200 7,200 0
Barington Capital Group, L.P. 75,500 75,500 0
Bear Stearns Securities Corp. f/b/o Dan Brecher-IRA 6,300 6,300 0
Napier Brown Holdings, Ltd. 120,000 120,000 0
Lawrence Burstein(1) 17,000 17,000 0
Cameo Trust Corporation Limited 4,000 4,000 0
Cass & Co. - Magnum US Equity Fund 81,660 81,660 0
Cass & Co. - Magnum Capital Growth Fund 40,830 40,830 0
Cass & Co. - Magnum Tech Fund 33,010 33,010 0
Steven Chrust & Sharon Chrust JTWROS(2) 60,000 60,000 0
Steven Chrust IRA(2) 60,000 60,000 0
CML Strategic Investment Fund, Ltd. 20,000 20,000 0
Cowen & Company custodian FBO William Waters
IRA 25,000 25,000 0
Dine Investors, L.P. 60,000 60,000 0
Domaco Venture Capital 900 900 0
Heidrun Eckes--Chantre 195,800 195,800 0
Engel Investors 100,000 100,000 0
Equity Interest Inc. 900 900 0
Leo I. George 90,000 90,000 0
DLJSC, Custodian f/b/o Stewart Greisman 20,000 20,000 0
Heptagon Capital Management, Inc. 900 900 0
International Capital Growth, Ltd.(3) 384,000 384,000 0
Katarina Kalda 5,000 5,000 0
Ronald Koenig(4) 1,500 1,500 0
Elizabeth G. Konaxis 40,000 40,000 0
Joseph G. and Lillian P. Matulich(5) 8,000 8,000 0
Robert E. Mullane 120,000 120,000 0
Patricia Bartlett Nemes 30,000 30,000 0
Barry Ridings 3,600 3,600 0
Rosebud Capital Growth Fund, Ltd. 103,000 103,000 0
Jonathan Rothschild 900 900 0
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
Shares
Shares Shares Owned
Name Held Offered After Sale
---- ---- ------- ----------
<S> <C> <C> <C>
S-A Capital LLC 30,000 30,000 0
Murray Slimowitz, IRA 20,000 20,000 0
Murray Slimowitz 30,000 30,000 0
Michael & Marjorie Stern JTWROS 240,000 240,000 0
Peter Stern Family Trust U.A.D. 8/21/90 180,000 180,000 0
Elizabeth Varabiev 5,000 5,000 0
</TABLE>
- - ----------------
(1) A former director prior to the mergers.
(2) Our Chairman. Does not include 1,000,000 shares underlying currently
exercisable warrants held by an entity controlled by Mr. Chrust.
(3) Placement Agent for the 1997 private offering.
(4) Chairman and CEO of International Capital Growth, Ltd.
(5) Parents of a Senior Vice President of International Capital Growth,
Ltd.
Shares Issuable Upon Exercise of Options and Warrants
<TABLE>
<CAPTION>
Shares
Shares Shares Owned
Names Held Offered After Sale
----- ---- ------- ----------
<S> <C> <C> <C>
Lawrence Burstein 50,000(1) 50,000 0
John Cattier 50,000(1) 50,000 0
Credo Interactive Inc. 50,000(2) 50,000 0
Charles L. & Donna Greenberg(4) 120,000(3) 120,000 0
Charles L. Greenberg IRA(4) 120,000(3) 120,000 0
Cowen & Co. f/b/o Stanley Hollander 78,000(5) 78,000 0
International Capital Growth Ltd. 85,375(6) 85,375 0
Steven Millner 50,000(1) 50,000 0
SGC Advisory Services(7) 1,000,000(8) 1,000,000 0
(footnotes continued on next page)
</TABLE>
- - ---------------------
(1) Represents shares issuable upon exercise of currently exercisable
warrants, exercisable at a per-share price of $1.00.
(2) Represents shares issuable upon exercise of warrants, exercisable at a
per-share price of $1.00.
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<PAGE>
(3) Represents shares issuable upon exercise of warrants, exercisable at a
per-share price of $1.00.
(4) Brother of Steven A. Greenberg, a principal shareholder.
(5) Represents shares issuable upon exercise of currently exercisable stock
options, exercisable at a per-share price of $0.50. Mr. Hollander is an
affiliate of Heptagon Capital Management.
(6) Represents shares issuable upon exercise of warrants, exercisable at a
per-share price of $1.00. International Capital Growth was the
placement agent for our December 1997 private placement.
(7) SGC is owned by Mr. Chrust, our Chairman of the Board.
(8) Represents shares issuable upon exercise of warrants, exercisable at a
per-share price of $0.50.
Shares Issued in 1999 Private Placement(1)
<TABLE>
<CAPTION>
Shares
Shares Shares Owned
Names Held Offered After Sale
----- ---- ------- ----------
<S> <C> <C> <C>
The Advent Fund L.L.C. 157,500 157,500 0
AMPM Enterprises 22,500 22,500 0
Robert Amster(6) 7,500 7,500 0
Shelly Bergman 11,250 11,250 0
Irwin H. Braunstein 22,500 22,500 0
Matias Bullrich 22,500 22,500 0
Camelot Trust Corporation Limited 67,500 67,500 0
James I. Cash 22,500 22,500 0
Steven Chrust(2) 45,000 45,000 0
David E. Dorman 22,500 22,500 0
Mark Edelstein 22,500 22,500 0
Wayne Eisenbaum 22,500 22,500 0
Kenneth Frolick 22,500 22,500 0
Janice C. Gale, Trustee f/b/o Ariena J. Galc 22,500 22,500 0
Leo I. George 45,000 45,000 0
Giant Trading Co. 67,500 67,500 0
GlobalNet Financial Com, Inc. 22,500 22,500 0
Jay Gottlieb 11,250 11,250 0
Graubard Mollen & Miller(4) 11,250 11,250 0
Charles Greenberg(3) & Dana Greenberg 22,500 22,500 0
Charles Greenberg(3) & Dana Greenberg 45,000 45,000 0
Craig Greenberg 11,250 11,250 0
Lori Greenberg 11,250 11,250 0
(footnotes on next page)
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
Shares
Shares Shares Owned
Names Held Offered After Sale
----- ---- ------- ----------
<S> <C> <C> <C>
Paul Hochhauser 22,500 22,500 0
Hillswood Holdings Limited 45,000 45,000 0
Ira Holtz 22,500 22,500 0
Peter Hyman 22,500 22,500 0
Herman Kagan 22,500 22,500 0
Ron Kuzon 22,500 22,500 0
James E. Lambert 45,000 45,000 0
The Lawrence Trust 22,500 22,500 0
Magnum Capital Fund 22,500 22,500 0
Magnum Select U.S. Equity Fund 45,000 45,000 0
Magnum Tech 22,500 22,500 0
Stanley Muses 45,000 45,000 0
Patricia Bartlett Nemes 22,500 22,500 0
Christiane Olsen 22,500 22,500 0
Harold Rothstein 22,500 22,500 0
Lawrence Siebert 11,250 11,250 0
Murray Slimowitz 22,500 22,500 0
Joseph Stansky 11,250 11,250 0
Gary Tobin(5) 11,250 11,250 0
Summit Bank Trustee 22,500 22,500 0
Summit Bank Trustee 22,500 22,500 0
Swiss American 22,500 22,500 0
Wel Partners 11,250 11,250 0
Raphael Wizman 22,500 22,500 0
</TABLE>
- - -------------------
(1) Each person set forth above purchased units or a fraction of a unit in
our June 1999 private placement. Each unit consisted of 15,000 shares
of common stock and warrants to purchase 7,500 shares of common stock.
The number of shares set forth in the above table represents both
shares of common stock and shares issuable upon exercise of warrants.
(2) Our Chairman. Does not include 1,000,000 shares underlying currently
exercisable warrants held by an entity controlled by Mr. Chrust.
(3) Brother of Steven A. Greenberg, our principal shareholder.
(4) Issued in consideration of certain legal services.
(5) Issued in consideration of certain public relations services.
(6) Issued in consideration of certain consulting services.
48
<PAGE>
PLAN OF DISTRIBUTION
The sale of the shares of common stock by the selling shareholders may
be effected by them from time to time in the over-the-counter market or in such
other public forum where our shares are publicly traded or listed for quotation.
These sales may be made in negotiated transactions through the timing of options
on the shares, or through a combination of such methods of sale, at fixed
prices, which may be charged at market prices prevailing at the time of sale, at
prices related to such prevailing market prices or at negotiated prices. The
selling shareholders may effect such transactions by selling the shares to or
through broker-dealers, and such broker-dealers may receive compensation in the
form of discounts, concessions or commissions from the selling shareholders
and/or the purchasers of the shares for which such broker-dealer may act as
agent or to whom they sell as principal, or both. The compensation as to a
particular broker-dealer may be in excess of customary compensation.
The selling shareholders and any broker-dealers who act in connection
with the sale of the shares hereunder may be deemed to be underwriters within
the meaning of Section 2(11) of the Securities Act, and any commissions received
by them and any profit on any sale of the shares as principal might be deemed to
be underwriting discounts and commissions under the Securities Act.
Other than the costs of preparing this prospectus and a registration
fee to the SEC, we are not paying any costs relating to the sales by the selling
shareholders. Each of the selling shareholders, or their transferees, and
intermediaries to whom such securities may be sold may be deemed to be an
"underwriter" of the common stock offered hereby, as that term is defined under
the Securities Act. Each of the selling shareholders, or their transferees, may
sell these shares from time to time for his own account in the open market at
the prices prevailing therein, or in individually negotiated transactions at
such prices as may be agreed upon. The net proceeds from the sale of these
shares by the selling shareholders will inure entirely to their benefit and not
to that of us.
Except as indicated below, none of the selling shareholders has held
any position or office, or had any material relationship with us or any of our
predecessors or affiliates within the last three years, and none will own any of
our outstanding common stock after completion of the offering of such shares.
The shares reflected by each selling shareholder is based upon information
provided to us by our transfer agent and from other available sources in August
1999.
These shares may be offered for sale from time to time in regular
brokerage transactions in the over-the-counter market, or, either directly or
through brokers or to dealers, or in private sales or negotiated transactions,
or otherwise, at prices related to the then prevailing market prices. Thus, they
may be required to deliver a current prospectus in connection with the offer or
sale of their shares. In the absence of a current prospectus, if required, these
shares may not be sold publicly without restriction unless held for two years,
or after one year subject to volume limitations and satisfaction of other
conditions. The selling shareholders have been advised that Rules 10b-6 and
10b-7 of the General Rules and Regulations promulgated under the Securities
Exchange Act of 1934 will be applicable to
49
<PAGE>
their sales of these shares. These rules contain various prohibitions against
trading by persons interested in a distribution and against so-called
"stabilization" activities.
The selling shareholders, or their transferees, might be deemed to be
"underwriters" within the meaning of Section 2(11) of the Act and any profit on
the resale of these shares as principal might be deemed to be underwriting
discounts and commissions under the Act. Any sale of these shares by selling
shareholders, or their transferees, through broker-dealers may cause the
broker-dealers to be considered as participating in a distribution and subject
to Rule 10b-6 promulgated under the Securities Exchange Act of 1934, as amended.
If any such transaction were a "distribution" for purposes of Rule 10b-6, then
such broker-dealers might be required to cease making a market in our equity
securities for either two or nine trading days prior to, and until the
completion of, such activity.
LEGAL MATTERS
Certain legal matters in connection with this offering are being passed
upon by the law firm of Graubard Mollen & Miller, New York, New York.
EXPERTS
Our audited financial statements as of December 31, 1998 and 1997 and
for the fiscal years then ended are included herein and in the registration
statement in reliance upon the reports of BDO Seidman, LLP, independent
certified public accountants, appearing elsewhere herein, and upon the authority
of said firm as experts in accounting and auditing. Such reports contain an
explanatory paragraph regarding the Companys' ability to continue as a going
concern.
50
<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)
Contents
- - --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Worlds Inc. (the "Company")
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
</TABLE>
F-1
<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-2
<PAGE>
Worlds Inc.
(a development stage enterprise)
Balance Sheets
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, 1997 1998
----------------------------------------------------------------------- ---------------------- ----------------------
<S> <C> <C>
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
depreciation and amortization (Note 5) 209,452 214,246
----------------------------------------------------------------------- ---------------------- ----------------------
$ 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;
issued 16,119,996 and 18,031,996 16,120 18,032
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-3
<PAGE>
Worlds Inc.
(a development stage enterprise)
Statements of Operations
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Cumulative,
Period from period from
April 8, 1997 April 8, 1997
(inception) to (inception) to
December 31, Year ended December 31,
1997(a) December 31, 1998 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 predecessor
liabilities (Note 11) - 810,140 810,140
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 (Note 10) 125,776 172,547 298,323
-------------------------------------------------------- ------------------- -------------------- -------------------
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
-------------------------------------------------------- ------------------- --------------------
--------------
(a) Includes the results of Predecessor and Academic which were merged into the
Company on December 3, 1997.
- - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying summary of accounting policies
and notes to financial statements.
F-4
<PAGE>
Worlds Inc.
(a development stage enterprise)
Statements of Stockholders' Deficit
(Note 8)
<TABLE>
<CAPTION>
Period from April 8, 1997 (inception) to December 31, 1998
----------------------------------------------------------------------------------------------------------------------------------
Deficit
accumulated
Common stock during the Total
------------------------------ Additional development stockholders'
Shares Amount paid-in capital stage Treasury stock deficit
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock
to founding stockholders 8,400,000 $ 8,400 $ 195,600 $ $ - $ 204,000
Sale of shares in private
offering memorandum and
shares issued to
placement agent, net
(Note 3) 4,810,000 4,810 3,689,866 - - 3,694,676
Issuance of shares to
Academic Computer
Systems, Inc. (Note 2) 910,000 910 557,116 - - 558,026
Issuance of shares
pursuant to merger with
predecessor (Note 2) 1,999,996 2,000 1,998,000 - - 2,000,000
Capital contribution
resulting from
forgiveness of debt to
shareholders of
predecessor (Note 6) - - 221,000 - - 221,000
Net loss for the period
April 8 to December 31,
1997 - - - (6,686,471) - (6,686,471)
---------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 16,119,996 16,120 6,661,582 (6,686,471) - (8,769)
Sale of shares in private
offering memorandum
(January 1998) (Note 3) 30,000 30 26,470 - - 26,500
Sale of shares in public
offering of common
stock, net (June 1998)
(Note 3) 1,832,000 1,832 1,713,968 - - 1,715,800
Conversion of 113,465
shares to certain
stockholders
(June 1998) (Note 2) - - - - (64,743) (64,743)
Conversion of employee
stock options into
shares (October 1998)
(Note 8) 50,000 50 (50) - - -
Net loss for the year
ended December 31, 1998 - - - (2,648,681) - (2,648,681)
---------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 18,031,996 $18,032 $8,401,970 $(9,335,152) $(64,743) $ (979,893)
---------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying summary of accounting policies
and notes to financial statements.
F-5
<PAGE>
Worlds Inc.
(a development stage enterprise)
Statements of Cash Flows
(Note 13)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Cumulative,
Period from period from
April 8, 1997 April 8, 1997
(inception) to Year ended (inception) to
December 31, 1997 December 31, 1998 December 31, 1998
----------------------------------------------------------- ------------------ ------------------- ------------------
Cash flows from operating activities:
Net loss $(6,686,471) $(2,648,681) $(9,335,152)
----------------------------------------------------------- ------------------ ------------------- ------------------
<S> <C> <C> <C>
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
predecessor liabilities - (810,140) (810,140)
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
stockholders 204,000 - 204,000
Proceeds from sale of common stock in private offering
memorandum 3,694,676 26,500 3,721,176
Proceeds from sale of common stock in public offering - 1,715,800 1,715,800
Payment of conversion price of shares to certain
stockholders - (64,743) (64,743)
Payments on note payable (4,000) (116,000) (120,000)
----------------------------------------------------------- ------------------ ------------------- ------------------
Net cash provided by financing activities 3,894,676 1,561,557 5,456,233
----------------------------------------------------------- ------------------ ------------------- ------------------
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-6
<PAGE>
Worlds Inc.
(a development stage enterprise)
Summary of Accounting Policies
- - --------------------------------------------------------------------------------
Definitions The Company is the resulting entity of two
contemporaneous mergers (the "Mergers") of Worlds
Inc., a Delaware corporation ("Predecessor"), with and
into Worlds Acquisition Corp., a Delaware corporation
("WAC"), and WAC with and into Academic Computer
Systems, Inc., a New Jersey corporation ("Academic"),
which changed its name to Worlds Inc. (see Note 2).
While Academic was the legal entity that survived the
Mergers, WAC was the accounting acquiror in both
Mergers. The Company's fiscal year-end is December 31.
The term the "Company," as used herein, refers to the
consolidated entity resulting from the two
contemporaneous Mergers, as well the pre-merger
Predecessor, WAC and Academic; however, Predecessor,
WAC and Academic are hereinafter sometimes referred to
separately as the context requires.
Nature of Business WAC was incorporated on April 8, 1997 to design,
develop and market three-dimensional ("3D") music
oriented Internet sites on the World Wide Web. These
web sites are anticipated to utilize 3D technologies
developed by Predecessor.
Basis of Presentation The 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-7
<PAGE>
Worlds Inc.
(a development stage enterprise)
Summary of Accounting Policies
- - --------------------------------------------------------------------------------
Fair Value of Financial The carrying amounts of financial instruments,
Instruments including cash and short-term 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 Cash and cash equivalents are comprised of highly
Equivalents liquid money market instruments, which have original
maturities of three months or less at the time of
purchase.
Property and 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-8
<PAGE>
Worlds Inc.
(a development stage enterprise)
Summary of Accounting Policies
- - --------------------------------------------------------------------------------
Software Development In accordance with the provisions of Statement of
Costs 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 Research and development costs are expensed as
Development Costs incurred.
Income Taxes The Company uses the liability method of accounting
for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Deferred income tax
assets and liabilities are recognized based on the
temporary differences between the financial statement
and income tax bases of assets, liabilities and
carryforwards using enacted tax rates. Valuation
allowances are established, when necessary, to reduce
deferred tax assets to the amount expected to be
realized.
F-9
<PAGE>
Worlds Inc.
(a development stage enterprise)
Summary of Accounting Policies
- - --------------------------------------------------------------------------------
Loss Per Share In 1997, the FASB's SFAS No. 128, "Earnings per
Share," replaced the calculation of primary and fully
diluted earnings (loss) per share with basic and
diluted earnings (loss) per share. Unlike primary
earnings per share, basic earnings per share excludes
any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is
very similar to the previously reported fully diluted
earnings per share. The loss per share amounts have
been presented to conform to SFAS No. 128
requirements. The common stock equivalents which would
arise from the exercise of stock options and warrants
are excluded from calculation of diluted loss per
share since their effect is anti-dilutive. Therefore,
the amounts reported for basic and diluted loss per
share are the same.
Stock-Based Compensation In October 1995, the FASB issued SFAS No. 123,
"Accounting for Stock-Based Compensation" ("SFAS No.
123"). SFAS No. 123 encourages entities to adopt the
fair value method in place of the provisions of
Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB No.
25"), for all arrangements under which employees
receive shares of stock or other equity instruments of
the employer or the employer incurs liabilities to
employees in amounts based on the price of its stock.
The Company has not adopted the fair value method
encouraged by SFAS No. 123 and will continue to
account for such transactions in accordance with APB
No. 25.
Comprehensive Income Effective January 1, 1998, the Company adopted SFAS
No. 130, "Reporting Comprehensive Income", which
establishes standards for reporting and display of
comprehensive income, its components and accumulated
balances. Comprehensive income is defined to include
all changes in equity except those resulting from
investments by owners and distributions to owners.
Adoption of the standard has had no effect on
financial statement disclosures since there were no
items of comprehensive income during the periods
presented.
F-10
<PAGE>
Worlds Inc.
(a development stage enterprise)
Notes to Financial Statements
- - --------------------------------------------------------------------------------
1. Going Concern As discussed in Note 3, the Company completed a
private placement raising gross proceeds of
$4,415,000, consummated a merger agreement with a
development stage enterprise, Predecessor, and
completed a public offering in June 1998 raising gross
proceeds of $1,832,000. Predecessor had not generated
significant revenues from operations and had an
accumulated deficit from inception to the Merger Date
of $21,236,139 and a capital deficit of $4,135,538.
The acquisition of Predecessor by the Company was
accounted for as a purchase. Accordingly, $6,135,538,
the portion of the purchase allocable to in-process
research and development projects that had not reached
technological feasibility and had no probable
alternative future uses, was expensed by the Company
at the date of merger.
The accompanying financial statements have been
prepared assuming that the Company will continue as a
going concern. The Company is in the development stage
and has had minimal revenues from operations since the
series of merger transactions. The Company anticipates
that it currently has only a portion of the funds
necessary to complete product development and
commercialization. There can be no assurance that the
Company will be able to obtain the substantial
additional capital resources necessary to pursue its
business plan or that any assumptions relating to its
business plan will prove to be accurate. The Company
is pursuing sources of additional financing and there
can be no assurance that any such financing will be
available to the Company on commercially reasonable
terms, or at all. Any inability to obtain additional
financing will have a material adverse effect on the
Company, including possibly requiring the Company to
significantly curtail or cease operations.
These factors raise substantial doubt about the
ability of the Company to continue as a going concern.
The financial statements do not include any
adjustments that might result from the outcome of this
uncertainty.
F-11
<PAGE>
Worlds Inc.
(a development stage enterprise)
Notes to Financial Statements
- - --------------------------------------------------------------------------------
2. The Mergers On December 3, 1997, Predecessor was merged with and
into WAC in a series of related transactions which
included a simultaneous capital transaction between
the Company and Academic (the "Mergers") and a private
offering of WAC's securities (the "Private
Placement"). In both the merger with Predecessor and
the capital transaction with Academic, WAC was the
acquiror for accounting purposes.
The acquisition of Predecessor was accounted for as a
purchase whereby all of the common and preferred stock
of Predecessor were exchanged for 1,999,996 shares of
WAC. The shares issued to Predecessor common and
preferred shareholders were valued at $1.00 per share
which represented the share value in the private
placement that occurred during this time period (see
Note 3); a purchase price of approximately $2,000,000.
The exchange ratio was determined after extensive
negotiation between management of Predecessor and WAC.
Predecessor was a development stage company, had not
generated significant revenues from operations and had
an accumulated deficit from inception to December 3,
1997 of $21,236,139 and a capital deficit of
$4,135,538. The assets acquired of Predecessor (cash,
prepaid expenses, property and equipment) were
recorded at fair market value which approximated book
value at December 3, 1997, and, as discussed in Note 1
above, since technological feasibility of the various
Predecessor technologies acquired had not been
established, the excess purchase 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-12
<PAGE>
Worlds Inc.
(a development stage enterprise)
Notes to Financial Statements
- - --------------------------------------------------------------------------------
3. Private Placement The Private Placement called for WAC to offer for sale
and Public a maximum of 50 units (57-1/2 with the over-
Offering 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 On June 25, 1998, the Company entered into an
Plan of Merger 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-13
<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, A summary of property, equipment and software
Equipment and development at December 31, 1997 and 1998 is as
Software Development follows:
<TABLE>
<CAPTION>
December 31, 1997 1998
---------------------------------- ---------------------- ----------------------
<S> <C> <C>
Computers, software and equipment $650,557 $426,796
Software development costs - 160,000
---------------------------------- ---------------------- ----------------------
Total 650,557 586,796
Less: Accumulated depreciation
and amortization 441,105 372,550
---------------------------------- ---------------------- ----------------------
$209,452 $214,246
================================== ====================== ======================
</TABLE>
F-14
<PAGE>
Worlds Inc.
(a development stage enterprise)
Notes to Financial Statements
- - --------------------------------------------------------------------------------
6. Notes Payable Long-term debt at December 31, 1997 and 1998 consists
of the following:
<TABLE>
<CAPTION>
December 31, 1997 1998
--------------------------------------------- ---------------- -----------------
<S> <C> <C>
Convertible promissory notes payable -
stockholders, maturing December 3, 2000,
plus interest at 7.5% compounded
annually. The notes are convertible into
shares of the Company's common stock as
follows: from December 4, 1998 to
December 3, 1999 at $5.00 per share and
after December 4, 1999 at $5.625 per
share. (Stockholders granted forgiveness
of accrued interest of $106,000 on this
debt which had previously been assumed as
an accrued expense in the merger - see
(a) below). $1,685,000 $1,685,000
Note payable - technology obligation
(noninterest bearing), payable in monthly
installments of $3,333 until November 2001 186,666 186,666
Note payable - stockholder, payable in
monthly installments of $6,944 until
December 2000, plus interest at 8%.
(Stockholder granted forgiveness of
$115,000 which had previously been
assumed as an account payable in the
merger - see (a) below). 250,000 250,000
Note payable - investment banker, payable
in monthly installments of $2,000 until
September 1998, with a final payment of
$100,000, plus interest at 8%. 116,000 -
--------------------------------------------- ---------------- -----------------
2,237,666 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-15
<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-16
<PAGE>
Worlds Inc.
(a development stage enterprise)
Notes to Financial Statements
- - --------------------------------------------------------------------------------
8. Stockholders' Common Stock Split
Deficit
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-17
<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:
<TABLE>
<CAPTION>
Period from
inception to Year ended
December 31, 1997 December 31, 1998
---------------------------------- ---------------------- ----------------------
<S> <C> <C>
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)
---------------------------------- ---------------------- ----------------------
</TABLE>
F-18
<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:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1998
------------------------ ------------------------
Weighted Weighted
average average
exercise exercise
Shares price Shares price
------------------------------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
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
year-end 13,750 $.50 153,805 $ .78
------------------------------- ------------ ------------ ----------- ------------
Weighted average fair value
of options granted during
the year $ - $ -
------------------------------- ------------ ------------ ----------- ------------
</TABLE>
The following table summarizes information about stock
options outstanding at December 31, 1998.
<TABLE>
<CAPTION>
Options outstanding Options exercisable
------------------------------------- ------------------------
Number Weighted Number
outstanding average Weighted exercisable Weighted
at remaining average at average
Range of December 31, contractual exercise December 31, exercise
exercise prices 1998 life price 1998 price
---------------- --------------- ------------ ----------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
$.50 to $1.00 794,000 9.1 yrs $.90 153,805 $.78
---------------- --------------- ------------ ----------- ------------- ----------
</TABLE>
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-19
<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 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 During December 1998, management determined that
from Reversal of certain predecessor liabilities assumed at the date of
Certain the Merger with were no longer Predecessor owed. During
Predecessor the fourth quarter of 1998, accounts payable
Liabilities ($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-20
<PAGE>
Worlds Inc.
(a development stage enterprise)
Notes to Financial Statements
- - --------------------------------------------------------------------------------
12. Loss Per Share The following table sets forth the computation of basic
and diluted loss per share:
<TABLE>
<CAPTION>
Period from
April 8, 1997
(inception) to Year ended
December 31, 1997 December 31, 1998
----------------------------------------- ------------------- ------------------
<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
loss per share (6,686,471) (2,648,681)
Effect of dilutive securities:
Convertible debt - -
----------------------------------------- ------------------- ------------------
Net loss, numerator for diluted
loss per share $(6,686,471) $ (2,648,681)
========================================= =================== ==================
Denominator:
Denominator for basic loss per share
- weighted average common shares 9,336,569 17,170,288
----------------------------------------- ------------------- ------------------
Effect of dilutive securities:
Convertible debt - -
Stock options and warrants 33,343 79,724
----------------------------------------- ------------------- ------------------
Dilutive potential common shares 33,343 79,724
----------------------------------------- ------------------- ------------------
Denominator for diluted loss per
share - adjusted weighted average
common shares and assumed
conversions 9,369,912 17,250,012
========================================= =================== ==================
Basic loss per share $ (.72) $ (.15)
----------------------------------------- ------------------- ------------------
Diluted loss per share - as calculated $ (.71) $ (.15)
----------------------------------------- ------------------- ------------------
Diluted loss per share - as disclosed
due to anti-dilutive effect of stock
options $ (.72) $ (.15)
----------------------------------------- ------------------- ------------------
</TABLE>
F-21
<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 Interest paid was approximately $1,600 and $1,000 for
Cash Flow the period ended December 31, 1997 and the year ended
Information 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-22
<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-23
<PAGE>
Worlds Inc. - Predecessor
(a development stage enterprise)
Contents
- - --------------------------------------------------------------------------------
Worlds Inc. ("Predecessor") is considered a predecessor company and the
information disclosed herein is as of and prior to the date of merger
with Worlds Inc. (formerly Worlds Acquisition Corp.) ("WAC") on
December 3, 1997.
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-24
<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-25
<PAGE>
Worlds Inc. - Predecessor
(a development stage enterprise)
Balance Sheet
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 3, 1997(a)
---------------------------------------------------------------------------------------------- ----------------------
<S> <C>
Assets
Current:
Cash and cash equivalents $ 56,345
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,
1,801,533 shares issued and outstanding 180
Preferred stock, $.0001 par value; designated as Series B; 2,300,000 shares authorized,
1,022,726 shares issued and outstanding 102
Common stock, $.0001 par value; 15,000,000 shares authorized; 5,535,646 shares issued and
outstanding 553
Deferred compensation related to stock options (5,337)
Additional paid-in capital 17,105,103
Deficit accumulated during development stage (21,236,139)
---------------------------------------------------------------------------------------------- ----------------------
Total stockholders' deficit (4,135,538)
---------------------------------------------------------------------------------------------- ----------------------
$ 450,011
============================================================================================== ======================
</TABLE>
--------------
(a) Date of merger with Worlds Inc. (formerly Worlds Acquisition Corp.)
- - --------------------------------------------------------------------------------
See accompanying summary of accounting policies
and notes to financial statements.
F-26
<PAGE>
Worlds Inc. - Predecessor
(a development stage enterprise)
Statements of Operations
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from
April 26, 1994
Year ended Period ended (inception) to
December 31, 1996 December 3, 1997(a) December 3, 1997(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 equipment (83,195) 4,070 (79,125)
Income from sale of technology (Note 7) - 260,100 260,100
------------------------------------------------------ -------------------- -------------------- --------------------
Loss before income taxes and extraordinary
item (10,071,954) (2,669,505) (21,505,424)
Income taxes (Note 8) (115,000) (5,000) (120,000)
------------------------------------------------------ -------------------- -------------------- --------------------
Loss before extraordinary item (10,186,954) (2,674,505) (21,625,424)
Extraordinary item - gain on debt settlement (Note 3) - 389,285 389,285
------------------------------------------------------ -------------------- -------------------- --------------------
Net loss $(10,186,954) $(2,285,220) $(21,236,139)
====================================================== ==================== ==================== ====================
</TABLE>
--------------
(a) Date of merger with Worlds Inc. (formerly Worlds Acquisition Corp.)
-------------------------------------------------------------------------------
See accompanying summary of accounting policies
and notes to financial statements.
F-27
<PAGE>
Worlds Inc. - Predecessor
(a development stage enterprise)
Statements of Stockholders'Deficit
<TABLE>
<CAPTION>
Preferred stock Deferred
---------------------------------- compen-
Common stock Series A Series B sation Additional Total
----------------- ---------------- ----------------- on stock paid-in Accumulated stockholders'
Shares Amount Shares Amount Shares Amount options capital deficit deficit
--------------------------- --------- ------- --------- ------ --------- -------- --------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996 5,274,260 $527 1,801,533 $180 - $ - $(45,647) $ 8,385,184 $ (8,763,965) $ (423,721)
Issuance of common stock 261,386 26 - - - - - 112,795 - 112,821
Issuance of Series B
preferred stock at $8.80
per share, net of
issuance costs of
$381,000 - - - - 1,022,726 102 - 8,618,887 - 8,618,989
Compensation related to
stock options - - - - - - 24,202 (9,394) - 14,808
Net loss for the year - - - - - - - - (10,186,954) (10,186,954)
--------------------------- --------- ------- --------- ------ --------- -------- --------- ------------ ------------- ------------
Balance, December 31, 1996 5,535,646 553 1,801,533 180 1,022,726 102 (21,445) 17,107,472 (18,950,919) (1,864,057)
Compensation related to
stock options - - - - - - 16,108 (2,369) - 13,739
Net loss for the period
ended December 3, 1997 - - - - - - - - (2,285,220) (2,285,220)
--------------------------- --------- ------- --------- ------ --------- -------- --------- ------------ ------------- ------------
Balance, December 3, 1997 5,535,646 $553 1,801,533 $180 1,022,726 $102 $ (5,337) $17,105,103 $(21,236,139) $(4,135,538)
=========================== ========= ======= ========= ====== ========= ======== ========= ============ ============= ============
</TABLE>
See accompanying summary of accounting policies
and notes to financial statements.
F-28
<PAGE>
Worlds Inc. - Predecessor
(a development stage enterprise)
Statements of Cash Flows
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from
April 26, 1994
Year ended Period ended (inception) to
December 31, December 3, December 3,
1996 1997(a) 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 issuance
costs 8,618,989 - 16,163,766
Advance from Worlds Inc. (formerly Worlds Acquisition Corp.) - 561,397 561,397
Payments on capital lease (56,724) - (116,018)
Payments on note payable (110,000) (40,000) (190,000)
Proceeds from note payable 1,000,000 650,000 1,650,000
---------------------------------------------------------------- ----------------- ---------------- -----------------
Net cash provided by financing activities 9,506,561 1,171,397 18,186,002
---------------------------------------------------------------- ----------------- ---------------- -----------------
Net increase (decrease) in cash and cash equivalents (218,590) (838,347) 56,345
Cash and cash equivalents, beginning of period 1,113,282 894,692 -
---------------------------------------------------------------- ----------------- ---------------- -----------------
Cash and cash equivalents, end of period $ 894,692 $ 56,345 $ 56,345
================================================================ ================= ================ =================
Supplemental disclosures of cash flow information:
Interest paid $ 9,234 $ - $ 23,916
Income taxes paid 5,064 556 5,620
---------------------------------------------------------------- ----------------- ---------------- -----------------
</TABLE>
Disclosures of noncash financing and investing activities:
In 1997, as part of the restructuring of operations, the Predecessor
disposed of property and equipment with a net book value of $252,180,
which included $138,439 of equipment under capital leases. The related
capital lease obligations, totaling $123,013, were assumed by the
lessor and a party which acquired certain assets used in the
Predecessor's prior Seattle operations. The agreement with this party
also resulted in a reduction of trade payables totaling $87,226.
-------------------------------------------------------------------------------
--------------
(a) Date of merger with Worlds Inc. (formerly Worlds Acquisition Corp.)
-------------------------------------------------------------------------------
See accompanying summary of accounting policies
and notes to financial statements.
F-29
<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 Due to recurring losses, insufficient revenue, a
Operations working capital deficit and a net stockholders'
deficit, the Predecessor's management made significant
reductions in operations in February 1997 that are
reflected in the Predecessor's financial statements for
the period ended December 3, 1997. In March 1997, the
Predecessor engaged an outside management firm to
assist with the downsizing of operations which has
included a major reduction in employees and a
consolidation of all operations to one location in San
Francisco. The Predecessor decided in December 1996 to
close its Seattle operations resulting in a $110,000
charge to operations for the year ended December 31,
1996.
F-30
<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 Cash and cash equivalents are comprised of highly
Equivalents liquid money market instruments, which have original
maturities of three months or less at the time of
purchase.
Property Property and equipment are stated at cost. Depreciation
and Equipment is calculated using the straight-line method over the
estimated useful lives of the assets, which range from
two to five years. Maintenance and repairs are expensed
as incurred and improvements are capitalized.
Revenue Recognition Revenue from technology development and licensing
contracts is recognized upon the attainment of
contractual milestones (approximating the
percentage-of-completion method). Cash received in
advance of revenues earned is recorded as deferred
revenue.
Software Development Software development costs are charged to expense when
Costs incurred until the technological feasibility of the
product has been established. After technological
feasibility has been established, any additional costs
would be capitalizable in accordance with SFAS No. 86.
No such costs have been capitalized to date.
Research and Research and development costs are expensed as
Development Costs incurred.
F-31
<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 The Predecessor derives revenues from corporate
Risk customers in a variety of industries. For the year
ended December 31, 1996, five customers accounted for
74% of the Predecessor's revenues. For the period ended
December 3, 1997, no individual customer accounted for
more than 10% of revenues.
New Accounting Effective January 1, 1996, the Predecessor adopted the
Standards 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-32
<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-33
<PAGE>
Worlds Inc. - Predecessor
(a development stage enterprise)
Notes to Financial Statements
- - --------------------------------------------------------------------------------
2. Property and A summary of property and equipment as of December 3,
Equipment 1997 is as follows:
<TABLE>
<CAPTION>
December 3, 1997
--------------------------------------------------------- ----------------------
<S> <C>
Computers, software and equipment $650,557
Less: Accumulated depreciation and amortization 424,782
--------------------------------------------------------- ----------------------
$225,775
--------------------------------------------------------- ----------------------
</TABLE>
<TABLE>
<CAPTION>
3. Notes Payable December 3, 1997
--------------------------------------------------------- ----------------------
<S> <C>
Bridge loan payable to stockholders $1,650,000
Technology obligation 186,667
--------------------------------------------------------- ----------------------
1,836,667
Less: Current portion 70,000
--------------------------------------------------------- ----------------------
$1,766,667
--------------------------------------------------------- ----------------------
</TABLE>
On December 13, 1996, the Predecessor received a Bridge
Loan totaling $1,000,000 from two preferred
stockholders. Additional advances of $650,000 were made
under the Bridge Loan during the eleven-month period
ended December 3, 1997 ($500,000 in January 1997 and
$50,000 in June 1997 were received from the same
preferred stockholders; and $100,000 was received in
May 1997 from an affiliated person of a stockholder).
These advances under the Bridge Loan were granted in
return for convertible promissory notes and options at
$0.88 per share (Predecessor management's estimate of
fair value of common stock as of December 1996) on
500,000 shares of the Predecessor's common stock held
by a founder and officer of the Predecessor as of
December 31, 1996 (825,000 shares at December 3, 1997).
Such options (which had a nominal value at date of
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
F-34
<PAGE>
Worlds Inc. - Predecessor
(a development stage enterprise)
Notes to Financial Statements
- - --------------------------------------------------------------------------------
December 3, 1997 when the Predecessor consummated a
merger (Note 10). The noteholders had the option to
convert the outstanding principal balance and unpaid
accrued interest into Predecessor's equity securities
at the closing of Predecessor's next round of equity
financing, at the price per share of such equity
securities. The loan bears interest at a rate of 9%
from the date of the advances. Accrued interest is
approximately $141,000 at December 3, 1997.
In June 1997, the Predecessor renegotiated the terms of
the Bridge Loan to convert it to a three year loan
bearing interest at 7.5% and the option to convert into
common stock based on the conversion price of $4.375,
$5.00 and $5.625 in each of the three years following
consummation of the merger of the Predecessor into
Worlds Inc. (formerly Worlds Acquisition Corp) (see
Note 10). The loan will not be payable until the
earlier of maturity or conversion. The holders of the
loan will also receive warrants to acquire an aggregate
of 100,000 shares of common stock at an exercise price
equal to $5.00 per share. There was no conversion
benefit associated with the convertible promissory
notes at date of issuance nor at the date of
renegotiation.
On January 3, 1995, the Predecessor purchased
technology for $750,000 under a license agreement with
Kinetic Effects, Inc. ("Kinetic") and Simon Fraser
University of British Columbia ("SFU"). At December 31,
1996, the Predecessor had an obligation to make monthly
payments of $10,000 ($6,667 to SFU and $3,333 to
Kinetic) through November 2000. The purchased
technology was charged to research and development
expense in 1995. This obligation was renegotiated
downward in August 1997 to $186,667, with monthly
payments to Kinetic of $3,333 over 56 months. Kinetic
is an entity affiliated with a prior officer and
current shareholder of the Predecessor. In September
1997, the Predecessor renegotiated the terms with SFU.
In exchange for the removal of exclusivity rights on
the technology, $373,333 of the debt was forgiven and
has been included within the extraordinary item of
$389,285 in the statement of operations for the period
ended December 3, 1997.
F-35
<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 The Predecessor has no lease commitments as of December
Commitments 3, 1997.
Rent expense for office space, computers and office
equipment was approximately $312,000 for the period
ended December 3, 1997 and $1,487,000 for the year
ended December 31, 1996.
5. Stockholders' Preferred Stock
Deficit
Each share of Series A and Series B preferred stock is
convertible, at the option of the holder, into fully
paid shares of common stock. The conversion rate is
based upon the original purchase price, subject to
adjustments for stock dividends, stock splits, and
capital reorganizations and price based 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-36
<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-37
<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-38
<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:
<TABLE>
<CAPTION>
Options outstanding Weighted
Options -------------------------- average
available Price per price per
for grant Shares share share
--------------------------- ------------- ------------- ------------ -----------
<S> <C> <C> <C> <C>
Balance, January 1, 1996 668,245 969,902 $.01-.43 $.379
Options authorized 1,000,000 - - -
Options granted (1,171,000) 1,171,000 .43-.88 .82
Option exercised - (261,386) .20-.88 .43
Options canceled 489,704 (489,704) .20-.88 .55
--------------------------- ------------- ------------- ------------ -----------
Balance, December 31, 1996 986,949 1,389,812 .20-.88 .68
Options granted - - - -
Option exercised - - - -
Options canceled - - - -
--------------------------- ------------- ------------- ------------ -----------
Balance, December 31, 1997 986,949 1,389,812 $.20-.88 $ .68
--------------------------- ------------- ------------- ------------ -----------
</TABLE>
As a result of the mergers described in Note 10, the
Plan and all options thereunder were terminated and a
new stock option plan, as described in Note 10, was
adopted.
F-39
<PAGE>
Worlds Inc. - Predecessor
(a development stage enterprise)
Notes to Financial Statements
- - --------------------------------------------------------------------------------
6. Related Party For the year ended December 31, 1996, $1,276,780 of
Revenue revenues from technology development contracts were
attributable to three preferred stockholders of
Predecessor. There was no related party revenue for the
period ended December 3, 1997.
7. Income from Sale In March 1997, Predecessor sold certain of its
of Technology internally developed computersoftware 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-40
<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:
<TABLE>
<CAPTION>
Year ended Period ended
December 31,1996 December 3, 1997
----------------------------------------- ------------------- ------------------
<S> <C> <C>
Foreign income taxes withheld (a) $105,000 $ -
State income taxes - current 10,000 5,000
----------------------------------------- ------------------- ------------------
$115,000 $5,000
----------------------------------------- ------------------- ------------------
</TABLE>
--------------
(a) Foreign income taxes withheld relates to two
preferred stockholders located in Japan.
The Predecessor has $156,000 in research credits
available to reduce future Federal income taxes which
expire between the years 2009 and 2011. Due to the
merger, this carryforward will be substantially
reduced.
9. Contingencies In 1996, the Predecessor incurred lawsuit settlement
expenses 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-41
<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-42
<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-43
<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-44
<PAGE>
Worlds Inc.
(a development stage
enterprise)
================================================================================
Financial Statements
Periods Ended June 30, 1998 and 1999
F-45
<PAGE>
Worlds Inc.
(a development stage enterprise)
Contents
================================================================================
Unaudited financial statements:
Balance sheets F-47
Statements of operations F-48
Statement of stockholders' equity (deficit) F-49
Statements of cash flows F-50
Summary of accounting policies F-51 - F-55
Notes to financial statements F-56 - F-59
F-46
<PAGE>
Worlds Inc.
(a development stage enterprise)
Balance Sheets
================================================================================
<TABLE>
<CAPTION>
December 31, 1998 June 30, 1999
- - ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets (unaudited)
Current:
Cash and cash equivalents $ 1,581,764 $ 2,537,617
Accounts receivable - 19,918
Prepaid expenses and other current assets 53,486 42,512
Inventory 58,516 87,052
- - ------------------------------------------------------------------------------------------------------------
Total current assets 1,693,766 2,687,099
Property, equipment and software development costs, net of
accumulated depreciation and amortization 214,246 562,132
Other assets (Note 5) - 503,095
- - ------------------------------------------------------------------------------------------------------------
$ 1,908,012 $ 3,752,326
============================================================================================================
Liabilities and Stockholders' Equity (Deficit)
Current:
Accounts payable $ 319,906 $ 468,488
Accrued expenses 446,333 769,832
Current maturities of notes payable 246,648 269,148
- - ------------------------------------------------------------------------------------------------------------
Total current liabilities 1,012,887 1,507,468
Long-term portion, notes payable 1,875,018 1,852,518
- - ------------------------------------------------------------------------------------------------------------
Total liabilities 2,887,905 3,359,986
- - ------------------------------------------------------------------------------------------------------------
Contingencies (Note 4)
Stockholders' equity (deficit) (Notes 2 and 3):
Common stock, $.001 par value - shares authorized
30,000,000; outstanding 18,031,996 and 18,815,746 18,032 18,816
Additional paid-in capital 8,401,970 11,227,300
Deficit accumulated during the development stage (9,335,152) (10,789,033)
- - ------------------------------------------------------------------------------------------------------------
(915,150) 457,083
Treasury stock, at cost, 113,465 and 1,613,465 shares (64,743) (64,743)
- - ------------------------------------------------------------------------------------------------------------
Total stockholders' equity (deficit) (979,893) 392,340
- - ------------------------------------------------------------------------------------------------------------
$ 1,908,012 $ 3,752,326
============================================================================================================
See accompanying summary of accounting policies
and notes to financial statements.
</TABLE>
F-47
<PAGE>
Worlds Inc.
(a development stage enterprise)
Statements of Operations (Unaudited)
================================================================================
<TABLE>
<CAPTION>
Cumulative,
period from
April 8, 1997
(inception) to
Three months ended June 30, Six months ended June 30, June 30,
---------------------------- --------------------------- ------------
1998 1999 1998 1999 1999(a)
- - ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net revenues $ 12,130 $ 57,748 $ 16,132 $ 92,925 $ 123,455
Costs and expenses:
Cost of revenues (22,500) (48,891) (25,101) (70,355) (99,634)
Selling, general and administrative (759,185) (809,680) (1,307,525) (1,425,495) (4,751,228)
Research and development (302,516) -- (534,428) -- (992,932)
Acquired research and development -- -- -- -- (6,135,538)
- - ----------------------------------------------------------------------------------------------------------------------------------
Operating loss (1,072,071) (800,823) (1,850,922) (1,402,925) (11,855,877)
Other income (expenses):
Gain resulting from reversal of certain
predecessor liabilities -- -- -- -- 810,140
Interest income 35,054 5,180 76,992 17,966 155,565
Interest expense (35,656) (30,000) (72,112) (68,922) (197,184)
- - ----------------------------------------------------------------------------------------------------------------------------------
Loss before extraordinary item (1,072,673) (825,643) (1,846,042) (1,453,881) (11,087,356)
Extraordinary item - gain on debt settlement -- -- 151,654 -- 298,323
- - ----------------------------------------------------------------------------------------------------------------------------------
Net loss $ (1,072,673) $ (825,643) $ (1,694,388) $ (1,453,881) $(10,789,033)
==================================================================================================================================
Loss per share (basic and diluted):
Loss before extraordinary item $ (.06) $ (.05) $ (.11) $ (.08)
Extraordinary item -- -- .01 --
- - ------------------------------------------------------------------------------------------------------------------
Net loss per share (basic and diluted) $ (.06) $ (.05) $ (.10) $ (.08)
==================================================================================================================
Weighted average common shares outstanding:
Basic and diluted 16,716,546 16,723,298 16,434,339 17,304,288
==================================================================================================================
- - --------------
(a) Includes the results of Predecessor and Academic (from December 4, 1997)
which were merged into the Company on December 3, 1997.
===================================================================================================================================
See accompanying summary of accounting policies
and notes to financial statements.
</TABLE>
F-48
<PAGE>
<TABLE>
<CAPTION>
Worlds Inc.
(a development stage enterprise)
Statements of Stockholders' Equity (Deficit)
===============================================================================================================================
Period from April 8, 1997 (inception) to June 30, 1999
- - -------------------------------------------------------------------------------------------------------------------------------
Deficit
accumulated Total
Common stock Additional during the stockholders'
---------------------- paid-in development Treasury equity
Shares Amount capital stage stock (deficit)
- - -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1998 16,119,996 $16,120 $ 6,661,582 $ (6,686,471) $ -- $ (8,769)
Sale of shares in private offering
memorandum (January 1998) 30,000 30 26,470 -- -- 26,500
Sale of shares in public offering
of common stock, net (June 1998) 1,832,000 1,832 1,713,968 -- -- 1,715,800
Conversion of 113,465 shares to
certain stockholders (June 1998) -- -- -- -- (64,743) (64,743)
Conversion of employee stock
options into shares (October 1998) 50,000 50 (50) -- -- --
Net loss for the year ended
December 31, 1998 -- -- -- (2,648,681) -- (2,648,681)
- - -------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 18,031,996 18,032 8,401,970 (9,335,152) (64,743) (979,893)
Contribution of 1,500,000 shares by
founders to treasury (April 1999) -- -- -- -- -- --
Exercise of stock options
(April 1999) 75,000 75 74,925 -- -- 75,000
Issuance of shares for content
supply agreement (June 1999) 93,750 94 374,906 -- -- 375,000
Sale of shares in private offering
memorandum (June 1999) 615,000 615 2,375,499 -- -- 2,376,114
Net loss for the six months ended
June 30, 1999 (unaudited) -- -- -- (1,453,881) -- (1,453,881)
- - -------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1999 (unaudited) 18,815,746 $18,816 $11,227,300 $(10,789,033) $(64,743) $ 392,340
===============================================================================================================================
See accompanying summary of accounting policies
and notes to financial statements.
</TABLE>
F-49
<PAGE>
Worlds Inc.
(a development stage enterprise)
Statements of Cash Flows (Unaudited)
===============================================================================
<TABLE>
<CAPTION>
Cumulative
period from
Six months ended June 30, April 8, 1997
-------------------------------- (inception) to
1998 1999 June 30, 1999
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (1,694,388) $(1,453,881) $(10,789,033)
------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net loss to net cash used in
operating activities:
Loss on disposal of fixed assets -- -- 54,041
Depreciation and amortization 93,583 105,114 251,189
Gain resulting from reversal of certain
predecessor liabilities -- -- (810,140)
Gain on debt settlement (151,654) -- (298,323)
Acquired research and development -- -- 6,135,538
Changes in operating assets and liabilities, net
of effects from merger with Predecessor and
Academic:
Trade receivable 538 (19,918) (19,918)
Inventory -- (28,536) (87,052)
Prepaid expenses and other assets 39,888 (117,121) (2,716)
Accounts payable and accrued expenses (71,395) 472,081 838,271
------------------------------------------------------------------------------------------------------------------
Total adjustments (89,040) 411,620 6,060,890
------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (1,783,428) (1,042,261) (4,728,143)
------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Acquisition of property and equipment -- (14,000) (42,587)
Additions to software development costs -- (439,000) (599,000)
------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities -- (453,000) (641,587)
------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from sale of common stock to founding
stockholders -- -- 204,000
Proceeds from sale of common stock in private offering
memorandum 26,500 2,376,114 6,097,290
Proceeds from exercise of options -- 75,000 75,000
Proceeds from sale of common stock in public offering 1,715,800 -- 1,715,800
Payment of conversion price of shares to certain
stockholders (64,743) -- (64,743)
Payments on note payable (16,440) -- (120,000)
------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,661,117 2,451,114 7,907,347
------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (122,311) 955,853 2,537,617
Cash and cash equivalents, beginning of period 3,541,829 1,581,764 --
------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 3,419,518 $ 2,537,617 $ 2,537,617
==================================================================================================================
See accompanying summary of accounting policies
and notes to financial statements.
</TABLE>
F-50
<PAGE>
Worlds Inc.
(a development stage enterprise)
Summary of Accounting Policies
================================================================================
Definitions The Company is the resulting entity of two
contemporaneous mergers (the "Mergers") of Worlds
Inc., a Delaware corporation ("Predecessor"), with
and into Worlds Acquisition Corp., a Delaware
corporation ("WAC"), and WAC with and into Academic
Computer Systems, Inc., a New Jersey corporation
("Academic"), which changed its name to Worlds Inc.
(see Note 2). While Academic was the legal entity
that survived the mergers, WAC was the accounting
acquiror in both mergers. The Company's fiscal
year-end is December 31.
The term the "Company," as used herein, refers to the
consolidated entity resulting from the two
contemporaneous mergers, as well the pre-merger
Predecessor, WAC and Academic; however, Predecessor,
WAC and Academic are hereinafter sometimes referred
to separately as the context requires.
Nature of Business WAC was incorporated on April 8, 1997 to
design, develop and market three-dimensional ("3D")
music oriented Internet sites on the World Wide Web.
These web sites are anticipated to utilize 3D
technologies developed by Predecessor.
Basis of Presentation The accompanying financial statements are unaudited;
however, in the opinion of management, all
adjustments necessary for a fair statement of
financial position and results for the stated periods
have been included. These adjustments are of a normal
recurring nature. Selected information and footnote
disclosures normally included in financial statements
prepared in accordance with generally accepted
accounting principles have been condensed or omitted.
Results for interim periods are not necessarily
indicative of the results to be expected for an
entire fiscal year. It is suggested that these
condensed financial statements be read in conjunction
with the audited financial statements and
accompanying notes for the Company for the year ended
December 31, 1998 and for the Predecessor for the
period ended December 3, 1997.
F-51
<PAGE>
Worlds Inc.
(a development stage enterprise)
Summary of Accounting Policies
================================================================================
The financial statements include the results of
Predecessor and Academic from December 4, 1997, the
date of the Mergers (the "Merger Date").
The financial statements have been prepared in
accordance with the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 7,
"Accounting, and Reporting by Development Stage
Enterprises," which requires development stage
enterprises to employ the same accounting principles
as operating companies.
Fair Value of Financial The carrying amounts of financial instruments,
Instruments including cash and short-term debt, approximated fair
value as of March 31, 1999 because of the relatively
short maturity of the instruments. The carrying value
of long-term debt, including the current portion,
approximates fair value as of June 30 1999, 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 Cash and cash equivalents are comprised of highly
Equivalents liquid money market instruments, which have original
maturities of three months or less at the time of
purchase.
Property and Equipment Property and equipment are stated at cost.
Depreciation is calculated using the straight-line
method over the estimated useful lives of the assets,
which range from two to five years.
F-52
<PAGE>
Worlds Inc.
(a development stage enterprise)
Summary of Accounting Policies
================================================================================
Revenue Recognition Revenue from technology development and licensing
contracts is recognized upon the attainment of
contractual milestones (approximating the
percentage-of-completion method). Cash received in
advance of revenues earned is recorded as deferred
revenue.
Inventory Inventory consists of merchandise held for resale and
is valued at the lower of cost or market on a
first-in, first-out (FIFO) basis.
Software Development In accordance with the provisions of SFAS No. 86,
Costs "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. During the six months ended June 30, 1999, a
further $439,000 was capitalized in this regard.
Amortization of the costs capitalized commenced in
the first quarter of 1999, 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 Research and development costs are expensed as
Development Costs incurred.
F-53
<PAGE>
Worlds Inc.
(a development stage enterprise)
Summary of Accounting Policies
================================================================================
Income Taxes The Company uses the liability method of accounting
for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Deferred income tax
assets and liabilities are recognized based on the
temporary differences between the financial statement
and income tax bases of assets, liabilities and
carryforwards using enacted tax rates. Valuation
allowances are established, when necessary, to reduce
deferred tax assets to the amount expected to be
realized.
Loss Per Share In 1997, the Financial Accounting Standards Board's
("FASB") 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 In October 1995, the FASB issued SFAS No. 123,
Compensation "Accounting for Stock-Based Compensation". 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", for all arrangements
under which employees receive shares of stock or
other equity instruments of the employer or the
employer incurs liabilities to employees in amounts
based on the price of its stock. The Company has not
adopted the fair value method encouraged by SFAS No.
123 and will continue to account for such
transactions in accordance with APB No. 25.
F-54
<PAGE>
Worlds Inc.
(a development stage enterprise)
Summary of Accounting Policies
================================================================================
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-55
<PAGE>
Worlds Inc. - Predecessor
(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-56
<PAGE>
Worlds Inc. - Predecessor
(a development stage enterprise)
Notes to Financial Statements
================================================================================
2. The Mergers On December 3, 1997, Predecessor was merged with and
into WAC in a series of related transactions which
included a simultaneous capital transaction between
the Company and Academic (the "Mergers") and a
private offering of WAC's securities (the "Private
Placement"). In both the merger with Predecessor and
the capital transaction with Academic, WAC was the
acquiror for accounting purposes.
The acquisition of Predecessor was accounted for as a
purchase whereby all of the common and preferred
stock of Predecessor were exchanged for 1,999,996
shares of WAC. The shares issued to Predecessor
common and preferred shareholders were valued at
$1.00 per share which represented the share value in
the private placement that occurred during this time
period (see Note 3); a purchase price of
approximately $2,000,000. The exchange ratio was
determined after extensive negotiation between
management of Predecessor and WAC. Predecessor was a
development stage company, had not generated
significant revenues from operations and had an
accumulated deficit from inception to December 3,
1997 of $21,236,139 and a capital deficit of
$4,135,538. The assets acquired of Predecessor (cash,
prepaid expenses, property and equipment) were
recorded at fair market value which approximated book
value at December 3, 1997, and, as discussed in Note
1 above, since technological feasibility of the
various Predecessor technologies acquired had not
been established, the excess purchase 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-57
<PAGE>
Worlds Inc. - Predecessor
(a development stage enterprise)
Notes to Financial Statements
================================================================================
3. Private Placement The Private Placement called for WAC to offer for
and Public sale a maximum of 50 units (57-1/2 with the
Offering 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.
During June 1999, the Company sold 615,000 shares in
a private offering memorandum and received gross
proceeds of $2,460,000. Net proceeds, after
commissions and expenses of this offering, aggregated
$2,376,114.
F-58
<PAGE>
Worlds Inc. - Predecessor
(a development stage enterprise)
Notes to Financial Statements
================================================================================
4. Contingencies During April 1999, the Company entered into a
three-year financial advisory and consulting
agreement with a consulting firm controlled by the
Company's Chairman that provides for an annual fee of
$120,000, escalating to $300,000 annually if the
Company raises $5 million in cash and the market
value of the Company's issued and outstanding common
stock is no less than $100 million. In addition, the
Company granted warrants to such firm to purchase
1,000,000 shares of common stock at $.50 per share.
The warrants are exercisable through April 13, 2006
and contain anti-dilution provisions and both
"demand" and "piggy-back" registration rights.
Further, in connection with the above consulting
agreement, three founding stockholders of WAC agreed
to contribute 1,500,000 shares to the capital of the
Company (included in treasury stock).
5. Content Supply During June 1999, the Company entered into a content
Agreement supply agreement for a 3D internet site offered by an
Internet service provider (the "Provider"). Under the
terms of the agreement, the Company paid $125,000 and
issued 93,750 shares of common stock upon signing
(included in other assets aggregating $500,000). A
further $125,000 and 93,750 shares is required to be
delivered to the Provider upon launch of the site
which is expected to occur during the quarter ended
September 30, 1999.
F-59
<PAGE>
=========================
You should only rely on the information contained in this document or other
information that we refer you to. We have not authorized anyone to provide you
with any other information that is different. You should note that even though
you received a copy of this prospectus, there may have been changes in our
affairs since the date of this prospectus. This prospectus does not constitute
an offer to sell securities in any jurisdiction in which such offer or
solicitation is not authorized
TABLE OF CONTENTS PAGE
Where You Can Find More Information.................2
Prospectus Summary..................................3
Summary Historical Financial........................8
Risk Factors........................................9
Special Note Regarding Forward-
Looking Statements...............................19
Management's Discussion and Analysis
of Financial Conditions and Results
of Operations....................................20
Business...........................................28
Management.........................................37
Security Ownership of Certain Beneficial
Owners and Management............................39
Executive Compensation.............................40
Certain Relationships and Related
Transactions.....................................41
Disclosure of Commission Position on
Indemnification for Securities Act
Liability........................................42
Description of Securities..........................43
Selling Shareholders...............................44
Plan of Distribution...............................49
Legal Matters......................................50
Experts............................................50
Index to Financial Statements.....................F-1
=========================
=========================
WORLDS INC.
5,149,825 shares of Common Stock
----------
PROSPECTUS
----------
September 10, 1999
=========================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
-------------------------------------------
The following statement sets forth the estimated expenses in connection
with the offering described in the Registration Statement, all of which will be
borne by the Registrant.
Securities and Exchange Commission.............................. $ 4,252.60
Accountants' Fees............................................... $ 25,000.00
Legal Fees...................................................... $ 50,000.00
Printing and engraving.......................................... $ 10,000.00
Miscellaneous................................................... $ 30,000.00
--------------
TOTAL........................................................... $ 119,252.60
Item 14. Indemnification of Directors and Officers.
------------------------------------------
Section 14A:3-5 of the New Jersey Business Corporation Act, as amended,
authorizes the Registrant to indemnify any director or officer under certain
prescribed circumstances and subject to certain limitations against certain
costs and expenses, including attorneys' fees actually and reasonably incurred
in connection with any action, suit or proceeding, whether civil, criminal,
administrative or investigative, to which such person is a party by reason of
being a director or officer of the Registrant if it is determined that such
person acted in accordance with the applicable standard of conduct set forth in
such statutory provisions. Article VI of the Registrant's By-Laws extends such
indemnities to the full extent permitted by New Jersey law.
The Registrant may also purchase and maintain insurance for the benefit
of any director or officer which may cover claims for which the Registrant could
not indemnify such persons.
Item 15. Recent Sales of Unregistered Securities
---------------------------------------
In June and August 1999, we consummated tranches of a private placement
in which we sold an aggregate of 57.5 units. Each unit cost $60,000 and
consisted of 15,000 shares of common stock and warrants to purchase 7,500 shares
of common stock for $5.00 a share. We also issued an aggregate of 1.33 units in
consideration of professional services rendered to our company.
II-1
<PAGE>
Item 16. Exhibits and Financial Statements Schedules.
--------------------------------------------
3.1 Certificate of Incorporation*
3.1.1 Certificate of Merger*
3.2 By-Laws*
4.1 Specimen Common Stock Certificate*
5 Opinion of Graubard Mollen & Miller
10.1 Merger Agreement between Worlds Acquisition Corp. and Academic
Computer Systems, Inc.**
23.1 Consent of Graubard Mollen & Miller
(included in the Opinion filed as Exhibit 5)
23.2 Consents of BDO Seidman, LLP
* Incorporated by reference from Registration Statement No. 2-31876.
** Incorporated by reference from the Company's Current Report on Form 8-K
dated December 3, 1997.
Item 17. Undertakings.
-------------
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which it offers or sells securities,
a post-effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3) of the
Securities
Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the registration statement; and notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if
the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high and of the
estimated maximum offering range may be reflected in the form of
prospectus filed with Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than a 20%
change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration
statement.
(iii) Include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement provided, however, that paragraphs (a)(1)(i) and
(a)(1)(ii) do not apply if the registration statement is on Form S-3,
Form S-8 or Form F-3, and the information required to be included in
post-effective amendment by
II-2
<PAGE>
those paragraphs is contained in periodic reports filed with or
furnished to the Commission by the registrant pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934 that are incorporated by
reference in the registration statement.
(iv) Include any additional or changed material information on
the plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
II-3
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and has authorized this registration
statement or amendment to be signed on its behalf by the undersigned, in the
City of New York on the 31 day of August 1999.
WORLDS INC.
By: /s/ Thomas Kidrin
---------------------------
Thomas Kidrin, President
In accordance with the requirements of the Securities Act, this
registration statement or amendment was signed by the following persons in the
capacities and on the dates stated:
Signature Title Date
- - --------- ----- ----
/s/ Steven G. Chrust Chairman August 31, 1999
- - ------------------------ --
Steven G. Chrust
/s/ Thomas Kidrin Director, Chief Executive August 31, 1999
- - ------------------------ Officer, Chief Financial and --
Thomas Kidrin Accounting Officer
/s/ Michael J. Scharf Director August 31, 1999
- - ------------------------ --
Michael J. Scharf
/s/ Kenneth A. Locker Director August 31, 1999
- - ------------------------ --
Kenneth A. Locker
II-4
<PAGE>
EXHIBIT 5.1
GRAUBARD MOLLEN & MILLER
600 Third Avenue
New York, NY 10016
September 1, 1999
Worlds Inc.
15 Union Wharf
Boston, MA 02109
Re: Registration Statement on Form SB-2
-----------------------------------
Ladies and Gentlemen:
We have acted as counsel to you in connection with the
registration on Form SB-2 under the Securities Act of 1933, as amended
("Securities Act"), by Worlds Inc. ("Company") of, among other shares of common
stock, up to 2,044,625 shares of the Company's common stock issuable upon
exercise of options and warrants.
In such capacity, we have examined, among other documents,
copies of the certificate of incorporation and by-laws of the Company and copies
of resolutions adopted by the Company's Board of Directors and the authorization
and sale of the shares of common stock to be issued upon exercise of the options
and warrants. We have examined and relied upon, to the extent we deemed such
reliance proper, certificates of officers and directors of the Company,
certificates of certain public officials and such other records and documents as
we have considered necessary or desirable and proper in order that we may render
the opinion hereinafter set forth. We have assumed the authenticity of such
certificate of incorporation and by-laws, resolutions, certificates, records and
other documents examined by us and the correctness of all statements of fact
contained therein, and nothing has come to our attention that indicates that
such documents and other items are not authentic or correct. With respect to
such examination, we have assumed the genuineness of all signatures appearing on
all documents presented to us as originals and the conformity to originals of
all documents presented to us as conformed or reproduced documents. We have not
examined the certificates for the shares of common stock other than specimens
thereof.
As members of the Bar of the State of New York, we do not
purport to be experts in the law of any jurisdiction other than the State of New
York and with respect to the Federal law of the United States.
<PAGE>
Based on the foregoing, we are of the opinion that the shares
of common stock issuable upon exercise of the options and warrants have been
duly authorized and, when issued and delivered against payment therefor, as
contemplated by the options and warrants, will be validly issued and fully paid
and nonassessable.
We hereby consent to the filing of this opinion as an exhibit
to the registration statement, to the use of our name as your counsel, and to
all references made to us in the registration statement. In giving this consent,
we do not hereby admit that we are in the category of persons whose consent is
required under Section 7 of the Securities Act, or the rules and regulations
promulgated thereunder.
This letter is being delivered to you solely for your benefit
and may not be relied upon in any manner by any other person.
Very truly yours,
/s/ Graubard Mollen & Miller
GRAUBARD MOLLEN & MILLER
2
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Worlds Inc.
Boston, Massachusetts
We hereby consent to the use in the Prospectus constituting a part of
this Registration Statement of our report dated March 26, 1999, relating to the
financial statements of Worlds Inc. (a development stage enterprise) which is
contained in that Prospectus, as of December 31, 1998 and the related statements
of operations, stockholders' deficit and cash flows for the period April 8, 1997
(inception) to December 31, 1997, the year ended December 31, 1998 and for the
period from inception (April 8, 1997) to December 31, 1998. Our report contains
an explanatory paragraph regarding the Company's ability to continue as a going
concern.
We also consent to the reference to us under the caption "Experts" in
the Prospectus.
BDO Seidman, LLP
New York, New York
August 31, 1999
