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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-KSB
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number
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WORLDS.COM INC.
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(Name of small business issuer in its charter)
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New Jersey 22-1848316
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(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.)
15 Union Wharf, Boston, Massachusetts 02019
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(Address of Principal Executive Offices) (Zip Code)
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Issuer's telephone number: (617) 725-8900
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common stock, par
value $.001 per share
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
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Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year: $507,499.
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As of March 27, 2000, the aggregate market value of the issuer's common
stock (based on its reported last sale price on the OTC Bulletin Board) held by
non-affiliates of the issuer was approximately $53,017,518. At March 27, 2000,
17,738,531 shares of issuer's common stock were outstanding.
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WORLDS.COM INC.
1999 FORM 10-KSB ANNUAL REPORT
TABLE OF CONTENTS
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SECTION PAGE NO.
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PART I
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Item 1. Business 3
Item 2. Properties 10
Item 3 Legal Proceedings 10
Item 4. Submission of Matters to a Vote of Security Holders 11
PART II
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Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 12
Item 6. Management's Discussion and Analysis of Financial Condition and Results 13
of Operation
Item 7. Financial Statements and Supplementary Data 18
Item 8. Changes in and Disagreements with Accountants on Accounting and 18
Financial Disclosure
PART III
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Item 9. Directors and Executive Officers of the Registrant 18
Item 10. Executive Compensation 20
Item 11. Security Ownership of Certain Beneficial Owners and Management 21
Item 12. Certain Relationships and Related Transactions 22
PART IV
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Item 13. Exhibits, Financial Statement Schedules and Reports on Form 8-K 23
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
General
Worlds.com is a leading 3D entertainment portal, which leverages our
proprietary technology to offer visitors a network of virtual, multi-user
environments. In support of this portal and our overall business strategy, we
design and develop software, content and related technology for the creation of
interactive, three-dimensional Internet web sites. Using our 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 Time Warner's Road Runner service, 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.
Our premiere site is Worlds Ultimate 3D Chat (www.worlds.com), an
interactive site employing our 3D technology which is 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:
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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.
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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
the user and site provider 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 computer with a traditional
modem to enjoy our interactive 3D sites.
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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.
The Internet has extended 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 is also 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, a sense of
community and attractive 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 helpful 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 achieving our
goal are:
Initially producing interactive multimedia music-related 3D sites. We
believe that music readily lends itself to exploitation through web 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 web 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 specific categories of music
including:
o alternative;
o jazz;
o rock;
o pop;
o country; and
o 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.
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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 a similar manner
are commonly referred to as CD+ or enhanced CDs. We believe that the
distribution of music on these types of CDs 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 we are currently 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 web sites,
such as those we have developed for Freeserve and Road Runner.
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 and its new "Hang" 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;
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;
o Polygram Merchandising, pursuant to which we market and sell
Polygram Merchandising's recording-artist merchandise on our sites; and
o Excite@Home, pursuant to which we will provide Excite@Home 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.
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 the Gamma tool kit to produce three-dimensional portals and web sites
for Worlds.com and third parties.
The Gamma Development Kit, our third generation and newest 3D toolset,
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
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AnimalHouse project which we created for Universal/Hyundai and in our e-commerce
site, WorldsStore.com.
The Gamma tool kit 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's 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 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 in our library. Users communicate with each other through 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 user 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
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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 corporations. Currently, we collect the name and e-mail address
from our Worlds Ultimate 3D Chat users and the 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 our Worlds
Ultimate 3D Chat product as a free download. By reducing the price barrier, we
hope to 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 web site.
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 increase sales 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.
Freeserve
In 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 serve 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.
In November 1999, we began selling advertising on Freeserve's site and
our revenues immediately increased 58 percent from November to December, while
total impressions increased 71 percent during the same period. The total number
of visitors on our web site also increased 23 percent during the same period.
Road Runner
In 1999, we 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
a high-speed online service owned by Time Warner, MediaOne Group, Microsoft
Corp., Compaq, and Advance/Newhouse. Our agreement with Road Runner permits all
Road Runner subscribers to participate in an entirely new, interactive online
experience. The co-branded area we created highlights 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.
e-New Media
In 1999, we entered into an agreement with e-New Media 3D Company Ltd.
in which we will create 10 virtual Asian language and style chat and
entertainment worlds for the Far East region. Pursuant to the agreement, we will
provide two customized web sites with real time text chat capability in the
traditional Chinese, simplified Chinese, Japanese, Bahasa (for Indonesia) and
Thai languages.
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ShinWon Telecom
In early 2000, we entered into an agreement with ShinWon Telecom, a
privately held telecommunications and cable television provider in South Korea,
pursuant to which we will create a Korean language chat and entertainment web
site which will be available through our portal and which will take advantage of
our proprietary 3-D technology. We believe that by having the ShinWon site
reside on our portal, we will be accessible to the large and growing Korean
population in the United States.
Powernet Telecom
In 2000, we entered into an agreement with Powernet Telecom, an Internet
service provider in the United Kingdom. We will provide Powernet with 3D
interactive chat and entertainment sites through the Worlds.com 3D entertainment
portal.
GQ Magazine Enhanced CD
In 1999, we entered into an agreement with GQ magazine pursuant to which
more than 700,000 enhanced CDs containing our Worlds Ultimate 3D Chat software
were included with the November 1999 issue of GQ.
Yankee Web Site
In 1999, we entered into an agreement to create and host
NYYankeesWorld.com, the first 3D virtual reality world to be created for a major
sports team.
Hanson
In 1999, we 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 Hanson's fan club. Hanson is a platinum recording group that
has sold more than 10 million CDs worldwide since 1997. The CD allows the
members of Hanson's fan club, "MOE," to enter, explore, and meet 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.
In addition, in March 2000, we entered into an agreement to carry a live
cybercast to users of our site and other sites of Hanson's performance at the
Bowery Ballroom in New York City.
Universal/Hyundai - Animal House.com
In 1999, 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 distributed 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 web 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 included on the Worlds Ultimate 3D Chat
CD. In conjunction with this 3D site, we launched our WorldsStore.com, an HTML,
2D, commerce site that offers the same merchandise as the 3D store to consumers
who wish to access these artists' stores through traditional HTML pages on the
Internet.
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David Bowie
In 1999, we 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 was completed and 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 DavidBowie.com that directs the user to our David
Bowie Internet store.
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 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 that will be in direct competition
with Worlds Platinum. Certain of these competitors have substantially greater
financial, technical, marketing, distribution personnel and other resources than
we do, permitting such companies to implement more extensive marketing campaigns
than we can.
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 our 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. 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 that have 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.
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Employees
We currently have 20 full time employees. 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 free V.I.P.
service for our Worlds Ultimate 3D Chat.
Corporate History
We were formed as a result of the contemporaneous mergers on December 3,
1997 of Worlds Inc., a Delaware corporation formed on April 26, 1994 with and
into Worlds Acquisition Corp., a Delaware corporation formed on April 8, 1997
and of Worlds Acquisition Corp. with and into Academic Computer Systems, Inc., a
New Jersey corporation formed on May 20, 1968 (the "Mergers"). Academic Computer
Systems changed its name to Worlds Inc. after the Mergers. In December 1999, we
changed our name from Worlds Inc. to Worlds.com Inc. in order to better reflect
our business as a consumer Internet web site that offers virtual "worlds" in
which consumers interact, conduct e-commerce and receive entertainment.
ITEM 2. DESCRIPTION OF PROPERTIES.
Our principal executive offices are located at 15 Union Wharf, Boston,
Massachusetts 02109 where we lease approximately 2,500 square feet of office
space at a base rent of approximately $50,000 per year. The initial term of the
lease expires in September 2000. We also have a facility in San Francisco,
California where we lease approximately 2,500 square feet of office space at a
base rent of $2,500 per month. The lease in San Francisco is on a month-to-month
basis.
ITEM 3. LEGAL PROCEEDINGS.
None.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On December 15, 1999, we held an annual meeting of shareholders at which
a new slate of directors was proposed for election. The following people were
elected to the Board of Directors:
Name Shares Voted For Shares Withheld
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Steven G. Chrust 12,381,444 27,750
Michael J. Scharf 12,381,544 27,650
Thomas Kidrin 8,562,694 27,750
Kenneth A. Locker 12,381,544 27,650
William Harvey 8,562,794 27,650
We also proposed to change our name to Worlds.com Inc. The shareholders
voted to change our name, with 10,382,544 shares voting for the name change,
15,400 shares voting against the name change, and 3,000 shares abstaining from
the vote or not voting.
We also proposed to amend our Certificate of Incorporation to establish
a class of preferred stock and to authorize the issuance by the Company of up to
15,000,000 shares of preferred stock, par value $.001 per share. The
shareholders voted to reject the amendment, with 4,427,916 shares voting for,
142,443 shares voting against, and 9,649,035 shares abstaining from the vote or
not voting.
We also proposed to amend our Certificate of Incorporation to increase
the number of authorized shares of common stock by an additional 35,000,000
shares of common stock to 65,000,000 shares of common stock. The shareholders
voted to approve the amendment, with 8,940,711 shares voting for, 66,733 shares
voting against, and 4,212,650 shares abstaining from the vote or not voting.
We also proposed to amend our Certificate of Incorporation to provide
that the liability of the Company's directors and officers be limited to the
fullest extent permitted under the New Jersey Business Corporation Act. The
shareholders voted to approve the amendment, with 9,792,361 shares voting for,
466,261 shares voting against, and 4,074,472 shares abstaining from the vote or
not voting.
We also proposed to amend the Company's 1997 Incentive and Non-Qualified
Stock Option Plan to increase the number of shares of common stock available for
issuance upon exercise of stock options granted thereunder from 1,000,000 shares
to 3,000,000 shares. The shareholders voted to approve the amendment, with
9,487,504 shares voting for, 161,260 shares voting against, and 4,159,205 shares
abstaining from the vote or not voting.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our common stock began trading on the OTC Bulletin Board on October 20,
1998 under the symbol "WLDI." On February 11, 2000, in connection with the
change in our name from Worlds Inc. to Worlds.com Inc., our symbol was changed
to "WDDD." The following table sets forth, for the periods indicated, the high
and low bids for our common stock as reported on the OTC Bulletin Board
(representing interdealer quotations, without retail mark-ups, mark-downs or
commissions, and may not necessarily represent actual transactions):
Period High($) Low($)
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Fiscal 2000
First Quarter* 6.37 2.25
Fiscal 1999
Fourth Quarter 4.53 1.81
Third Quarter 5.43 2.31
Second Quarter 6.50 1.31
First Quarter 1.63 0.72
Fiscal 1998
Fourth Quarter 2.00 0.25
* Through March 27, 2000.
On March 27, 2000, the last sale price of the common stock as reported
on the OTC Bulletin Board was $4.78.
Holders
As of March 27, 2000, there were more than 550 beneficial owners of our
common stock.
Dividends
We have never paid a dividend on our common stock and do not anticipate
paying any dividends in the near future.
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Recent Sales of Unregistered Securities
In December 1997, we consummated the Mergers, as well as a private
placement of our common stock raising gross proceeds of $4,385,000, by selling
4,385,000 shares. We netted proceeds of approximately $3,695,000 from this
private placement. In January 1998, we received an additional $30,000, of which
we netted approximately $26,500, and issued an additional 30,000 shares in this
private placement. In June 1998, we closed on a secondary offering of $1,832,000
gross proceeds, of which we netted approximately $1,715,800 by selling 1,832,000
shares of our common stock at $1.00 per share.
In June and August 1999, we consummated a private placement, selling an
aggregate of 59 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 raised
gross proceeds of $3,540,000 in this private placement, netting proceeds of
approximately $3,264,000.
In the first quarter of 2000, we granted options to purchase an
aggregate of 1,028,500 shares of our common stock to directors, officers and
employees of, and consultants to, Worlds.com, at exercise prices ranging from
$3.00 to $9.00.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Forward-Looking Statements
When used in this Report, words or phrases "will likely result,"
"management expects," "the Company expects," "will continue," "is anticipated,"
"estimated" or similar expressions are intended to identify "forward- looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. You are cautioned not to place undue reliance on any such
forward-looking statements, each of which speak only as of the date made. Such
statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from historical earnings and those presently
anticipated or projected. The Company has no obligation to publicly release the
result of any revisions which may be made to any forward-looking statements to
reflect anticipated or unanticipated events or circumstances occurring after the
date of such 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 as stated in other of our public filings with the
Securities and Exchange Commission.
The following discussion should be read in conjunction with the
financial statements and related notes included in this Report.
Corporate 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, our predecessor became insolvent and
terminated most of its personnel. We thereafter acquired the enterprise through
the Mergers in December 1997.
Overview
During the fourth quarter of 1998, we completed the development of our
Gamma development tool kit. This technology is the foundation of our existing
and planned product offerings. In early 1999, we embarked on our strategy to
commercialize our technology. We are following an aggressive growth strategy by
rapidly exploiting our technology to create 3D chat, entertainment, information
and e-commerce sites for our company and for third parties. We seek to establish
Worlds.com as the leading producer of 3D portals, web sites and content.
13
<PAGE>
Revenues
Historical revenues prior to 1998 were generated by our predecessor
primarily through production service activities and sales of technology
licenses. Following our new strategy, we generate revenues in the following
manner:
o sales of music and sports related products through our 33
e-commerce web sites which essentially are artist-specific online stores and
include sites such as DavidBowieStore.com, RickyMartinStore.com, U2Store.com,
EltonJohnStore.com and BruceSpringsteenStore.com, among others. Sports related
products are sold through our NYYankeesWorld.com store;
o the production of 3D promotion sites for third parties;
o VIP subscriptions to our Worlds Ultimate 3-D Chat service and
services that we provide to Freeserve and Roadrunner;
o development and operation of 3D chat and entertainment sites for
third parties;
o on-line advertising revenues; and
o e-commerce commissions and fees.
To date, we have used our technology to develop numerous 3D chat sites
and promotional sites and related products for our company and third parties. 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 six major companies in the Internet arena,
including Excite@Home, Road Runner and Freeserve, among others, under which we
produce 3D sites and related products. We also are in negotiations with other
entities for numerous additional projects. No assurance can be given that any
negotiations will lead to the consummation of any additional agreements.
During 1999, we put an experienced management team in place to manage
the expected growth in our businesses in 2000. We expect our e-commerce sales to
grow as we add music and sports related as well as other online stores at an
anticipated rate of four a quarter. We have also launched and expanded our New
York Yankees web site, the first 3D virtual reality world created for a major
sports team, and we expect the e-commerce generated from our Yankees store to
start to add significantly to our total e- commerce sales.
In November of 1999 we started to generate advertising revenue through
our relationship with Freeserve. We expect our advertising and related revenue
to grow as we add advertising to our 3D chat sites on Freeserve and continue to
receive advertising revenue from our 2D sites.
We also expect to see our revenue grow as we rollout 3D entertainment
sites we are developing with e-New Media and ShinWon Telecom.
Our VIP subscriptions are continuing to grow in 2000. Our subscriptions
for the first quarter of 2000 were higher than the first three quarters of 1999.
Expenses
We classify our expenses into three broad groups:
o research and development;
o cost of revenues; and
o selling, general and administration.
During 1999, we continued the implementation of our new business plan.
Significant expenditures were incurred in connection with:
14
<PAGE>
o the commercialization of our Gamma technology;
o maintaining our new-commerce sites; and
o building a management team to develop the infrastructure required
to handle and promote rapid growth.
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 costs in the fourth quarter of 1998 with the
commercial release of three products, AnimalHouse.com, BowieWorld and Worlds
Ultimate 3D Chat. At December 31, 1999, approximately $1,353,000 of such
expenditures had been capitalized.
Results of Our Operations
The following data extracted from the attached audited financial
statements compares the results of our operations for the twelve months ended
December 31, 1999 to the twelve months ended December 31, 1998 and the period
April 8, 1997 to December 31, 1997.
<TABLE>
<CAPTION>
Period from
April 8, 1997 Year ended December 31,
(inception) to -------------------------------
December 31,
1997 1998 1999
--------------- --------------- ---------------
<S> <C> <C> <C>
Net revenues ................................................. $ 1,420 $ 29,110 $ 507,499
Costs and expenses:
Cost of revenues ........................................ -- (29,279) (318,553)
Selling, general and administrative ..................... (675,030) (2,650,703) (3,428,236)
Research and development ................................ -- (992,932) --
Acquired research and development ....................... (6,135,538) -- --
Operating loss .................................... (6,809,148) (3,643,804) (3,239,290)
Other income (expenses):
Gain resulting from reversal of certain predecessor
liabilities ............................................. -- 810,140 --
Interest income ......................................... 13,593 124,006 56,945
Interest expense ........................................ (16,692) (111,570) (157,155)
Loss before extraordinary item .................... (6,812,247) (2,821,228) (3,339,500)
Extraordinary item - gain on debt settlement ................. 125,776 172,547 --
Net loss ..................................................... $(6,686,471) $(2,648,681) $(3,339,500)
</TABLE>
15
<PAGE>
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
We started generating advertising revenue in November 1999 through our
relationship with Freeserve. We also realized nominal royalty revenues by
licensing our technology to third parties. Our fourth quarter revenue growth was
significant, with revenues generated during the fourth quarter representing 52%
of our total revenue for 1999. Revenue for 1999 was $507,499 and had associated
direct costs of $318,553, compared to $29,110 in revenue and $29,279 of direct
costs for the same period in 1998.
Selling, general and administrative expenses were $3,428,236 for the
year ended December 31, 1999. This represented an increase of $777,533 from
$2,650,703 for the year ended December 31, 1998. This increase was attributable
to the higher costs associated with maintaining our new-commerce sites, legal
and professional fees, and building a management team to develop the
infrastructure required to handle and promote rapid growth.
We incurred no research and development costs during the year ended
December 31, 1999 as compared to $992,932 for the year ended December 31, 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 1999, $1,193,190 of such expenditures were
capitalized.
Other income included $56,945 of interest income for the year ended
December 31, 1999 earned from the remainder of the proceeds of our share
offerings as compared to $124,006 for the year ended December 31, 1998. Other
expenses included interest expense of $157,155 directly attributable to our
predecessor's notes payable for the year ended December 31, 1999. Interest
expense for the year ended December 31, 1998 was $111,570.
As a result of the foregoing we incurred a net loss of $3,339,500 for
the year ended December 31, 1999, compared to a loss of $2,648,681 for the year
ended December 31, 1998, an increase of $690,819. The loss in the 1998 period
was after an extraordinary gain of $172,547.
Year Ended December 31, 1998 Compared With Period from April 8, 1997 (inception)
through December 31, 1997
Our primary activities during 1998 were signing three contracts to
produce content for music related web sites, completing a small financing and
attempting a merger for additional financing, completing development of Worlds
Platinum, releasing a new version of Worlds Chat and developing and operating a
web site for the sale of music related merchandise. Our primary activities
during the period from April 8, 1997 through December 31, 1997 consisted of the
start-up activities of our predecessor and our formation of WAC, negotiation and
consummation of the Mergers, administration of post-Merger legal and business
matters, the completion of a private placement, and the negotiation and
compromise of debts of our predecessor.
Revenues were nominal at $29,110 during 1998 as compared to $1,420 in
1997, due to almost total lack of sales directly attributable to the fact that
its WorldsStore.com web site was not operational until November 1997.
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 predecessor's web sites and
content for the contracts within the music industry, professional fees and other
expenses incurred in connection with the Mergers and other transactions,
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 our predecessor, plus the value of the 1,999,996 shares of our common
stock given in exchange for all the outstanding stock of our predecessor at the
time of the Mergers. We invested $992,932 during 1998 in research and
development for the completion of the development of our Gamma technology.
16
<PAGE>
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 financings than accumulated on our predecessor's notes payable.
We also realized an extraordinary gain of $172,547 during 1998 as
compared to $125,776 during 1997, by settling debts of predecessor 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 our
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.
Liquidity and Capital Resources
Net cash provided from financing activities, net of operating and
investing activities from January 1, 1999 through December 31, 1999 was
$239,416. At December 31, 1999, we had a working capital deficit of $1,441,900
and cash and cash equivalents in the amount of $1,821,180. The negative working
capital is primarily the result of a convertible promissory note payable to one
of our stockholders (maturing December 3, 2000) for $1,685,000, and a note
payable to such stockholder (maturing December 2000) for $250,000.
On December 3, 1997, the Mergers were deemed to close as well as the
first round of a private placement of our common stock raising gross proceeds of
$3.8 million, by selling 3.8 million shares, of which we netted approximately
$3,166,000. We also acquired approximately an additional $560,000 from one of
the other parties to the Mergers. In addition, as a result of the Mergers by
operation of law, we assumed our predecessor's then liabilities of approximately
$4.6 million, the majority of which has since been paid or renegotiated. At
December 31, 1999, our total liabilities were $3,803,146, including the current
term portion of notes payable of $2,054,996.
Prior to the Mergers, we had 910,000 shares outstanding. Effective
December 31, 1997, we closed on an additional $585,000 of gross proceeds from
the private offering, of which we netted $529,000, and issued an additional
585,000 shares of common stock and on January 2, 1998 received an additional
$30,000, of which we netted $26,500, and issued an additional 30,000 shares. In
June 1998, we closed on a secondary offering of $1,832,000 gross proceeds, of
which we netted $1,715,800 by selling 1,832,000 shares at $1.00 per share.
In June and August 1999, we consummated two tranches of a private
placement, selling an aggregate of 59 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. At September 30, 1999, we had raised gross proceeds of
$3,540,000.
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. Commercialization will require capital
resources substantially greater than what we have now currently available to us.
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 May 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.
Accordingly, 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, we 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. While we hope
to raise additional financing, we have no current arrangements with respect to,
or sources of, additional financing and there can be no assurance that any such
financing, particularly the significant amounts of financing that would be
required, will be available to us on commercially reasonable terms, or at all.
Any inability to obtain additional financing will have a material adverse effect
on our business, including possibly requiring us to significantly curtail or
cease operations.
17
<PAGE>
Effect of Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133 "Accounting for Derivative Instruments and Hedging Activities," which
requires entities to recognize all derivative financial instruments as either
assets or liabilities in the balance sheet and measure these instruments at fair
value. SFAS No. 133, as amended by SFAS No. 137, is effective for all fiscal
years beginning after June 15, 2000. We do not presently enter into any
transactions involving derivative financial instruments and, accordingly, we do
not anticipate that the new standard will have any effect on our financial
statements.
ITEM 7. FINANCIAL STATEMENTS.
The financial statements begin on page 24.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Our officers and directors are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Steven G. Chrust 50 Chairman of the Board
Thomas Kidrin 47 President, Chief Executive Officer,
Treasurer, Secretary and Director
Michael J. Scharf 57 Director
Kenneth A. Locker 49 Director
William Harvey 56 Director
</TABLE>
Steven G. Chrust has been Chairman of the Board since April 1999. He is
also the Co-Chairman of UMagic Systems, Inc., a provider of subscription-based
and free online, interactive information services featuring expert-led advice
services and discussions. 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., a telecommunications company. Prior to becoming an
executive in the telecommunications industry, Mr. Chrust was Director of
Technology Research at Sanford C. Bernstein & Co., a Wall Street investment
firm, where he was named a top telecommunications analyst each year for more
than a decade by Institutional Investor and ranked as the #1 analyst in the
sector for five consecutive years in its all-star ranking. Mr. Chrust is
Chairman of the Association for Local Telecommunications Services, 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 1997 until
April 1999. Mr. Scharf was also Chairman and Secretary of Worlds Acquisition
Corp. from June 1997 until December 1997, when it was merged into the Company as
part of the Mergers, and has been a director of the Company since the Mergers.
Since 1993, he has been Chairman, Chief Executive Officer and President of
Niagara Corp., a company engaged in the manufacturing and distribution of steel
bars. From 1983 until 1989, Mr. Scharf was Chairman
18
<PAGE>
and Chief Executive Officer of Edgecomb Corporation, one of the largest
independent metals service center and distribution companies in the United
States. Mr. Scharf received an A.B. degree from Princeton University and an
M.B.A. from Harvard Business School.
Thomas Kidrin has been President, Chief Executive Officer, Secretary and
Treasurer since December 1997. Mr. Kidrin was also President and a director of
Worlds Acquisition Corp. from April 1997 to December 1997. He is Chairman and
President of Datastream Corporation, a designer and developer of interactive
products and services. From December 1991 to June 1996, Mr. Kidrin was a
founder, director, and President of UC Television Network Corp., a company
engaged in the design and manufacture of interactive entertainment/advertising
networks in the college market under the brand name College Television
Network(TM), the largest private network on college campuses in the United
States. Mr. Kidrin attended Drake University and received a B.A. degree from the
New School of Social Research.
Kenneth A. Locker has been a director since December 1997 and prior
thereto was a director of Worlds Acquisition Corp. Since June 1998 he has been a
Senior Consultant to Intel Corporation on entertainment industry strategies and
has also served as an advisor to Ziff Davis, Inc., an Internet consulting
company, and to Digital Evolution, Inc., a technology publishing company. From
June 1996 to June 1998, he was the General Manager and Executive Producer for
MGM Interactive, Inc., an interactive content and programming company, where he
was responsible for creating and implementing the MGM Interactive online
business strategy. From 1994 to March 1996, he was a founder and Vice President
of our predecessor and from 1993 to 1994, he 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, Inc., a television
production company, 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 technology
publishing company which is a division of Softbank Corp. Mr. Locker received a
B.A. degree from Johns Hopkins University and attended the Massachusetts
Institute of Technology and Oxford University.
William Harvey, 56, has been a director since November 1999. In 1972 and
1991, respectively, Mr. Harvey founded New Electronic Media Science, Inc.
("NEMS"), and Next Century Media, Inc. ("Next Century"), marketing, media and
research consulting companies specializing in the marketing, entertainment and
interactive media industries. Mr. Harvey has served as Chief Executive Officer
and President of both NEMS and Next Century since their respective inceptions.
Through NEMS and Next Century, Mr. Harvey has worked with major television and
cable networks, several RBOCs, major film studios, IBM, AT&T, advertising
agencies, videotex companies and advertisers on the integration of advertising
into various new media. Mr. Harvey invented the marketing tool known as the Area
Dominant Influence for Arbitron and co- founded International Ratings Services,
Inc., the first company to provide United States movie studios, including Warner
Brothers, Columbia and CBS International, with ratings for their television
programs broadcast in foreign countries. Since 1979, Mr. Harvey has also been
the publisher of "The Marketing Pulse," a monthly advertising and media trade
newsletter.
Our Audit Committee is currently comprised of Michael Scharf and Kenneth
Locker. The function of our Audit Committee is to recommend annually to the
Board of Directors the appointment of our independent auditors; review with the
independent auditors the scope of the annual audit and review their report
relating thereto; review with the independent auditors our accounting practices
and policies; review with the internal accountants and independent auditors our
overall accounting and financial controls; and be available to independent
auditors during the year for consultation.
Messrs. Scharf, Locker and Chrust serve on our Compensation Committee.
The Compensation Committee administers our 1997 Incentive and Nonqualified Stock
Option Plan, as amended, to the extent not administered by the full Board of
Directors, and reviews and makes recommendations with respect to compensation of
officers, consultants and key employees.
We do not have a standing Nominating Committee.
19
<PAGE>
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires our officers, directors and persons who beneficially own more than ten
percent of a registered class of our equity securities ("ten-percent
shareholders") to file reports of ownership and changes in ownership with the
Securities and Exchange Commission. Officers, directors and ten-percent
shareholders also are required to furnish us with copies of all Section 16(a)
forms they file. Based solely on our review of the copies of such forms
furnished to us, and written representations that no other reports were
required, we believe that during the fiscal year ended December 31, 1999, all of
our officers, directors and ten-percent shareholders complied with the Section
16(a) reporting requirements, except that Mr. Chrust filed a Form 4 late for the
month of December 1999, in which he gifted certain shares of our common stock
owned by him or his affiliate to his daughters and certain other relatives.
ITEM 10. EXECUTIVE COMPENSATION.
The following table sets forth the compensation for the three years
ended December 31, 1999, for our Chief Executive Officer and other executive
officers whose compensation exceeded $100,000 (or would have exceeded $100,000
if employed for the full year) for the year ended December 31, 1999.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Long-Term Compensation
Compensation(1)(2)
Name and Principal Position Year Salary ($) Bonus ($) Restricted All Other
Stock Compensation
Awards ($)
<S> <C> <C> <C> <C> <C>
Thomas Kidrin 1999 176,000 -0- -0- -0-
President and CEO 1998 175,000 -0- -0- -0-
1997 21,903(3) -0- -0- -0-
Steven G. Chrust, 1999 $85,000(4) -0- -0- -0-
Chairman of the Board 1998 0 -0- -0- -0-
1997 0 -0- -0- -0-
Debra Sito 1999 39,375(5) -0- -0- -0-
Executive Vice President 1998 0 -0- -0- -0-
1997 0 -0- -0- -0-
</TABLE>
(1) The above compensation does not include other personal benefits, the
total value of which do not exceed 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) Paid by us from December 3, 1997 to December 31, 1997. No compensation
was paid to Mr. Kidrin by our predecessor during the remainder of 1997.
(4) Represents amounts paid by us to SGC Advisory Services, Inc., a firm
which provides consulting services to Worlds.com, and of which Mr.
Chrust is President and sole stockholder. The agreement provides for an
annual consulting fee of $120,000, of which $85,000 was earned and
accrued in 1999.
(5) Ms. Sito began her employment with the Company in September 1999 at an
annual salary of $135,000.
20
<PAGE>
Option Grants
The following table represents the stock options granted in the fiscal
year ended December 31, 1999 to our executive officers identified in the Summary
Compensation table above.
<TABLE>
<CAPTION>
Options Granted in the Last Fiscal Year
Number of Percent of
Securities Total Options
Underlying Granted to
Options Employees in Exercise Price of
Name of Executive Granted (#) Fiscal Year (%) Options ($) Expiration Date
<S> <C> <C> <C> <C>
Steven G. Chrust 1,000,000 51% 0.50 4/13/06
Thomas Kidrin 0 n/a n/a n/a
Debra Sito 150,000 13% 4.00 9/03/04
50,000 7.50 9/03/04
50,000 10.00 9/03/04
</TABLE>
1997 Stock Option Plan and Other Options
The 1997 Incentive and Non-Qualified Stock Option Plan, as amended
("Plan") has been adopted by the Board and the shareholders as an incentive for,
and to encourage share ownership by, the Company's directors, officers and other
key employees and/or consultants and management of possible future acquired
companies. The Plan was amended at our annual meeting of shareholders in
December 1999 to increase the number of shares of common stock available under
the Plan from 1,000,000 to 3,000,000. The Plan also allows for the granting of
stock appreciation rights in tandem with, or independently of, stock options.
Independent (stand-alone) grants of stock appreciation rights are not counted
against the Plan limit. As of December 31, 1999, there were outstanding grants
under the Plan of options to purchase an aggregate of 971,375 shares of common
stock. The number of outstanding options includes options to purchase 60,000
shares for $0.50 each, held by Kenneth Locker, a director. As of December 31,
1999, there were 2,028,625 additional shares of common stock available for grant
under the Plan.
The purpose of the 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.
The Board designates those persons to receive grants under the Plan and
determines the number of options and/or stock appreciation rights, as the case
may be, to be granted. The price payable for the shares of common stock
underlying each option will be fixed by the Board 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 Board also determines 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.
We have other outstanding options to purchase an aggregate of 3,000,875
shares of our common stock. These securities are exercisable at prices ranging
from $0.67 to $10.00 and include options to purchase 1,000,000 shares for $0.50
each held by SGC Advisory Services, a company owned by Mr. Chrust, our chairman
of the board.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of March 27, 2000, information
regarding the beneficial ownership of our common stock based upon the most
recent information available to us for (i) those persons or group
21
<PAGE>
of persons known by us to beneficially own more than five percent (5%) of our
voting securities, (ii) each director and director-nominee of Worlds, (iii) each
current executive officer whose compensation exceeded $100,000 in 1999, and (iv)
all executive officers and directors of Worlds, as a group.
<TABLE>
<CAPTION>
Amount and
Nature of
Name and Address of Beneficial Owner Beneficial Owner Percent of Class
- ------------------------------------ ---------------- ----------------
<S> <C> <C>
Steven Chrust .................................... 2,927,113(1) 15.5%
Michael J. Scharf ................................ 1,391,250(2)(3) 7.8%
Thomas Kidrin .................................... 1,348,333(2)(4) 7.6%
Kenneth A. Locker ................................ 100,000(3)(5) *
William Harvey ................................... 0(6) *
Steven A. Greenberg .............................. 3,515,811(7) 19.8%
All Executive Officers and Directors ............. 5,766,696(8) 30.5%
as a Group (5 persons)
</TABLE>
- -------------------------
* less than 1%
(1) Includes 1,000,000 shares underlying currently exercisable warrants
owned by SGC Advisory Services. Also includes (a) warrants to purchase
15,000 shares of common stock and (b) currently exercisable options to
purchase 98,832 shares of common stock. Also includes 1,363,342 shares
of common stock currently owned by Steven Greenberg, which Mr. Chrust
has the option to purchase ("Chrust Option"). Does not include options
to purchase 188,668 shares of common stock which vest in two equal
annual installments, commencing in March 2001.
(2) Messrs. Scharf, Kidrin and Greenberg have agreed to vote shares owned by
them for the election of Mr. Chrust as a director through March 2002.
(3) Does not include 5,000 shares of common stock issuable upon exercise of
options, which vest in three equal annual installments, commencing in
December 2000.
(4) Includes 58,333 shares of common stock issuable upon exercise of
currently exercisable options. Does not include 116,667 shares issuable
upon exercise of options which vest in two equal annual installments,
commencing in March 2001.
(5) Represents shares of common stock issuable upon exercise of currently
exercisable stock options.
(6) Does not include 50,000 shares of common stock issuable upon exercise of
options, which vest in three equal annual installments, commencing in
November 2000.
(7) Includes the 1,363,342 shares of common stock subject to the Chrust
Option.
(8) Includes the shares referred to as being included in notes (1), (3),
(4) and (5).
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
On March 10, 2000, Mr. Chrust, our Chairman, purchased 302,939 shares of
common stock at a purchase price of $3.301 per share in a private transaction
from Steven A. Greenberg, a founder of Worlds Acquisition Corp. and a principal
stockholder of Worlds.com, and purchased an option for $.007335 per share to
purchase an aggregate of 1,363,342 additional shares of common stock owned by
Mr. Greenberg at $3.301 per share.
We have entered into a Financial Advisory and Consulting Agreement,
dated March 23, 1999, with SGC Advisory Services, Inc., of which Mr. Chrust is
the President and sole shareholder. The agreement continues through March 2002
and provides for an annual fee of $120,000. The annual fee will rise to $300,000
if we raise $5 million in cash from investors 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 shares of our
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.
In connection with the engagement of SGC Advisory Services, Inc.,
Messrs. Scharf, Kidrin and Greenberg agreed (i) to contribute to us for
cancellation 318,750, 300,000 and 881,250 shares of our common stock,
respectively, and (ii) during the term of the consulting agreement, to vote any
shares of our common stock owned by them for the election of Mr. Chrust as a
director.
22
<PAGE>
In June and August 1999, we sold an aggregate of 59 units of our
securities in a private placement. Each unit cost $60,000 and consisted of
15,000 shares of our common stock and warrants to purchase 7,500 shares of our
common stock (at an exercise price of $5.00 per share). Mr. Chrust purchased two
units in this private placement.
In December 1997, we entered into a month-to-month consulting agreement
with Steven A. Greenberg. The agreement provided for monthly compensation of
$15,000 plus reimbursement of reasonable expenses actually incurred. This
agreement was terminated in February 2000. During 1997, Mr. Greenberg loaned
$77,000 to Worlds Acquisition Corp. on an interest-free basis of which $73,000
was repaid as of December 31, 1998, and the balance was repaid as of June 30,
1999.
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits Filed.
See Exhibit Index appearing later in this Report.
(b) Reports on Form 8-K.
None.
23
<PAGE>
Worlds.com Inc.
(a development stage
enterprise)
- --------------------------------------------------------------------------------
Financial Statements
Years Ended December 31, 1998 and 1999
F-1
<PAGE>
Worlds.com Inc.
(a development stage enterprise)
Contents
- --------------------------------------------------------------------------------
Report of independent certified public accountants F-3
Financial statements:
Balance sheets F-4
Statements of operations F-5
Statements of stockholders' equity (deficit) F-6
Statements of cash flows F-7
Summary of accounting policies F-8 - F-12
Notes to financial statements F-13 - F-28
F-2
<PAGE>
Report of Independent Certified Public Accountants
Worlds.com Inc.
Boston, Massachusetts
We have audited the accompanying balance sheets of Worlds.com Inc. (the
"Company") (a development stage enterprise) as of December 31, 1998 and 1999,
and the related statements of operations, stockholders' equity (deficit) and
cash flows for the period from April 8, 1997 (inception) to December 31, 1997
and for the years ended December 31, 1998 and 1999. 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.com Inc. at December 31,
1998 and 1999, and the results of it operations and its cash flows for the
period from April 8, 1997 (inception) to December 31, 1997 and for the years
ended December 31, 1998 and 1999, in conformity with generally accepted
accounting principles.
As discussed in Note 1, the accompanying financial statements have been prepared
assuming Worlds.com Inc. will continue as a going concern. The Company is in the
development stage and has incurred losses since its inception, has a working
capital deficiency, 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 10, 2000
F-3
<PAGE>
Worlds.com Inc.
(a development stage enterprise)
Balance Sheets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, 1998 1999
----------------------------------------------------------------------- ---------------------- ----------------------
<S> <C> <C>
Assets
Current:
Cash and cash equivalents $ 1,581,764 $ 1,821,180
Accounts receivable - 177,215
Prepaid expenses and other current assets 53,486 74,670
Inventories 58,516 221,511
----------------------------------------------------------------------- ---------------------- ----------------------
Total current assets 1,693,766 2,294,576
Property, equipment and software development, net of accumulated
depreciation and amortization (Note 5) 214,246 1,353,047
Intangible asset (Note 6) - 1,133,334
----------------------------------------------------------------------- ---------------------- ----------------------
$ 1,908,012 $ 4,780,957
----------------------------------------------------------------------- ---------------------- ----------------------
Liabilities and Stockholders' Deficit
Current:
Accounts payable (Note 12) $ 319,906 $ 370,037
Accrued expenses (Note 12) 446,333 811,443
Deferred revenue (Note 8(d)) - 500,000
Current maturities of notes payable (Note 7) 246,648 2,054,996
----------------------------------------------------------------------- ---------------------- ----------------------
Total current liabilities 1,012,887 3,736,476
Long-term portion, notes payable (Note 7) 1,875,018 66,670
----------------------------------------------------------------------- ---------------------- ----------------------
Total liabilities 2,887,905 3,803,146
----------------------------------------------------------------------- ---------------------- ----------------------
Commitments (Note 8)
Stockholders' equity (deficit) (Notes 2, 3 and 9):
Common stock, $.001 par value - shares authorized 65,000,000;
issued 18,031,996 and 17,738,531 18,032 17,738
Additional paid-in capital 8,401,970 13,634,725
Deficit accumulated during the development stage (9,335,152) (12,674,652)
----------------------------------------------------------------------- ---------------------- ----------------------
(915,150) 977,811
Treasury stock, at cost, 113,465 shares in 1998 (Note 2) (64,743) -
----------------------------------------------------------------------- ---------------------- ----------------------
Total stockholders' equity (deficit) (979,893) 977,811
----------------------------------------------------------------------- ---------------------- ----------------------
$ 1,908,012 $ 4,780,957
----------------------------------------------------------------------- ---------------------- ----------------------
</TABLE>
See accompanying summary of accounting policies
and notes to financial statements.
F-4
<PAGE>
Worlds.com Inc.
(a development stage enterprise)
Statements of Operations
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Cumulative,
Period from period from
April 8, 1997 April 8, 1997
(inception) to Year ended December 31, (inception) to
December 31, --------------------------------------- December 31,
1997(a) 1998 1999 1999(a)
------------------------------------ ------------------- ------------------- -------------------- -----------------
<S> <C> <C> <C> <C>
Net revenues $ 1,420 $ 29,110 $ 507,499 $ 538,029
Costs and expenses:
Cost of revenues - (29,279) (318,553) (347,832)
Selling, general and
administrative (675,030) (2,650,703) (3,428,236) (6,753,969)
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) (3,239,290) (13,692,242)
Other income (expenses):
Gain resulting from reversal of
certain predecessor
liabilities (Note 12) - 810,140 - 810,140
Interest income 13,593 124,006 56,945 194,544
Interest expense (16,692) (111,570) (157,155) (285,417)
------------------------------------ ------------------- ------------------- -------------------- -------------------
Loss before extraordinary
item (6,812,247) (2,821,228) (3,339,500) (12,972,975)
Extraordinary item - gain on debt
settlement (Note 11) 125,776 172,547 - 298,323
------------------------------------ ------------------- ------------------- -------------------- -------------------
Net loss $ (6,686,471) $ (2,648,681) $ (3,339,500) $(12,674,652)
------------------------------------ ------------------- ------------------- -------------------- -------------------
Loss per share (basic and diluted)
(Note 13):
Loss before extraordinary
item $ (.73) $ (.16) $ (.19)
Extraordinary item .01 .01 -
------------------------------------ ------------------- ------------------- --------------------
Net loss per share (basic
and diluted) $ (.72) $ (.15) $ (.19)
------------------------------------ ------------------- ------------------- --------------------
Weighted average common shares
outstanding:
Basic and diluted 9,336,569 17,170,288 17,377,808
------------------------------------ ------------------- ------------------- --------------------
</TABLE>
--------------
(a) Includes the results of Predecessor and Academic which were merged into the
Company on December 3, 1997.
- --------------------------------------------------------------------------------
See accompanying summary of accounting policies
and notes to financial statements.
F-5
<PAGE>
Worlds.com Inc.
(a development stage enterprise)
Statements of Stockholders' Equity (Deficit)
(Note 9)
- --------------------------------------------------------------------------------
Period from April 8, 1997 (inception) to December 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Deficit
accumulated
Common stock Additional during the
---------------------------- paid-in development
Shares Amount capital stage
----------------------------------------------------------------------- -------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Issuance of common stock to founding stockholders 8,400,000 $ 8,400 $ 195,600 $
Sale of shares in private offering memorandum and shares issued to
placement agent, net (Note 3) 4,810,000 4,810 3,689,866 -
Issuance of shares to Academic Computer Systems, Inc. (Note 2) 910,000 910 557,116 -
Issuance of shares pursuant to merger with predecessor (Note 2) 1,999,996 2,000 1,998,000 -
Capital contribution resulting from forgiveness of debt to
shareholders of predecessor (Note 7) - - 221,000 -
Net loss for the period April 8 to December 31, 1997 - - - (6,686,471)
----------------------------------------------------------------------- -------------- -------------- -------------- -------------
Balance, December 31, 1997 16,119,996 16,120 6,661,582 (6,686,471)
Sale of shares in private offering memorandum (January 1998) (Note 3) 30,000 30 26,470 -
Sale of shares in public offering of common stock, net
(June 1998) (Note 3) 1,832,000 1,832 1,713,968 -
Purchase of 113,465 treasury shares (June 1998) (Note 2) - - - -
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)
----------------------------------------------------------------------- -------------- -------------- -------------- -------------
Balance, December 31, 1998 18,031,996 18,032 8,401,970 (9,335,152)
Issuance of warrants for consulting services (April 1999) (Note 8(c)) - - 465,000 -
Contribution of 1,500,000 shares by founders to treasury (April 1999)
and subsequent cancellation (Note 8(c)) (1,500,000) (1,500) 1,500 -
Exercise of stock options (April 1999) 75,000 75 74,925 -
Issuance of shares for content supply agreement (June 1999) (Note 6) 93,750 93 374,907 -
Issuance of shares to agent for content supply agreement (July 1999)
(Note 6) 50,000 50 199,950 -
Sale of shares in private offering memorandum, net (June through
September 1999) (Note 3) 892,500 893 3,263,081 -
Issuance of options for consulting services and software development
costs (August and September 1999) - - 368,230 -
Issuance of shares for legal and consulting services (September 1999) 20,000 20 79,980 -
Cancellation of treasury shares (September 1999) (Note 2) (113,465) (113) (64,630) -
Exercise of warrants (November 1999) 95,000 95 94,905 -
Issuance of shares for content supply agreement (December 1999)
(Note 6) 93,750 93 374,907 -
Net loss for the year ended December 31, 1999 - - - (3,339,500)
----------------------------------------------------------------------- -------------- -------------- -------------- -------------
Balance, December 31, 1999 17,738,531 $ 17,738 $13,634,725 $(12,674,652)
----------------------------------------------------------------------- -------------- -------------- -------------- -------------
<CAPTION>
Total
stockholders'
Treasury equity
stock (deficit)
- ----------------------------------------------------------------------- -------------- --------------
<S> <C> <C>
Issuance of common stock to founding stockholders $ - $ 204,000
Sale of shares in private offering memorandum and shares issued to
placement agent, net (Note 3) - 3,694,676
Issuance of shares to Academic Computer Systems, Inc. (Note 2) - 558,026
Issuance of shares pursuant to merger with predecessor (Note 2) - 2,000,000
Capital contribution resulting from forgiveness of debt to
shareholders of predecessor (Note 6) - 221,000
Net loss for the period April 8 to December 31, 1997 - (6,686,471)
- ----------------------------------------------------------------------- -------------- --------------
Balance, December 31, 1997 - (8,769)
Sale of shares in private offering memorandum (January 1998) (Note 3) - 26,500
Sale of shares in public treasury offering of common stock, net
(June 1998) (Note 3) - 1,715,800
Purchase of 113,465 treasury shares (June 1998) (Note 2) (64,743) (64,743)
Conversion of employee stock options into shares (October 1998)
(Note 8) - -
Net loss for the year ended December 31, 1998 - (2,648,681)
- ----------------------------------------------------------------------- -------------- --------------
Balance, December 31, 1998 (64,743) (979,893)
Issuance of warrants for consulting services (April 1999) (Note 8(c)) - 465,000
Contribution of 1,500,000 shares by founders to treasury (April 1999)
and subsequent cancellation (Note 8(c)) - -
Exercise of stock options (April 1999) - 75,000
Issuance of shares for content supply agreement (June 1999) (Note 6) - 375,000
Issuance of shares to agent for content supply agreement (July 1999)
(Note 6) - 200,000
Sale of shares in private offering memorandum, net (June through
September 1999) (Note 3) - 3,263,974
Issuance of options for consulting services and software development
costs (August and September 1999) - 368,230
Issuance of shares for legal and consulting services (September 1999) - 80,000
Cancellation of treasury shares (September 1999) (Note 2) 64,743 -
Exercise of warrants (November 1999) - 95,000
Issuance of shares for content supply agreement (December 1999)
(Note 6) - 375,000
Net loss for the year ended December 31, 1999 - (3,339,500)
- ----------------------------------------------------------------------- -------------- --------------
Balance, December 31, 1999 $ - $ 977,811
- ----------------------------------------------------------------------- -------------- --------------
</TABLE>
See accompanying summary of accounting policies
and notes to financial statements.
F-6
<PAGE>
Worlds.com Inc.
(a development stage enterprise)
Statements of Cash Flows
(Note 14)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Cumulative,
Period from period from
April 8, 1997 April 8, 1997
(inception) to Year ended December 31, (inception) to
December 31, -------------------------------- December 31,
1997(a) 1998 1999 1999
---------------------------------------------------- -------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $(6,686,471) $(2,648,681) $(3,339,500) $(12,674,652)
---------------------------------------------------- -------------- --------------- --------------- ---------------
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 16,323 129,752 282,674 428,749
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 - -
Issuance of warrants for consulting services - - 465,000 465,000
Issuance of options for consulting services - - 13,226 13,226
Issuance of shares for legal and consulting
services - - 80,000 80,000
Changes in operating assets and liabilities,
net of effects from merger with
Predecessor and Academic:
Accounts receivable - - (177,215) (177,215)
Inventories - (58,516) (162,995) (221,511)
Prepaid expenses and other current
assets 93,716 20,689 (21,184) 93,221
Accounts payable and accrued expenses 214,361 151,829 235,572 601,762
Deferred revenue - - 500,000 500,000
------------------------------------------------------ -------------- --------------- --------------- ---------------
Total adjustments 6,333,624 (684,354) 1,215,078 6,864,348
------------------------------------------------------ -------------- --------------- --------------- ---------------
Net cash used in operating activities (352,847) (3,333,035) (2,124,422) (5,810,304)
------------------------------------------------------ -------------- --------------- --------------- ---------------
Cash flows from investing activities:
Acquisition of property and equipment - (28,587) (161,619) (190,206)
Additions to software development costs - (160,000) (783,517) (943,517)
Additions to intangible asset - - (125,000) (125,000)
------------------------------------------------------ -------------- --------------- --------------- ---------------
Net cash used in investing activities - (188,587) (1,070,136) (1,258,723)
------------------------------------------------------ -------------- --------------- --------------- ---------------
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 3,263,974 6,985,150
Proceeds from sale of common stock in public
offering - 1,715,800 - 1,715,800
Proceeds from exercise of options - - 75,000 75,000
Proceeds from exercise of warrants - - 95,000 95,000
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 3,433,974 8,890,207
------------------------------------------------------ -------------- --------------- --------------- ---------------
Net increase (decrease) in cash and cash equivalents 3,541,829 (1,960,065) 239,416 1,821,180
Cash and cash equivalents, beginning of period - 3,541,829 1,581,764 -
------------------------------------------------------ -------------- --------------- --------------- ---------------
Cash and cash equivalents, end of period $ 3,541,829 $ 1,581,764 $ 1,821,180 $ 1,821,180
------------------------------------------------------ -------------- --------------- --------------- ---------------
</TABLE>
See accompanying summary of accounting policies
and notes to financial statements.
F-7
<PAGE>
Worlds.com 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.com Inc. 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 utilize 3D technologies developed by
Predecessor. The Company also sells music and sports
related merchandise through its website.
Revenue Recognition Revenue from technology development and licensing
contracts is recognized upon the attainment of
contractual milestones (approximating the
percentage-of-completion method).
Deferred revenue represents cash received in advance to
be offset against royalties to be earned.
Basis of Presentation The financial statements include the results of
operations of Predecessor and Academic from
December 3, 1997, the date of the Mergers (the "Merger
Date").
The financial statements have been prepared in
accordance with the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 7,
"Accounting and Reporting by Development Stage
Enterprises," which requires development stage
enterprises to employ the same accounting principles as
operating companies.
F-8
<PAGE>
Worlds.com 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, 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 December 31, 1999, based
upon quoted market prices 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 and intangible assets are stated
and Intangible Assets at cost. Depreciation and amortization are calculated
using the straight-line method over the estimated
useful lives of the assets, which range from two to
five years.
Inventory Inventories consist of merchandise held for resale and
are valued at the lower of cost or market. Cost is
determined by the first-in, first-out (FIFO) method.
F-9
<PAGE>
Worlds.com Inc.
(a development stage enterprise)
Summary of Accounting Policies
- --------------------------------------------------------------------------------
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 and $1,193,190
(aggregating $1,353,190), were capitalized and included
in property, equipment and software development as of
December 31, 1998 and 1999, respectively. 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. All software development costs are being
amortized over a period of three years. Amortization
expense charged to operations for the year ended
December 31, 1999 was $151,890.
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-10
<PAGE>
Worlds.com Inc.
(a development stage enterprise)
Summary of Accounting Policies
- --------------------------------------------------------------------------------
Loss Per Share The Company has adopted SFAS No. 128, "Earnings per
Share," which provides for the calculation of "basic"
and "diluted" earnings/loss per share. Basic
earnings/loss per share includes no dilution and is
computed by dividing income/loss available to common
shareholders by the weighted average number of common
shares outstanding for the period. Diluted
earnings/loss per share reflect, in periods in which
they have a dilutive effect, the effect of common
shares issuable upon exercise of stock options and
warrants. 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"). SFAS No. 123 encourages entities to adopt the
fair value method in place of the provisions of
Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB No. 25"), for all
arrangements under which employees receive shares of
stock or other equity instruments of the employer or
the employer incurs liabilities to employees in amounts
based on the price of its stock. The Company has not
adopted the fair value method encouraged by SFAS No.
123 and will continue to account for such transactions
in accordance with APB No. 25.
Comprehensive Income Effective January 1, 1998, the Company adopted SFAS No.
130, "Reporting Comprehensive Income", which
establishes standards for reporting and display of
comprehensive income, its components and accumulated
balances. Comprehensive income is defined to include
all changes in equity except those resulting from
investments by owners and distributions to owners.
Adoption of the standard has had no effect on financial
statement disclosures since there were no items of
comprehensive income during the periods presented.
F-11
<PAGE>
Worlds.com Inc.
(a development stage enterprise)
Summary of Accounting Policies
- --------------------------------------------------------------------------------
Recent Accounting In June 1998, the Financial Accounting Standards Board
Pronouncements issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities," which requires
entities to recognize all derivative financial
instruments as either assets or liabilities in the
balance sheet and measure these instruments at fair
value. SFAS No. 133, as amended by SFAS No. 137, is
effective for all fiscal years beginning after June 15,
2000. The Company does not presently enter into any
transactions involving derivative financial instruments
and, accordingly, does not anticipate that the new
standard will have any effect on its financial
statements.
F-12
<PAGE>
Worlds.com Inc.
(a development stage enterprise)
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. Going Concern As discussed in Notes 2 and 3, the Company completed a
private placement during the fourth quarter of 1997 raising
gross proceeds of $4,415,000, consummated a merger agreement
during December 1997 with a development stage enterprise,
Predecessor, completed a public offering in June 1998
raising gross proceeds of $1,832,000, and completed a
private placement during the third quarter of 1999, raising
gross proceeds of $3,540,000. 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, has incurred
significant losses since its inception, and has had minimal
revenues from operations since the series of merger
transactions. 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-13
<PAGE>
Worlds.com 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 and were
cancelled during the third quarter of 1999.
F-14
<PAGE>
Worlds.com Inc.
(a development stage enterprise)
Notes to Financial Statements
- --------------------------------------------------------------------------------
3. Private Placement The Private Placement discussed in Note 2 called for
and Public WAC to offer for sale a maximum of 50 units (57-1/2
Offering with the over-allotment), each consisting of 120,000
shares of WAC's common stock (the "Units") at a price
of $120,000 per Unit. In connection with the Private
Placement, the placement agent was to receive one
warrant to purchase one share of WAC's common stock at
$1 per share for every $40 of gross proceeds from the
sale of the Units. On November 21, 1997, WAC sold 31.67
Units with gross proceeds of $3,800,000 (3,800,000
shares) (the "Initial Private Placement Closing") and
the placement agent was issued 425,000 shares of common
stock. On December 31, 1997, the Company sold 4.88
Units with gross proceeds of $585,000 (585,000 shares).
On January 2, 1998 a further 30,000 shares were issued
with gross proceeds of $30,000. Cumulative net
proceeds, after commissions and expenses of the
offering, aggregated $3,721,176.
WAC agreed to include the shares of common stock
underlying the Units sold in the Private Placement (the
"Private Placement Shares") in a registration statement
to be filed with the Securities and Exchange Commission
(the "SEC"). Such registration statement was declared
effective on May 1, 1998. During June 1998, WAC sold
1,832,000 shares in a public offering of its stock and
received gross proceeds of $1,832,000. Net proceeds,
after commissions of this offering, aggregated
$1,715,800.
During the second and third quarters of 1999, the
Company sold 892,500 shares in a private offering and
received gross proceeds of $3,540,000. In connection
with the private offering, the Company issued warrants
to purchase 452,500 shares of common stock at $5.00 per
share to the investors in the offering. Broker-dealers
assisting the Company in the sale of its securities
were issued warrants to purchase 48,000 shares of
common stock of the Company at $5.00 per share. Net
proceeds, after commissions and expenses of this
offering, aggregated $3,263,974.
F-15
<PAGE>
Worlds.com Inc.
(a development stage enterprise)
Notes to Financial Statements
- --------------------------------------------------------------------------------
4. Agreement and On June 25, 1998, the Company entered into an agreement
Plan of Merger 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.com
Inc." The Agreement was, among other conditions,
subject to approval by both Unity and the Company's
stockholders.
On October 29, 1998, the Company's stockholders voted
in favor of the Agreement, however, Unity did not
obtain the super majority of 80% required by Unity's
Charter, thereby canceling the proposed plan of merger
and reorganization.
5. Property, A summary of property, equipment and software
Equipment and development at December 31, 1998 and 1999 is as follows:
Software
Development
<TABLE>
<CAPTION>
<S> <C> <C>
December 31, 1998 1999
---------------------------------- ---------------------- ----------------------
Computers, software and equipment $426,796 $ 599,333
Software development costs 160,000 1,353,190
---------------------------------- ---------------------- ----------------------
Total 586,796 1,952,523
Less: Accumulated depreciation
and amortization 372,550 599,476
---------------------------------- ---------------------- ----------------------
$214,246 $ 1,353,047
---------------------------------- ---------------------- ----------------------
</TABLE>
F-16
<PAGE>
Worlds.com Inc.
(a development stage enterprise)
Notes to Financial Statements
- --------------------------------------------------------------------------------
6. Intangible Asset During June 1999, the Company entered into a content
supply agreement for 2D and 3D internet sites offered
by an Internet service provider (the "Provider"). The
agreement provides for advertising revenue sharing and
an e-commerce link to the Company's website which
markets music and sports related merchandise.Under the
terms of the agreement, the Company paid $125,000 and
issued 93,750 shares of common stock upon signing. The
brokerage agent of such agreement was issued 50,000
shares of common stock during July 1999 ($200,000).
Further, 93,750 shares were issued upon launch of the
sites during November 1999 and $125,000, which was
accrued at December 31, 1999, was paid during February
2000. The total consideration of $1,200,000 is recorded
as an intangible asset and is being amortized on a
straight-line basis (commencing in the fourth quarter
of 1999) over the initial term of the agreement, which
expires June 2001. Accumulated amortization at December
31, 1999 was $66,666.
F-17
<PAGE>
Worlds.com Inc.
(a development stage enterprise)
Notes to Financial Statements
- --------------------------------------------------------------------------------
7. Notes Payable Long-term debt at December 31, 1998 and 1999 consists
of the following:
<TABLE>
<CAPTION>
December 31, 1998 1999
--------------------------------------------- ---------------- -----------------
<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
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
--------------------------------------------- ---------------- -----------------
2,121,666 2,121,666
Less: Current maturities 246,648 2,054,996
--------------------------------------------- ---------------- -----------------
Long-term portion $1,875,018 $ 66,670
--------------------------------------------- ---------------- -----------------
</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-18
<PAGE>
Worlds.com Inc.
(a development stage enterprise)
Notes to Financial Statements
- --------------------------------------------------------------------------------
Maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------------------- ----------------------
<S> <C>
2000 $2,054,996
2001 39,996
2002 26,674
--------------------------------------------------------- ----------------------
$2,121,666
--------------------------------------------------------- ----------------------
</TABLE>
8. Commitments (a) The Company is obligated under noncancellable operating
leases for office space. Minimum annual rental
payments are approximately as follows:
<TABLE>
<CAPTION>
Year ending December 31,
------------------------------------------------------ ------------------
<S> <C>
2000 $75,000
2001 37,000
2002 18,000
------------------------------------------------------ ------------------
</TABLE>
Rent expense for the period ended December 31, 1997
and the years ended December 31, 1998 and 1999 were
approximately $21,000, $112,000, and $156,000,
respectively. These amounts include approximately
$5,000, $64,000 and $89,000 for the periods,
respectively, of rent paid under month-to-month
arrangements.
(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-19
<PAGE>
Worlds.com Inc.
(a development stage enterprise)
Notes to Financial Statements
- --------------------------------------------------------------------------------
(c) On March 23, 1999, the Company entered into a
three-year financial advisory and consulting
agreement (that became effective during April
1999) 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. 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.
Further, in connection with the above consulting
agreement, three founding stockholders of WAC
contributed 1,500,000 shares to the capital of the
Company. Such shares had been classified as treasury
stock and were cancelled during the third quarter of
1999.
(d) On December 15, 1999, the Company entered into an
additional content supply agreement to provide
two customized websites with the Company's 3D
technology. Under the terms of the agreement the
Company received $500,000 upon signing, which is
included in deferred revenue at December 31, 1999. The
Company will be entitled to an additional payment of
$250,000 upon delivery of the first website.
On December 31, 1999, the Company entered into an
additional content supply agreement to provide a
customized website with the Company's 3D technology.
Under the terms of the agreement the Company received
$20,000 upon execution of the agreement during January
2000.
The above agreements provide for the Company to receive
royalty revenue from advertising placements and
subscriptions with respect to customized websites.
F-20
<PAGE>
Worlds.com Inc.
(a development stage enterprise)
Notes to Financial Statements
- --------------------------------------------------------------------------------
9. Stockholders'
Equity (Deficit) 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 3,000,000 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 3,000,000 limit.
The Company applies APB Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25"), and related
Interpretations in accounting for the Option Plan.
Under APB 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.
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 1998
and 1999, no dividend yield; expected volatility of
46.1% in 1998 and 45.8% in 1999; risk-free interest
rate of 4.3% in 1998 and 5.8% in 1999; and expected
life of 3.8 years.
F-21
<PAGE>
Worlds.com Inc.
(a development stage enterprise)
Notes to Financial Statements
- --------------------------------------------------------------------------------
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,
December 31, ------------------ -----------------
1997 1998 1999
------------------------ ----------------- ------------------ -----------------
<S> <C> <C> <C>
Net loss:
As reported $(6,686,471) $(2,648,681) $(3,339,500)
Pro forma (6,751,856) (2,654,185) (3,811,956)
Net loss per share
(basic and
diluted):
As reported $ (.72) $ (.15) $ (.19)
Pro forma (.72) (.15) (.22)
------------------------ ----------------- ------------------ -----------------
</TABLE>
F-22
<PAGE>
Worlds.com 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, 1998 and 1999, and changes during the years ending on those dates, is
presented below:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1998 December 31, 1999
----------------------------- ---------------------------- ---------------------------
Weighted Weighted Weighted
average average average
exercise exercise exercise
Shares price Shares price Shares price
--------------------------- -------------- -------------- --- -------------- ------------- --- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year - $ - 165,000 $ .50 830,000 $ .90
Granted 165,000 .50 700,000 1.00 321,300 3.00
Exercised - - - - (75,000) 1.00
Cancelled - - (35,000) (1.00) (180,000) .90
--------------------------- -------------- -------------- --- -------------- ------------- --- -------------- ------------
Outstanding at end of year 165,000 $ .50 830,000 $ .90 896,300 $ 1.63
--------------------------- -------------- -------------- --- -------------- ------------- --- -------------- ------------
Options exercisable at
year-end 13,750 $ .50 153,805 $ .78 492,466 $ .92
--------------------------- -------------- -------------- --- -------------- ------------- --- -------------- ------------
Weighted average fair
value of options
granted during the year $ - $ - $ 1.12
--------------------------- -------------- -------------- --- -------------- ------------- --- -------------- ------------
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1999.
<TABLE>
<CAPTION>
Options outstanding Options exercisable
--------------------------------------------------------- ------------------------------------
Number
outstanding at Weighted average Number
Range of exercise December 31, remaining Weighted average exercisable at Weighted average
prices 1999 contractual life exercise price December 31, 1999 exercise price
------------------------ ------------------ ------------------ ------------------- -- ------------------- ----------------
<S> <C> <C> <C> <C> <C>
$.50 to $1.00 600,000 3.81 $ .90 485,666 $ .88
$2.00 to $3.00 165,000 4.66 2.46 - -
$3.01 to $4.00 131,300 4.66 4.00 6,800 4.00
------------------------ ------------------ ------------------ ------------------- -- ------------------- ----------------
896,300 4.09 $ 1.63 492,466 $ .92
------------------------ ------------------ ------------------ ------------------- -- ------------------- ----------------
</TABLE>
F-23
<PAGE>
Worlds.com Inc.
(a development stage enterprise)
Notes to Financial Statements
- --------------------------------------------------------------------------------
Non-Plan Stock Options and Warrants
The Company has issued options and warrants to various
employees, directors and other third parties that were not
part of the Company's Option Plan. The following non-plan
options and warrants were issued during 1999:
a) Warrants to purchase 300,000 shares of common stock of
the Company at $2.46 per share were issued to a
consultant in connection with services rendered for the
development of the Company's proprietary software (see
Note 1). The warrants were valued at $355,004 and were
capitalized as software development costs.
b) Options to purchase an aggregate of 750,000 shares of
common stock of the Company at various prices between
$2.91 and $10.00 per share were issued to two employees
and a director of the Company.
c) Warrants to purchase an aggregate of 500,500 shares of
common stock of the Company at $5.00 per share were
issued in connection with a private offering
(see Note 3).
d) Warrants to purchase 1,000,000 shares of common stock
at $.50 per share were issued in connection with a
financial advisory and consulting agreement
(see Note 8(c)).
F-24
<PAGE>
Worlds.com Inc.
(a development stage enterprise)
Notes to Financial Statements
- --------------------------------------------------------------------------------
10. Income Taxes The use of the Predecessor's net operating loss ("NOL") is
subject to annual limits due to the ownership change for the
Mergers. In general, an ownership change occurs if, during
any three-year test period, the aggregate of all increases
in percentage ownership by stockholders is more than 50%.
Upon completion of the Mergers discussed in Note 2, such an
ownership change occurred.
At December 31, 1999, 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 $9,300,000 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.
11. Extraordinary During 1997, the Company negotiated settlement of
Item 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.
12. Gain Resulting During December 1998, management determined that certain
from Reversal predecessor liabilities assumed at the date of the Merger
of Certain with Predecessor were no longer owed. During the fourth
Predecessor quarter of 1998, accounts payable ($220,000), accrued
Liabilities 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-25
<PAGE>
Worlds.com Inc.
(a development stage enterprise)
Notes to Financial Statements
- --------------------------------------------------------------------------------
13. Loss Per Share The following table sets forth the computation of basic and
diluted loss per share:
<TABLE>
<CAPTION>
Period from
inception to Year ended December 31,
December 31, --------------- ---------------
1997 1998 1999
-------------------------------- -------------- --------------- ---------------
<S> <C> <C> <C>
Numerator:
Loss before extraordinary
item $(6,812,247) $ (2,821,228) $ (3,339,500)
Extraordinary item 125,776) 172,547 -
-------------------------------- -------------- --------------- ---------------
Net loss, numerator
for basic loss per
share (6,686,471) (2,648,681) (3,339,500)
Effect of dilutive
securities:
Convertible debt - - -
-------------------------------- -------------- --------------- ---------------
Net loss, numerator
for diluted loss
per share $(6,686,471) $ (2,648,681) $ (3,339,500)
-------------------------------- -------------- --------------- ---------------
Denominator:
Denominator for basic loss
per share - weighted
average common shares 9,336,569 17,170,288 17,377,808
-------------------------------- -------------- --------------- ---------------
Effect of dilutive
securities:
Convertible debt - - -
Stock options and
warrants 33,343 79,724 1,206,749
-------------------------------- -------------- --------------- ---------------
Dilutive potential
common shares 33,343 79,724 1,206,749
-------------------------------- -------------- --------------- ---------------
Denominator for diluted
loss per share -
adjusted weighted
average common shares
and assumed conversions 9,369,912 17,250,012 18,584,557
-------------------------------- -------------- --------------- ---------------
Basic loss per share $ (.7) $ (.15) $ (.19)
-------------------------------- -------------- --------------- ---------------
Diluted loss per share - as
calculated $ (.71) $ (.15) $ (.18)
-------------------------------- -------------- --------------- ---------------
Diluted loss per share - as
disclosed due to
anti-dilutive effect of
stock options $ (.72) $ (.15) $ (.19)
-------------------------------- -------------- --------------- ---------------
</TABLE>
F-26
<PAGE>
Worlds.com Inc.
(a development stage enterprise)
Notes to Financial Statements
- --------------------------------------------------------------------------------
For additional disclosure regarding stock options, warrants
and convertible debt, see Notes 3, 7, 8 and 9, respectively.
Options to purchase 50,000 shares of common stock at $5 per
share were outstanding during 1997 and 1998, and options to
purchase 1,125,000 shares of common stock, at various
prices, were outstanding during 1999. These shares were not
included in the computation of diluted loss per share
because the option exercise prices were greater than the
fair value of common shares and, therefore, the effect would
be anti-dilutive.
14. Supplemental 1) Interest paid was approximately $1,600, $1,000 and $575
Cash Flow for the period ended December 31, 1997 and the years
Information ended December 31, 1998 and 1999, respectively.
2) Noncash investing and financing activities during the
period ended December 31, 1997 were as follows:
(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 7).
(c) The Company converted accounts payable of
$250,000 into a note payable (see Note 7).
F-27
<PAGE>
Worlds.com Inc.
(a development stage enterprise)
Notes to Financial Statements
- --------------------------------------------------------------------------------
3) Noncash investing and financing activities during the
year ended December 31, 1999 were as follows:
(a) During 1999, the Company issued 237,500 shares
(valued at $950,000) with respect to a content
supply agreement and incurred $125,000 in
accounts payable related to such agreement that
was paid in February 2000 (see Note 6).
(b) During 1999, the Company issued 300,000 warrants
to purchase common stock in the Company as
consideration for services rendered in
connection with the development of the Company's
proprietary software. The warrants were valued
at $355,004.
F-28
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: March 29, 2000 WORLDS.COM INC.
(Registrant)
By: /s/ Thomas Kidrin
--------------------------------------
Name: Thomas Kidrin
Title: President and Chief Executive
Officer
In accordance with the Securities Exchange Act of 1934, this Report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
- ---------- ----- ----
<S> <C> <C>
/s/ Thomas Kidrin President, Chief Executive March 29, 2000
- ----------------------------- Officer and Director (Chief --
Thomas Kidrin Financial Accounting Officer)
/s/ Steven G. Chrust Chairman March 29, 2000
- ----------------------------- --
Steven G. Chrust
/s/ Kenneth A. Locker Director March 29, 2000
- ----------------------------- --
Kenneth A. Locker
/s/ Michael J. Scharf Director March 29, 2000
- ----------------------------- --
Michael J. Scharf
/s/ William Harvey Director March 29, 2000
- ----------------------------- --
William Harvey
</TABLE>
25
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Incorporated
By Reference
Exhibit from No. in
Number Description Document Document Page
- ------ ----------- -------- -------- ----
<S> <C> <C> <C> <C>
3.1 Certificate of Incorporation A 3.1
3.1.1 Certificate of Amendment of the Certificate - - Filed
of Incorporation Herewith
3.1.2 Certificate of Merger A 3.1.1
3.2 By-Laws A 3.2
4.1 Specimen common stock Certificate A 4.1
4.2 1997 Incentive and Non-Qualified Stock B 4.1
Option Plan, as amended
4.3 Form of Employee Incentive/Non-Incentive B 4.2
Stock Option Agreement under the 1997
Incentive and Non-Qualified Stock Option
Plan
4.4 Form of Consultant Non-Incentive Stock B 4.3
Option Agreement under the 1997 Incentive
and Non-Qualified Stock Option Plan
4.5 Form of Director Non-Incentive Stock B 4.4
Option Agreement under the 1997 Incentive
and Non-Qualified Stock Option Plan
4.6 Form of Community Leader Stock Option B 4.5
Agreement under the 1997 Incentive and
Non-Qualified Stock Option Plan
4.10 Schedule of Option Grants under Benefit B 4.9
Plans
10.1 Merger Agreement between Worlds C 99
Acquisition Corp. and Academic Computer
Systems, Inc.
10.2 Consulting Agreement between the - - Filed
Registrant and SGC Advisory, Inc. Herewith
27 Financial Data Schedule - - Filed
Herewith
99 Risk Factors - - Filed
Herewith
</TABLE>
A. Registrant's Registration Statement No. 2-31876.
B. Registrant's Registration Statement on Form S-8 (File No. 333-89937).
C. Registrant's Current Report on Form 8-K filed on December 18, 1997.
26
EXHIBIT 3.1.1
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
WORLDS INC.
---------------------------------
Pursuant to Sections 14A:9-2(4) and 14A:9-4(3)
of the New Jersey Business Corporation Act
---------------------------------
The undersigned, on behalf of Worlds Inc. ("Corporation"), a New Jersey
corporation, pursuant to the provisions of Sections 14A:9-2(4) and 14A:9-4(3) of
the New Jersey Business Corporations Act, hereby certifies:
1. The name of the Corporation is Worlds Inc.
2. The Certificate of Incorporation of the Corporation is hereby
amended by deleting Article FIRST in its entirety and by substituting the
following new Article FIRST in lieu thereof:
FIRST: The name of the corporation is Worlds.com Inc. (hereinafter
sometimes called the "Corporation").
3. The Certificate of Incorporation of the Corporation is also amended
by deleting Article FOURTH in its entirety and by substituting the following new
Article FOURTH in lieu thereof:
FOURTH: The total authorized capital stock of this corporation is
65,000,000 shares of common stock, par value $.001 per share.
4. The Certificate of Incorporation of the Corporation is further
amended by adding the following new ARTICLE EIGHTH:
EIGHTH: A director or officer shall not be personally liable to the
Corporation or its shareholders for damages for breach of any duty owed to the
Corporation or its shareholders, except that such provision shall not relieve a
director or officer from liability for any breach of duty based upon an act or
omission (a) in breach of such person's duty of loyalty to the Corporation or
its shareholders, (b) not in good faith or involving a knowing violation of law
or (c) resulting in receipt by such person of an improper personal benefit. As
used in this paragraph, an act or omission in breach of a person's duty of
loyalty means an act or omission which that person knows or believes to be
contrary to the best interests of the Corporation or its shareholders in
<PAGE>
connection with a matter in which he has a material conflict of interest.
5. These amendments to the Certificate of Incorporation were approved
by the directors and thereafter duly adopted by the shareholders of the
Corporation on the 15th day of December, 1999:
6. The number of shares outstanding at the time of the adoption of the
amendments was 17,550,381. The total number of shares entitled to vote thereon
was 17,550,381.
7. 10,382,544 shares voted in favor of the amendment to Article FIRST,
15,400 shares voted against the amendment to Article FIRST.
8. 8,940,711 shares voted in favor of the amendment to Article FOURTH,
66,733 shares voted against the amendment to Article FOURTH.
9. 9,392,361 shares voted in favor of the new Article EIGHTH, 466,261
shares voted against the new Article EIGHTH.
WORLDS INC.
By: /s/ Thomas Kidrin
--------------------
Thomas Kidrin, President
Dated this 22nd day of December, 1999
<PAGE>
FINANCIAL ADVISORY AND CONSULTING AGREEMENT
-------------------------------------------
This Agreement is made and entered into as of the 23rd day of March,
1999 between SGC Advisory Services, Inc. ("SGC" or the "Consultant") and Worlds
Inc. (the "Company").
In consideration of the mutual promises made herein and for other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. The Company hereby engages the Consultant to render financial
advisory and consulting service to the Company upon the terms and conditions set
forth herein. The term of this Agreement shall be for 36 months commencing as of
the "Start Date," as defined below. On or prior to April 13, 1999, the Company
shall appoint Steven Chrust as a member and Chairman of its Board of Directors
(the date of such appointment referred to herein as the "Start Date"). The
Company agrees that it will nominate Mr. Chrust for election as a director at
any shareholder's meeting held for the purpose of electing directors during the
term of this Agreement. As long as Mr. Chrust is a director of the Company, he
shall retain his title of Chairman of the Board.
2. During the term of this Agreement, Consultant shall provide the
Company with such regular and customary financial consulting advice as is
reasonably requested by the Company. It is understood and acknowledged by the
parties that the value of Consultant's advice is not readily quantifiable, and
that although Consultant shall be obligated to render the advice contemplated by
this Agreement upon the reasonable request of the Company, Consultant shall not
be obligated to spend any specific amount of time in so doing. Consultant's
duties may include, but will not necessarily be limited to:
(a) Rendering advice with regard to internal operations,
including:
(i) the formation of corporate goals and their
implementation;
(ii) the Company's financial structure and its divisions or
subsidiaries; and
(iii) corporate organization and personnel.
(b) Rendering advice with regard to any of the following
corporate finance matters:
(i) changes in the capitalization of the Company;
(ii) changes in the Company's corporate structure;
(iii) redistribution of shareholdings of the Company's stock;
(iv) offerings of securities in public and private
transactions;
(v) alternative uses of corporate assets;
(vi) structure and use of debt; and
(vii) sales of stock by insiders pursuant to Rule 144 or
otherwise.
<PAGE>
(c) Assistance in connection with the preparation and
dissemination of information about the Company to the investment community at
large and otherwise assisting in the Company's financial public relations.
In addition to the foregoing, Consultant agrees to (A) furnish
advice to the Company in connection with the acquisition of and/or merger with
other companies, the sale of the Company itself, or any of its assets,
subsidiaries or affiliates, or similar type of transaction (hereinafter referred
to as a "Transaction"), (B) assist the Company in identifying potential partners
in connection with a Transaction, (C) furnish advice to the Company in
connection with financings from financial institutions, including but not
limited to lines of credit, performance bonds, letters of credit, loans or other
financings (hereinafter referred to as a "Bank Financing"), and (D) assist the
Company in the negotiation and review of all documents submitted to the Company
by third parties in connection with a potential Transaction or Bank Financing.
Consultant shall also render such other financial consulting
and/or investment banking services as may from time to time be agreed upon by
Consultant and the Company.
3. The Company shall pay Consultant the following compensation:
(a) an annual fee of $120,000 in monthly installments of
$10,000, commencing on the Start Date; provided, however, that such monthly
payments shall accrue and not be paid in cash until the date by which the
Company has raised at least $1,500,000 in debt or equity financings consummated
at any time during the term of this Agreement ("Financing Trigger Date"). If the
Company does not raise such financing, no fees shall be paid. If the Company
raises such financing, then all accrued and unpaid fees shall be paid on the
Financing Trigger Date and all payments will be made monthly, in cash,
thereafter for as long as this Agreement remains in effect. Notwithstanding the
foregoing, the annual fee shall increase to $300,000 ($25,000 per month) at such
time when (i) the Company's market value (i.e. the number of outstanding shares
multiplied by the market price) exceeds $100,000,000, and (ii) the Company has
raised at least $5,000,000 in debt or equity financings consummated at any time
during the term of this Agreement.
(b) warrants ("Warrants") to purchase 1,000,000 shares of the
Company's Common Stock, exercisable for a period of seven years commencing on
the Start Date at an exercise price $.50 per share. The Warrants are fully
earned by SGC (and/or its designees) as of the execution of this Agreement and
may not be terminated by the Company for any reason.
4. In addition to the fees payable hereunder, the Company shall
reimburse Consultant for all reasonable travel and out-of-pocket expenses
incurred in connection with the services performed by Consultant pursuant to
this
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<PAGE>
Agreement, promptly after submission to the Company of appropriate evidence of
such expenditures. Notwithstanding the foregoing, Consultant shall incur no more
than $3,000.00 of expenses in any calendar month without Company's consent.
5. The Company acknowledges that all opinions and advice (written or
oral) given by Consultant to the Company in connection with Consultant's
engagement are intended solely for the benefit and use of the Company in
considering the transaction to which they relate, and the Company agrees that no
person or entity other than the Company shall be entitled to make use of or rely
upon the advice of Consultant to be given hereunder, and no such opinion or
advice shall be used for any manner or for any purpose, nor may the Company make
any public references to Consultant, or use the Consultant's name in any annual
reports or any other reports or releases of the Company, without Consultant's
prior written consent.
6. Consultant will hold in confidence any information which the Company
provides to Consultant pursuant to this Agreement which is confidential and not
part of the public domain. Notwithstanding the foregoing, Consultant shall not
be required to maintain confidentiality with respect to information (i) which is
or becomes part of the public domain not due to the breach of this Agreement by
Consultant; (ii) of which it had independent knowledge prior to disclosure;
(iii) which comes into the possession of Consultant in the normal and routine
course of its own business from and through independent non-confidential
sources; or (iv) which is required to be disclosed by Consultant by laws, rules
or regulations. If Consultant is requested or required to disclose any
confidential information supplied to it by the Company, Consultant shall, unless
prohibited by law, promptly notify the Company of such request(s) so that the
Company may seek an appropriate protective order. Upon termination of this
Agreement or at the earlier request of the Company, Consultant shall return to
the Company all confidential documents, files, reports and data regarding the
Company, its business or its finances then in Consultant's possession.
7. The Company acknowledges that Consultant or its affiliates are in
the business of providing financial services and consulting advice to others.
Nothing herein contained shall be construed to limit or restrict Consultant in
conducting such business with others, or in rendering such advice to others.
8. The Company recognizes and confirms that, in advising the Company
hereunder, Consultant will use and rely on data, material and other information
furnished to Consultant by the Company, without independently verifying the
accuracy, completeness or veracity of same.
9. The Company agrees to indemnify and hold harmless SGC, its
employees, agents, representatives and controlling persons from and against any
and all losses, claims, damages, liabilities, suits, actions, proceedings, costs
and expenses (collectively, "Damages"), including, without limitation,
reasonable attorney fees and expenses, as and when incurred, if such Damages
were directly or indirectly caused by, relating to, based upon or arising out of
the
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<PAGE>
rendering by SGC of services pursuant to this Agreement, so long as SGC shall
not have engaged in intentional or willful misconduct, or shall have acted
grossly negligently, in connection with the services provided which form the
basis of the claim for indemnification. The Company agrees to indemnify and hold
harmless Steven Chrust, to the fullest extent possible under law, for Damages,
as and when incurred, if such Damages were directly or indirectly caused by,
relating to, based upon or arising out of Mr. Chrust acting as a director and/or
Chairman of the Board of Directors of the Company. This paragraph shall survive
the termination of this Agreement. Notwithstanding the foregoing, if the Company
has entered into indemnification agreements or agreements with an executive
officer or director which is more favorable to such person then as set forth
above, the Company shall promptly after the execution of this agreement, enter
into a similar agreement with Mr. Chrust.
10. Consultant shall perform its services hereunder as an independent
contractor and not as an employee or agent of the Company or any affiliate
thereof. Consultant shall have no authority to act for, represent or bind the
Company or any affiliate thereof in any manner, except as may be expressly
agreed to by the Company in writing from time to time.
11. This Agreement constitutes the entire agreement between the parties
with respect to the subject matter hereof. No provision of this Agreement may be
amended, modified or waived, except in a writing signed by both parties. This
Agreement shall be binding upon and inure to the benefit of each of the parties
and their respective successors, legal representatives and assigns. This
Agreement may be executed in counterparts. In the event of any dispute under
this Agreement, then and in such event, each party agrees that the same shall be
submitted to the American Arbitration Association ("AAA") in the City of New
York, for its decision and determination in accordance with its rules and
regulations then in effect. Each of the parties agrees that the decision and/or
award made by the AAA may be entered as judgment of the Courts or the State of
New York, and shall be enforceable as such. This Agreement shall be construed
and enforced in accordance with the laws of the State of New York, without
giving effect to conflict of laws.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed on the day and year first above written.
SGC ADVISORY SERVICES, INC. WORLDS INC.
By: /s/ Steven Chrust By: /s/ Thomas Kidrin
-------------------------------- --------------------------------
Name: Steven Chrust Name: Thomas Kidrin
Title: President Title: President and CEO
4
<PAGE>
Exhibit 99
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 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 our 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
$3,339,500 for the year ended December 31, 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 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.
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
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.
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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 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 as we require it, 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.
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 web sites 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
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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 compel them to return to the site for repeat visitations.
We have conducted only limited marketing activities to date and have only
limited experience and 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 book 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 products into the marketplace in a timely manner and to continually enhance
and improve our technology (including to conform to any industry standards).
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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 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.
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.
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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.
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
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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.
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
rights 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 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.
vi
<PAGE>
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.
Although we have not experienced any disruptions in our operations due to Year
2000 issues, disruptions may occur in the future. If our efforts to address Year
2000 compliance issues turn out to be unsuccessful, or if vendors with whom we
conduct business unsuccessfully addressed 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's consulting company which has a term 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.
Possible issuances of our capital stock would cause dilution to our existing
shareholders.
While we currently have approximately 17,700,000 shares of common stock
outstanding, we are authorized to issue up to 65,000,000 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 a
significant portion 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 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.
vii
<PAGE>
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 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.
The exercise or conversion of outstanding options and warrants 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
approximately 3,975,000 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.
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.
viii
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary information extracted from the financial
statements of Worlds.com Inc. for the year ended December 31, 1999 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,821,180
<SECURITIES> 0
<RECEIVABLES> 177,215
<ALLOWANCES> 0
<INVENTORY> 221,511
<CURRENT-ASSETS> 2,294,576
<PP&E> 1,952,523
<DEPRECIATION> 599,476
<TOTAL-ASSETS> 4,780,957
<CURRENT-LIABILITIES> 3,736,476
<BONDS> 0
0
0
<COMMON> 17,738
<OTHER-SE> 960,073
<TOTAL-LIABILITY-AND-EQUITY> 4,780,957
<SALES> 507,499
<TOTAL-REVENUES> 507,499
<CGS> 318,553
<TOTAL-COSTS> 318,553
<OTHER-EXPENSES> 3,428,236
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 157,155
<INCOME-PRETAX> (3,339,500)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,339,500)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,339,500)
<EPS-BASIC> (.19)
<EPS-DILUTED> (.19)
</TABLE>
