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As filed with the Securities and Exchange Commission on June 29, 2000
Registration No. 333-10838
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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POST-EFFECTIVE AMENDMENT NO. 3
TO
FORM SB-2
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
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WORLDS.COM INC.
(Formerly Worlds Inc.)
We are not affiliated with Worldcom Inc.
(Name of small business issuer in its charter)
<TABLE>
<S> <C> <C>
New Jersey 7370 22-1848316
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
15 Union Wharf Thomas Kidrin, CEO
Boston, Massachusetts 02109 15 Union Wharf
(617) 725-8900 Boston, Massachusetts 02109
(Address and Telephone Number of (617) 725-8900
Principal Executive Offices and (Name, Address and Telephone
Principal Place of Business) Number of Agent For Service)
</TABLE>
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Copies to:
David Alan Miller, Esq.
Graubard Mollen & Miller
600 Third Avenue
New York, New York 10016
Telephone: (212) 818-8800
Approximate Date of Commencement of Proposed Sale to Public: At the discretion
of the selling shareholders.
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement of the earlier effective registration statement for the
same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
----------------------------
The registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
We are filing this Post-Effective Amendment No. 3 to our Registration
Statement on Form SB-2, which was declared effective on October 28,
1999 in order to meet our obligations pursuant to Rule 427 of the
General Rules and Regulations under the Securities Act of 1933
concerning the date of our financial statements.
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WORLDS.COM INC.
--------------------------------
5,356,125 shares of common stock
This Prospectus covers:
o The sale from time to time of an aggregate of 2,609,500 shares
of common stock by the persons indicated in this prospectus. All of these shares
were issued by us to them in a private placement in December 1997.
o The sale from time to time of an aggregate of 1,235,375 shares
of common stock by the persons indicated in this prospectus. All of these shares
are shares that would be issued by us to them upon the exercise of options and
warrants.
o The sale from time to time of an aggregate of 882,500 shares of
common stock by the persons indicated in this prospectus. All of these shares
were issued by us to them in or in connection with a private placement in June
and August 1999.
o The sale from time to time of an aggregate of 441,250 shares of
common stock by the persons indicated in this prospectus. All of these shares
are shares that would be issued by us to them upon the exercise of warrants
issued in or in connection with the June and August 1999 private placement.
o The sale from time to time of 187,500 shares of common stock by
the persons indicated in this prospectus. These shares were issued by us in
connection with our recent transaction with Freeserve.
Our common stock is quoted on the OTC Bulletin Board under the symbol
"WDDD." On June 23, 2000, the last reported sale price of our common stock was
$1.44 per share.
We will not receive any cash proceeds from the sale of any shares by
any person under this prospectus. We will receive proceeds upon the exercise of
the aforementioned options and warrants from time to time and will use such
proceeds for working capital and general corporate purposes. We will bear all
costs, expenses and fees in connection with the registration of the shares
offered by this prospectus. Such expenses are estimated to be approximately
$140,000.
See "Risk Factors" beginning on page 6 of this prospectus for information that
should be considered by prospective investors.
------------------------------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
Prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
The date of the Prospectus is June 29, 2000.
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WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and
other information with the SEC. Our SEC filings are available to the public over
the Internet at the SEC's web site at http://www.sec.gov. You may also read and
copy any document we file at the SEC's public reference room at 450 Fifth
Street, N.W., Washington, D.C. 20549. These documents are also available at the
public reference rooms at the SEC's regional offices in New York, New York and
Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further information
on the public reference rooms. Our SEC filings are also available at the offices
of the Nasdaq National Market in Washington, D.C.
We have filed a registration statement on Form SB-2 under the
Securities Act of 1933 with the SEC. This prospectus is part of that
registration statement and, as permitted by the SEC's rules, does not contain
all of the information included in the registration statement. For further
information about us and our common stock, you may refer to the registration
statement and its exhibits and schedules. You can review and copy these
documents at the public reference facilities maintained by the SEC or on the
SEC's website as described above.
This prospectus may contain summaries of contracts or other documents.
Because they are summaries, they will not contain all of the information that
may be important to you. If you would like complete information about a contract
or other document, you should read the copy filed as an exhibit to the
registration statement or incorporated in the registration statement by
reference.
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PROSPECTUS SUMMARY
General
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.
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.
Corporate Background
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.
The address of our principal executive offices is 15 Union Wharf,
Boston, Massachusetts 02109. Our phone number is (617) 725-8900.
Recent Transactions
On March 31, 2000, we consummated an agreement to sell an aggregate of
976,598 shares of common stock pursuant to Regulation S. The shares of common
stock were sold to ten non-U.S. principals at $3.52 per share, less a discount
of 5%, for net proceeds to us of $3,243,957, which includes approximately
$21,000 of fees invoiced after March 31, 2000. In connection with the offering,
we issued a five-year Purchase Option to purchase an aggregate of 73,245 shares
of common stock at $3.87 per share to the placement agent.
On April 7, 2000, we consummated agreements with four investors to sell
an aggregate of 142,045 shares of common stock pursuant to Section 4(2) of the
Securities Act at $3.52 per share. As compensation for these subscriptions, we
paid another agent a commission of 7%. Aggregate net proceeds to us from these
sales were $465,000.
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SUMMARY HISTORICAL FINANCIAL INFORMATION
The following sets forth our selected financial operations data for the
quarter ended March 31, 2000, years ended December 31, 1998 and 1999, and the
selected financial operations data of Worlds.com Inc. (formerly Worlds Inc. and
World's Acquisition Corp.) for the period April 8, 1997 (inception) through
December 31, 1997, and of our predecessor for the year ended December 31, 1996
and for the period of January 1, 1997 through December 3, 1997 (the date we
acquired our predecessor). The following also sets forth our selected balance
sheet data at March 31, 2000 and December 31, 1999. Data for March 31, 2000 are
derived from our unaudited financials of the same date included in this
prospectus while those for the period from inception through December 31, 1999
are derived from the audited financial statements included in this prospectus
(in which the independent certified public accountants report contained
explanatory paragraphs regarding the Company's ability to continue as a going
concern). Data for 1997 are derived from the audited financial statements
previously filed. The following data should be read in conjunction with those
financial statements.
<TABLE>
<CAPTION>
Statement of Operations Data
Worlds.com Inc. Predecessor
---------------------------------------------------------- ------------------------------
Three Months
Ended From 4/8/97 For the Period For the Year
3/31/00 Year Ended Year Ended (Inception) Ended Ended
(Unaudited) 12/31/99 12/31/98 to 12/31/97 12/3/97 12/31/96
----------------------------------------------------------- ------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net revenues............................ $ 180,023 $ 507,499 $ 29,110 $ 1,420 $ 80,720 $ 3,784,019
Total cost and expense.................. $ 2,161,640 $ 3,746,789 $ 3,672,914 $ 6,810,568(b) $ 2,885,088 $ 13,871,984
Operating loss.......................... $(1,981,617) $(3,239,290) $(3,643,804) $(6,809,148) $(2,804,368) $(10,087,965)
Other income and (expenses)............. $ (26,878) $ (100,210) $ 822,576(a) $ (3,099) $ 134,863 $ 16,011
Net loss before taxes and
extraordinary item..................... $(2,008,495) $(3,339,500) $(2,821,228) $(6,812,247) $(2,669,505) $(10,071,954)
Income taxes............................ $ -0- $ -0- $ -0- $ -0- $ (5,000) $ (115,000)
Net loss before extraordinary item...... $(2,008,495) $(3,339,500) $(2,821,228) $(6,812,247) $(2,674,505) $(10,186,954)
Extraordinary item - gain on debt
settlement............................. $ -0- $ -0- $ 172,547 $ 125,776 $ 389,285 $ -0-
Net loss................................ $(2,008,495) $(3,339,500) $(2,648,681) $(6,686,471) $(2,285,220) $(10,186,954)
Loss per share - before extraordinary
item (basic and diluted) $ (.11) $ (0.19) $ (0.16) $ (0.73)
Loss per share (basic and diluted)...... $ (.11) $ (0.19) $ (0.15) $ (0.72)
Balance Sheet Data
<CAPTION>
March 31, 2000
(Unaudited) December 31, 1999
--------------------------------------
<S> <C> <C>
Working capital................................ $ 338,025 (1,441,900)
Total assets................................... $ 6,611,165 4,780,957
Total liabilities.............................. $ 4,141,375 3,803,146
Stockholders' equity........................... $ 2,469,190 977,811
</TABLE>
------------------------
(a) Includes $810,140 gain resulting from reversal of certain predecessor
liabilities.
(b) Includes $6,135,538 of acquired research and development costs
resulting from the Mergers.
5
<PAGE>
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 have a limited history of operations.
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.com (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, $3,339,500 for the year ended December 31, 1999 and $2,008,495 for the
three-month period ended March 31, 2000.
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, and may never, generate any
meaningful revenues or achieve profitable operations until we successfully
attract and retain a significant number of advertisers and users to our 3D sites
and other customers for our 3D technology. 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.
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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.
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 November 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 2001, 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 agreements 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
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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 or termination in our access to any necessary third
party technologies, and our subsequent inability to make alternative
arrangements in a timely manner, if at all, would have a material adverse effect
on our business and financial condition.
The market may not readily accept our products.
Demand and market acceptance for new products, such as our Worlds
Ultimate 3D Chat site, 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 Ultimate 3D 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:
8
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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 bases;
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.
We will need to introduce new services and products in a timely manner in order
to remain competitive.
The markets in which we compete are characterized by rapid changes in
technology and customer requirements, frequent new service and product
introductions 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 to meet 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.
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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. Continued concerns over the security of Internet
transactions and the privacy of its users may also inhibit the growth of the
Internet generally as a means of conducting commercial transactions.
We rely upon encryption and authentication technology, including public
key cryptography technology licensed from third parties, to provide the security
and authentication necessary to effect secure transmission of confidential
information over the Internet. Advances in computer capabilities, new
discoveries in the field of cryptography or other developments could result in a
compromise or breach of the procedures we use to protect customer transaction
data. If any such compromise of our security occurs, our business, financial
condition and operating results could be materially adversely affected.
We are subject to the risks associated with fluctuations in the sales of
prerecorded music and related products.
The recorded music industry has experienced an overall slowdown during
the late 1990s relative to the early 1990s, a trend which is expected to
continue. During the mid-1990s, several of the country's largest record store
chains and many independent music shops either declared bankruptcy or went out
of business as sales of prerecorded music experienced this slowdown. Industry
analysts suggest several causes for this trend, including a glut of products on
the market. In addition, each recording is an individual artistic work, and its
commercial success is primarily determined by consumer taste, which is
unpredictable and constantly changing. Generally, in the record industry,
prerecorded music is shipped to wholesalers and/or retailers on a returnable
basis. Accordingly, there can be no assurance as to the financial success of any
particular release, the timing of such success or the popularity of any
particular artist. There can be no assurance that any of the prerecorded music
producers, artists or distributors that may use our technology or our sites will
be able to generate any significant revenue through such use or, if they do,
that such revenue will be sufficient to recoup costs.
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We are dependent on the success of the Internet as a commercial market place.
Consumers have started to use the Internet only recently and market
acceptance of the Internet as a medium for commerce and advertising is therefore
still uncertain. The rapid growth of global commerce and the exchange of
information on the Internet and other online networks is relatively new and
still evolving, making it difficult to predict whether the Internet will prove
to be a viable commercial marketplace. We believe that our future success may
depend on our ability to significantly increase revenues which may require the
development and widespread acceptance of the Internet and online services as a
medium for commerce and advertising.
The Internet may not prove to be a viable commercial marketplace
because of inadequate development of the necessary infrastructure, such as
reliable network backbones, or complementary services, such as high speed modems
and security procedures for financial transactions. Consumer concern over
Internet security has been, and could continue to be, a barrier to commercial
activities requiring consumers to send their credit card information over the
Internet. The Internet has experienced, and is expected to continue to
experience, significant growth in the number of users and amount of traffic.
There can be no assurance that the Internet infrastructure will continue to be
able to support the demands placed on it by sustained growth. In addition, the
viability of the Internet may prove uncertain due to delays in the development
and adoption of new standards and protocols, the inability to handle increased
levels of Internet activity or due to increased government regulation. If use of
the Internet does not continue to grow, or if the necessary Internet
infrastructure or complementary services are not developed to effectively
support growth that may occur, our business, result of operations and financial
condition would be materially adversely affected.
We face potential liability for the content delivered over our sites.
While we intend to acquire all licenses and other rights necessary to
conduct our business without violating any copyrights, there can be no assurance
that we will be able to do so. Due to the nature of our business, we could
become involved in litigation regarding the music, video and other content
transmitted over our sites which could force us to incur significant legal
defense costs, could result in substantial damage awards against us and could
otherwise damage our brand name and reputation.
In addition, because music materials may be downloaded from our sites
and may be subsequently distributed to others, claims could be made against us
for "pirating" and copyright or trademark infringement. Claims could also be
made against us if material deemed inappropriate for viewing by children is
accessed or accessible through our sites. While we carry insurance policies, our
insurance may not cover these types of claims or may not be otherwise adequate
to cover liability that may be imposed. Any partially or completely uninsured
claim against us, if successful and of sufficient magnitude, would have a
material adverse effect on us.
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
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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.
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.
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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, 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 do not currently have an 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. 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 19,100,000 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 our 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, a director and
two principal shareholders have agreed to vote all of their approximately
4,700,000 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.
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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 4,710,000 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.
The majority 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 us to register such shares in the
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future. Sales or the expectation of sales of a substantial number of shares of
our common stock in the public market could adversely affect the prevailing
market price of our common stock.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and elsewhere in this prospectus are forward-looking
statements that involve risks and uncertainties. These forward-looking
statements include statements about our plans, objectives, expectations,
intentions and assumptions and other statements contained in this prospectus
that are not statements of historical fact. You can identify these statements by
words such as "may," "will," "should," "estimates," "plans," "expects,"
"believes," "intends" and similar expressions. We cannot guarantee future
results, levels of activity, performance or achievements. Our actual results and
the timing of certain events may differ significantly from the results discussed
in the forward- looking statements. Factors that might cause such a discrepancy
include those discussed in "Risk Factors" and elsewhere in this prospectus. You
are cautioned not to place undue reliance on any forward-looking statements.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
financial statements and related notes which are included elsewhere in this
prospectus. Statements made below which are not historical facts are
forward-looking statements. Forward-looking statements involve a number of risks
and uncertainties including, but not limited to, general economic conditions,
our ability to complete development and then market our products, competitive
factors and other risk factors detailed herein. See "Risk Factors" and "Special
Note Regarding Forward-Looking Statements."
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.
Revenues
Historical revenues prior to 1998 were generated by our predecessor
primarily through production service activities and sales of technology
licenses. Following our strategy, we generate revenues in the following manner:
o sales of music and sports related products through our 35
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;
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
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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 are also 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.
During the first quarter of 2000, we began to generate increased
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 the first quarter of 2000, we continued the implementation of
our new business plan. Significant expenditures were incurred in connection
with:
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
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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. For the three months ended March 31, 2000, we did not capitalize
any software development expenditures.
Results of Our Operations
The following data extracted from our unaudited financial statements
compares the results of our operations for the three months ended March 31, 2000
to the three months ended March 31, 1999. The following data extracted from our
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
Three Months Ended March 31, April 8, 1997 Year ended December 31,
---------------------------- (inception) to -----------------------
(unaudited) December 31,
1999 2000 1997 1998 1999
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net revenues............................ $ 35,177 $ 180,023 $ 1,420 $ 29,110 $ 507,499
Costs and expenses:
Cost of revenues................... (21,464) (69,951) - (29,279) (318,553)
Selling, general and
administrative..................... (615,815) (2,091,689 (675,030) (2,650,703) (3,428,236)
Research and development........... - - - (992,932) -
Acquired research and
development........................ - - (6,135,538) - -
Operating loss (602,102) (1,981,617) (6,809,148) (3,643,804) (3,239,290)
Other income (expenses):
Gain resulting from reversal of
certain predecessor liabilities.... - - - 810,140 -
Interest income.................... 12,786 15,751 13,593 124,006 56,945
Interest expense................... (38,922) (2,008,495) (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................................ $(628,238) $(2,008,495) $(6,686,471) $(2,648,681) $(3,339,500)
</TABLE>
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Three months ended March 31, 2000 compared to three months ended March 31, 1999
We continued generating advertising revenue in the first quarter of
2000 through our relationship with Freeserve. We also realized other royalty
revenues by licensing our technology to third parties. Our first quarter of 2000
revenues were $180,023, compared to revenues of $ 35,177 during the first
quarter of 1999, an increase of 411%. Compared to the last quarter of 1999 our
revenues decreased by 32% due to seasonality of our e-commerce merchandise
business.
Selling, general and administrative expenses were $2,091,689 for the
three months ended March 31, 2000 as compared to the three months ended March
31, 1999 of $615,815. This represented an increase of $1,475,874. This increase
was attributable to higher costs associated with building a new management team
to develop the infrastructure required to handle and promote rapid growth,
implementation of our contractual relationships with our strategic partners,
increasing the number of and maintaining our new e-commerce sites and legal and
professional fees.
Other income included $15,751 of interest income for the three months
ended March 31, 2000 earned from the remainder of the proceeds of our share
offerings as compared to $12,786 for the three months ended March 31, 1999.
Other expenses included interest expense of $42,629 directly attributable to our
predecessor's notes payable for the three months ended March 31, 2000. Interest
expense for the three months ended March 31, 1999 was $38,922.
As a result of the foregoing we incurred a net loss of $2,008,495 for
the three months ended March 31, 2000, compared to a loss of $628,238 for the
three months ended March 31, 1999, an increase of $1,380,257.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Revenues consisted primarily of e-commerce sales through our website.
Further, 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.
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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 that was not consummated,
completing development of certain products, 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.
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
At March 31, 2000, we had working capital of $338,025 and cash and cash
equivalents in the amount of $2,707,163. At March 31,2000 we had proceeds from a
private placement in transit of $1,255,373. Included in the working capital
calculation is 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.
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At March 31, 2000, our total liabilities were $4,141,975, including the
current term portion of notes payable of $2,064,995.
In March 2000, we consummated a private placement, selling an aggregate
976,598 shares of common stock. Each share cost $3.52. We raised net proceeds of
$3,243,957.
In April 2000, we entered into agreements with four investors to sell
an aggregate of 142,045 shares of common stock at $3.52 per share. From the
$500,000 total offering price, aggregate net proceeds to us from these sales
were $465,000.
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 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 November 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 2001, 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
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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.
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.
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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:
o engage other avatars in one-on-one text-based or real
voice-to-voice discussions;
o enter theme-based chat rooms featuring group discussions on
numerous music styles, specific recording artists and other topics;
o experience interactive advertising and promotions;
o access information on various recording artists, concert
schedules and other music-related and nonmusic-related information;
o view new music videos by leading recording artists;
o listen to selections from newly released CDs by numerous
recording artists;
o purchase music and recording artist-related merchandise
online; and
o enter pay-access areas as a VIP subscriber.
Currently, almost all Internet sites are entirely two-dimensional with
limited graphic and interactive capabilities because existing technological
barriers typically prevent the delivery of high-quality 3D graphics and motion
imagery. Typically, in order for sites to provide users with high-quality 3D
graphics on the Internet, such users must have very powerful computers and both
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
23
<PAGE>
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.
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;
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<PAGE>
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.
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.
25
<PAGE>
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 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.
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<PAGE>
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 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.
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<PAGE>
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.
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.
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.
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<PAGE>
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, "MOE." 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 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.
Polygram
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.
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.
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<PAGE>
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 us. 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.
Employees
We currently have 25 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.
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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.
Legal Proceedings
We are not involved in any material legal proceeding.
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MANAGEMENT
Officers and Directors
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
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.
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
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<PAGE>
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 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. 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.
Compensation of Directors
Non-employee directors, excluding Mr. Chrust, will be reimbursed for
reasonable travel and lodging expenses incurred in attending meetings of the
Board of Directors and any committee on which they may serve.
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<PAGE>
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of May 31, 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 of persons
known by us to beneficially own more than five percent (5%) of our voting
securities, (ii) each director of Worlds.com, (iii) each current executive
officer whose compensation exceeded $100,000 in 1999, and (iv) all executive
officers and directors of Worlds.com, as a group.
<TABLE>
<CAPTION>
Amount and Nature
Name and Address of Beneficial Owner of Beneficial Owner Percent of Class
------------------------------------ ------------------- ----------------
<S> <C> <C>
Steven G. Chrust 1,465,939(1) 7.8%
Thomas Kidrin 1,290,000(2)(4) 6.8%
Kenneth A. Locker 100,000(3) *
William Harvey -0- (5) *
Steven A. Greenberg 2,046,562(2) 10.7%
Michael J. Scharf(6) 1,381,250(2) 7.2%
All Executive Officers and Directors
as a Group (4 persons) 2,953,771(7) 14.6
</TABLE>
----------
* less than 1%
(1) Includes (i) 1,000,000 shares of common stock issuable upon exercise
the warrants held by SGC;(ii) 42,000 shares of common stock held of
record by Steven and Sharon Chrust jointly; (iii) 60,000 shares of
common stock held of record by Bear Stearns Securities Corp., as
custodian for Mr. Chrust's Individual Retirement Account; (iv) 16,000
shares of common stock held of record by Steven Chrust BSSC Master Def
Contribution Profit Sharing Account; (v) 15,000 shares of common stock
held of record by Eve Chrust, Mr. Chrust' daughter; (vi) 15,000 shares
of common stock held of record by Liza Chrust, Mr. Chrust's other
daughter; and (vii) 15,000 shares of common stock issuable upon the
exercise of presently exercisable warrants granted to Steven and Sharon
Chrust, jointly. Does not include options to purchase a total of
287,500 shares which vest in three equal annual installments,
commencing in March 2001.
(2) Messrs. Kidrin, Greenberg and Scharf have agreed to vote shares owned
by them for the election of Mr. Chrust as a director through March
2002.
(3) Represents shares of common stock issuable upon exercise of currently
exercisable stock options. 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) Does not include options to purchase a total of 175,000 shares which
vest in three equal annual installments, commencing in March 2001.
(5) Does not include 50,000 ahres of common stock issuable upon exercise of
options, which vest in three equal annual installments, commencing in
November 2000.
(6) Mr. Scharf resigned as a director, effective May 30, 2000.
(7) Does not include shares owned by Mr. Scharf.
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<PAGE>
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 $100,000
if employed for the full year) (the "Named Executive Officers") for the year
ended December 31, 1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------
Annual Long-Term Compensation
Compensation(1)(2)
-----------------------------------------------------------
Name and Principal Position Year Salary Bonus ($) 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 us with consulting services, 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 $135,000.
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<PAGE>
Option Grants
The following table represents the stock options granted in the fiscal
year ended December 31, 1999 to our executive officers identified in the Summary
Compensation table above.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
Options Granted in the Last Fiscal Year
----------------------------------------------------------------------------------------------------
Number of Percent of
Securities Total Options
Underlying Granted to
Options Employees in Exercise Price of
Name of Executive Granted (#) Fiscal Year (%) Options ($) 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
----------------------------------------------------------------------------------------------------
<CAPTION>
None of the Named Executive Officers exercised any stock options during 1999.
The following table sets forth certain information concerning the fiscal year
end value of unexercised options held by such persons.
----------------------------------------------------------------------------------------------------
Aggregated Option Exercises in Last Fiscal Year and FY-End Option Values
----------------------------------------------------------------------------------------------------
Number of Securities Underlying
Unexercised Options at FY-End Value of Unexercised In-The-Money
Name of Executive (#) Options at FY-End ($)(1)
----------------------------------------------------------------------------------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Steven G. Chrust 1,000,000 -0- $2,190,000 -0-
----------------------------------------------------------------------------------------------------
Thomas Kidrin -0- -0- -0- -0-
----------------------------------------------------------------------------------------------------
Debra Sito -0- 250,000 -0- -0-
----------------------------------------------------------------------------------------------------
</TABLE>
(1) Represents the difference between the aggregate market value at
December 31, 1999 of the common stock underlying the options, based on
a last sale price of $2.59 on that date, and the options' exercise
prices.
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 May 31, 2000, there were outstanding grants under
the Plan of options to purchase an aggregate of 1,825,100 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, options to purchase
125,000 shares of our stock at $5.68 each, 25,000 shares at $6.00 each and
25,000 shares at $9.00 each, held by Thomas Kidrin, our President, Chief
Executive Officer and President, and options to purchase 187,500 shares at $5.68
each, 50,000 at $6.00 each and 50,000 at $9.00 each, held by Steven G. Chrust,
the Chairman of the Board. As of May 31, 2000, there were 1,064,900 additional
shares of common stock available for grant under the Plan.
36
<PAGE>
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 2,888,875
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.
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 options at $.007335 per share to
purchase 1,363,342 additional shares of common stock owned by Mr. Greenberg at
$3.301 per share. On April 27, 2000, Mr. Chrust, in a private transaction,
assigned 1,317,780 of these options at a price of $.007335 per share. The
remaining 45,562 options were cancelled for no value.
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.
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 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
37
<PAGE>
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.
DISCLOSURE OF COMMISSION POSITION ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Section 14A:3-5 of the New Jersey Business Corporation Act, as amended,
authorizes us to indemnify any director or officer under certain prescribed
circumstances and, subject to certain limitations, against certain costs and
expenses, including attorneys' fees actually and reasonably incurred in
connection with any action, suit or proceeding, whether civil, criminal,
administrative or investigative, to which such person is a party by reason of
being one of our directors or officers if it is determined that such person
acted in accordance with the applicable standard of conduct set forth in such
statutory provisions. At our annual meeting of shareholders on December 15,
1999, our shareholders adopted an amendment to our Certificate of Incorporation
which limited the liability of our directors to the fullest extent permitted
under the New Jersey Business Corporation Act. Article VI of our By-Laws also
provides for indemnification of our directors to the fullest extent permitted
under the New Jersey Business Corporation Act.
We may also purchase and maintain insurance for the benefit of any
director or officer which may cover claims for which we could not indemnify such
person.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons
pursuant to the foregoing provisions, or otherwise, we have been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore
unenforceable.
DESCRIPTION OF SECURITIES
Common Stock
We are currently authorized by our Certificate of Incorporation to
issue 65,000,000 shares of common stock, par value $.001 per share.
The holders of our common stock are entitled to one vote per share on
all matters to be voted upon by our shareholders. The holders of common stock do
not have cumulative voting rights, which means that the holders of more than 50%
of such outstanding shares can elect all of our directors. The holders of our
common stock are entitled to receive such dividends, if any, as may be declared
from time to time by our Board of Directors out of funds legally available
therefor. In the event we are liquidated or dissolved, the holders of our common
stock are entitled to receive all assets available for distribution to the
shareholders. The holders of common stock have no preemptive or other
subscription rights, and there are no conversion rights or redemption or sinking
fund provisions with respect to our common stock. All outstanding shares of
common stock are, and the shares offered hereby are, validly issued, fully paid
and nonassessable.
Shares Available for Future Sale
A large majority of our outstanding common stock may be deemed
"restricted securities," as that term is defined under Rule 144 promulgated
under the Securities Act. Such shares may be sold to the public, subject to
volume restrictions, as described below. Commencing at various dates, these
shares may be sold to
38
<PAGE>
the public without any volume limitations. The remaining outstanding shares of
common stock are freely tradable.
In general, under Rule 144 as currently in effect, subject to the
satisfaction of certain other conditions, a person, including one of our
affiliates, or persons whose shares are aggregated with affiliates, who has
owned restricted shares of common stock beneficially for at least one year is
entitled to sell, within any three-month period, a number of shares that does
not exceed 1% of the total number of outstanding shares of the same class. In
the event our shares are sold on an exchange or are reported on the automated
quotation system of a registered securities association, you could sell during
any three-month period the greater of such 1% amount or the average weekly
trading volume as reported for the four calendar weeks preceding the date on
which notice of your sale is filed with the SEC. Sales under Rule 144 are also
subject to certain manner of sale provisions, notice requirements and the
availability of current public information about us. A person who has not been
one of our affiliates for at least the three months immediately preceding the
sale and who has beneficially owned shares of common stock for at least two
years is entitled to sell such shares under Rule 144 without regard to any of
the limitations described above.
Transfer Agent
Continental Stock Transfer & Trust Company, 2 Broadway, New York, New
York 10004, acts as Transfer Agent for our common stock.
39
<PAGE>
Market for the Company's Securities
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):
<TABLE>
<CAPTION>
Period High($) Low($)
------ ------- ------
<S> <C> <C>
Fiscal 2000
Second Quarter* 6.38 1.13
First Quarter 6.88 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
</TABLE>
* Through May 30, 2000.
On June 23, 2000, the last sale price of the common stock as reported
on the OTC Bulletin Board was $1.44.
Holders
As of May 31, 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.
40
<PAGE>
SELLING SHAREHOLDERS
This Prospectus covers:
o The sale from time to time of an aggregate of 2,609,500 shares
of common stock by the persons indicated in this prospectus. All of these shares
were issued by us to them in a private placement in December 1997.
o The sale from time to time of an aggregate of 1,235,375 shares
of common stock by the persons indicated in this prospectus. All of these shares
are shares that would be issued by us to them upon the exercise of options and
warrants.
o The sale from time to time of an aggregate of 882,500 shares
of common stock by the persons indicated in this prospectus. All of these shares
were issued by us to them in a private placement in June 1999.
o The sale from time to time of an aggregate of 441,250 shares
of common stock by the persons indicated in this prospectus. All of these shares
are shares that would be issued by us to them upon the exercise of warrants
issued in or in connection with the June and August 1999 private placement.
o The sale from time to time of 187,500 shares of common stock
by the persons indicated in this prospectus. These shares were issued by us in
connection with our recent transaction with Freeserve.
The following tables set forth relevant information about the selling
shareholders:
Shares Issued in 1997 Private Placement
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
Shares
Shares Shares Owned
Name Held Offered After Sale
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Ian Barnett 2,700 2,700 0
--------------------------------------------------------------------------------------------------------------
Jerome Baron 7,200 7,200 0
--------------------------------------------------------------------------------------------------------------
Barington Capital Group, L.P. 75,500 75,500 0
--------------------------------------------------------------------------------------------------------------
Bear Stearns Securities Corp. f/b/o Dan Brecher-IRA 6,300 6,300 0
--------------------------------------------------------------------------------------------------------------
Napier Brown Holdings, Ltd. 120,000 120,000 0
--------------------------------------------------------------------------------------------------------------
Lawrence Burstein(1) 17,000 17,000 0(8)
--------------------------------------------------------------------------------------------------------------
Cameo Trust Corporation Limited 4,000 4,000 0
--------------------------------------------------------------------------------------------------------------
Cass & Co. - Magnum U.S. Equity Fund 81,660 81,660 0(8)
--------------------------------------------------------------------------------------------------------------
Cass & Co. - Magnum Capital Growth Fund 40,830 40,830 0(8)
--------------------------------------------------------------------------------------------------------------
Cass & Co. - Magnum Tech Fund 33,010 33,010 0(8)
--------------------------------------------------------------------------------------------------------------
Steven Chrust & Sharon Chrust JTWROS(2) 42,000 42,000 (7)
--------------------------------------------------------------------------------------------------------------
Steven Chrust IRA(2) 60,000 60,000 (7)
--------------------------------------------------------------------------------------------------------------
CML Strategic Investment Fund, Ltd. 20,000 20,000 0
--------------------------------------------------------------------------------------------------------------
Cowen & Company custodian FBO William Waters IRA 25,000 25,000 0
--------------------------------------------------------------------------------------------------------------
Dine Investors, L.P. 60,000 60,000 0
--------------------------------------------------------------------------------------------------------------
Domaco Venture Capital 900 900 0
--------------------------------------------------------------------------------------------------------------
Heidrun Eckes-- Chantre 195,800 195,800 0
--------------------------------------------------------------------------------------------------------------
Engel Investors 240,000 240,000 0
--------------------------------------------------------------------------------------------------------------
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
Shares
Shares Shares Owned
Name Held Offered After Sale
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Equity Interest Inc. 900 900 0
--------------------------------------------------------------------------------------------------------------
Leo I. George 90,000 90,000 0(8)
--------------------------------------------------------------------------------------------------------------
Charles L. & Donna Greenberg(3) 120,000 120,000 0(8)
--------------------------------------------------------------------------------------------------------------
Charles L. Greenberg IRA(3) 120,000 120,000 0(8)
--------------------------------------------------------------------------------------------------------------
DLJSC, Custodian f/b/o Stewart Greisman 20,000 20,000 0
--------------------------------------------------------------------------------------------------------------
Heptagon Capital Management, Inc. 900 900 0
--------------------------------------------------------------------------------------------------------------
International Capital Growth, Ltd.(4) 384,000 384,000 0(8)
--------------------------------------------------------------------------------------------------------------
Katarina Kalda 5,000 5,000 0
--------------------------------------------------------------------------------------------------------------
Ronald Koenig(5) 1,500 1,500 0
--------------------------------------------------------------------------------------------------------------
Elizabeth G. Konaxis 40,000 40,000 0
--------------------------------------------------------------------------------------------------------------
Joseph G. and Lillian P. Matulich(6) 8,000 8,000 0
--------------------------------------------------------------------------------------------------------------
Steven Millner 6,800 6,800 0(8)
--------------------------------------------------------------------------------------------------------------
Robert E. Mullane 120,000 120,000 0
--------------------------------------------------------------------------------------------------------------
Patricia Bartlett Nemes 30,000 30,000 0(8)
--------------------------------------------------------------------------------------------------------------
Barry Ridings 3,600 3,600 0
--------------------------------------------------------------------------------------------------------------
Rosebud Capital Growth Fund, Ltd. 103,000 103,000 0
--------------------------------------------------------------------------------------------------------------
Jonathan Rothschild 900 900 0
--------------------------------------------------------------------------------------------------------------
S-A Capital LLC 30,000 30,000 0
--------------------------------------------------------------------------------------------------------------
Murray Slimowitz, IRA 20,000 20,000 0(8)
--------------------------------------------------------------------------------------------------------------
Murray Slimowitz 30,000 30,000 0(8)
--------------------------------------------------------------------------------------------------------------
Chad Spodek Educational Trust 9,000 9,000 0(9)
--------------------------------------------------------------------------------------------------------------
David Spodek Educational Trust 9,000 9,000 0(9)
--------------------------------------------------------------------------------------------------------------
Michael & Marjorie Stern JTWROS 240,000 240,000 0
--------------------------------------------------------------------------------------------------------------
Peter Stern Family Trust U.A.D. 8/21/90 180,000 180,000 0
--------------------------------------------------------------------------------------------------------------
Elizabeth Varabiev 5,000 5,000 0
--------------------------------------------------------------------------------------------------------------
</TABLE>
----------------
(1) A former director prior to the Mergers.
(2) Our Chairman. Does not include 1,000,000 shares underlying currently
exercisable warrants held by an entity controlled by Mr. Chrust.
(3) Charles L. Greenberg is the brother of Steven Greenberg, our principal
stockholder.
(4) Placement Agent for the 1997 private offering.
(5) Chairman and CEO of International Capital Growth, Ltd.
(6) Parents of a Senior Vice President of International Capital Growth,
Ltd.
(7) Steven Chrust, our Chairman, is deemed to have beneficial ownership of
1,465,939 shares of common stock. Under this prospectus, a total of
1,147,000 of these shares, including the 1,000,000 shares owned by SGC
Advisory Services (see Note 3 under the table "Shares Issuable Upon
Exercise of Options and Warrants."), will be freely tradeable. If all
shares registered under the prospectus were sold, Mr. Chrust would
currently have beneficial ownership of 318,939 shares of common stock,
not including options to purchase a total of 287,500 shares of common
stock which vest in three equal annual installments, commencing in
March 2001.
42
<PAGE>
(8) Upon sales of all shares being registered under this prospectus.
(9) Received as a gift from Steven & Sharon Chrust JTWROS in March 2000.
Shares Issuable Upon Exercise of Options and Warrants
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
Shares
Shares Owned
Names Shares Held Offered After Sale
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Lawrence Burstein 50,000(1) 50,000 0(5)
----------------------------------------------------------------------------------------------------------
John Cattier 86,000(6) 50,000 36,000
----------------------------------------------------------------------------------------------------------
International Capital Growth Ltd. 85,375(2) 85,375 0(5)
----------------------------------------------------------------------------------------------------------
Steven Millner 50,000(1) 50,000 0(5)
----------------------------------------------------------------------------------------------------------
SGC Advisory Services(3) 1,000,000(4) 1,000,000 0
----------------------------------------------------------------------------------------------------------
</TABLE>
---------------------
(1) Represents shares issuable upon exercise of currently exercisable
warrants, exercisable at a per-share price of $0.67.
(2) Represents shares issuable upon exercise of warrants, exercisable at a
per-share price of $1.00. International Capital Growth was the
placement agent for our December 1997 private placement.
(3) SGC is owned by Mr. Chrust, our Chairman of the Board.
(4) Represents shares issuable upon exercise of warrants, exercisable at a
per-share price of $0.50.
(5) Upon sales of all shares being registered under this prospectus.
(6) Includes 50,000 shares issuable upon exercise of currently exercisable
warrants, exercisable at a per-share price of $0.67. Mr. Cattier is an
affiliate of Heptagon Capital Management.
Shares Issued in 1999 Private Placement(1)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
Shares
Shares Owned
Names Shares Held Offered After Sale
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
The Advent Fund L.L.C. 375,438 52,500 322,938
----------------------------------------------------------------------------------------------------------
AMPM Enterprises 22,500 22,500 0
----------------------------------------------------------------------------------------------------------
Robert Amster(2) 7,500 7,500 0
----------------------------------------------------------------------------------------------------------
Shelly Bergman 11,250 11,250 0
----------------------------------------------------------------------------------------------------------
Irwin H. Braunstein 22,500 22,500 0
----------------------------------------------------------------------------------------------------------
Matias Bullrich 22,500 22,500 0
----------------------------------------------------------------------------------------------------------
Camelot Trust Corporation Limited 67,500 67,500 0
----------------------------------------------------------------------------------------------------------
James I. Cash 22,500 22,500 0
----------------------------------------------------------------------------------------------------------
Steven Chrust(3) 45,000 45,000 (3)
----------------------------------------------------------------------------------------------------------
David E. Dorman 22,500 22,500 0
----------------------------------------------------------------------------------------------------------
Mark Edelstein 22,500 22,500 0
----------------------------------------------------------------------------------------------------------
Wayne Eisenbaum 22,500 22,500 0
----------------------------------------------------------------------------------------------------------
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
Shares
Shares Owned
Names Shares Held Offered After Sale
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Kenneth Frolick 22,500 22,500 0
----------------------------------------------------------------------------------------------------------
Janice C. Gale, Trustee f/b/o Ariena J. Galc 22,500 22,500 0
----------------------------------------------------------------------------------------------------------
Leo I. George 45,000 45,000 0(7)
----------------------------------------------------------------------------------------------------------
Giant Trading Co. 67,500 67,500 0(7)
----------------------------------------------------------------------------------------------------------
GlobalNet Financial Com, Inc. 67,500 67,500 0
----------------------------------------------------------------------------------------------------------
Jay Gottlieb 11,250 11,250 0
----------------------------------------------------------------------------------------------------------
Graubard Mollen & Miller(4) 11,250 11,250 0
----------------------------------------------------------------------------------------------------------
Charles Greenberg(5) & Dana Greenberg 22,500 22,500 0(7)
----------------------------------------------------------------------------------------------------------
Charles Greenberg(5) & Dana Greenberg 45,000 45,000 0(7)
----------------------------------------------------------------------------------------------------------
Craig Greenberg 11,250 11,250 0
----------------------------------------------------------------------------------------------------------
Fred Greenberg 22,500 22,500 0
----------------------------------------------------------------------------------------------------------
Lori Greenberg 11,250 11,250 0
----------------------------------------------------------------------------------------------------------
Paul Hochhauser 22,500 22,500 0
----------------------------------------------------------------------------------------------------------
Hillswood Holdings Limited 45,000 45,000 0
----------------------------------------------------------------------------------------------------------
Ira Holtz 22,500 22,500 0
----------------------------------------------------------------------------------------------------------
Peter Hyman 22,500 22,500 0
----------------------------------------------------------------------------------------------------------
Herman Kagan 22,500 22,500 0
----------------------------------------------------------------------------------------------------------
Ron Kuzon 22,500 22,500 0
----------------------------------------------------------------------------------------------------------
James E. Lambert 45,000 45,000 0
----------------------------------------------------------------------------------------------------------
The Lawrence Trust 22,500 22,500 0
----------------------------------------------------------------------------------------------------------
Cass & Co. - Magnum Capital Growth Fund 22,500 22,500 0(7)
----------------------------------------------------------------------------------------------------------
Cass & Co. - Magnum Select U.S. Equity Fund 45,000 45,000 0(7)
----------------------------------------------------------------------------------------------------------
Cass & Co. - Magnum Tech Fund 22,500 22,500 0(7)
----------------------------------------------------------------------------------------------------------
Stanley Muss 45,000 45,000 0
----------------------------------------------------------------------------------------------------------
Needham Capital Group 11,250 11,250 0
----------------------------------------------------------------------------------------------------------
Patricia Bartlett Nemes 22,500 22,500 0(7)
----------------------------------------------------------------------------------------------------------
Christiane Olsen 22,500 22,500 0
----------------------------------------------------------------------------------------------------------
Harold Rothstein 22,500 22,500 0
----------------------------------------------------------------------------------------------------------
Rush & Co. 22,500 22,500 0
----------------------------------------------------------------------------------------------------------
Lawrence Siebert 20,250 20,250 0
----------------------------------------------------------------------------------------------------------
Murray Slimowitz 22,500 22,500 0(7)
----------------------------------------------------------------------------------------------------------
Joseph Stansky 11,250 11,250 0
----------------------------------------------------------------------------------------------------------
Gary Tobin(6) 11,250 11,250 0
----------------------------------------------------------------------------------------------------------
Summit Bank Trustee 22,500 22,500 0
----------------------------------------------------------------------------------------------------------
Summit Bank Trustee 22,500 22,500 0
----------------------------------------------------------------------------------------------------------
Swiss American 22,500 22,500 0
----------------------------------------------------------------------------------------------------------
Wel Partners 11,250 11,250 0
----------------------------------------------------------------------------------------------------------
Raphael Wizman 22,500 22,500 0
----------------------------------------------------------------------------------------------------------
</TABLE>
-------------------
(1) Each person set forth above purchased units or a fraction of a unit in
our June 1999 private placement. Each unit consisted of 15,000 shares
of common stock and warrants to purchase 7,500 shares of common stock.
The number of shares set forth in the above table represents both
shares of common stock and shares issuable upon exercise of warrants.
44
<PAGE>
(2) Issued in consideration of certain consulting services.
(3) See Note 7 under the table "Shares Issued in 1997 Private Placement."
(4) Issued in consideration of certain legal services.
(5) Brother of Steven A. Greenberg, our principal shareholder.
(6) Issued in consideration of certain public relations services.
(7) Upon sales of all shares being registered in this prospectus.
(8) Receive as gift from Steven and Sharon Chrust, JTWROS in March 2000.
PLAN OF DISTRIBUTION
The sale of the shares of common stock by the selling shareholders may
be effected by them from time to time in the over-the-counter market or in such
other public forum where our shares are publicly traded or listed for quotation.
These sales may be made in negotiated transactions through the timing of options
on the shares, or through a combination of such methods of sale, at fixed
prices, which may be charged at market prices prevailing at the time of sale, at
prices related to such prevailing market prices or at negotiated prices. The
selling shareholders may effect such transactions by selling the shares to or
through broker-dealers, and such broker-dealers may receive compensation in the
form of discounts, concessions or commissions from the selling shareholders
and/or the purchasers of the shares for which such broker-dealer may act as
agent or to whom they sell as principal, or both. The compensation as to a
particular broker-dealer may be in excess of customary compensation.
The selling shareholders and any broker-dealers who act in connection
with the sale of the shares hereunder may be deemed to be underwriters within
the meaning of Section 2(11) of the Securities Act, and any commissions received
by them and any profit on any sale of the shares as principal might be deemed to
be underwriting discounts and commissions under the Securities Act.
Other than the costs of preparing this prospectus and a registration
fee to the SEC, we are not paying any costs relating to the sales by the selling
shareholders. Each of the selling shareholders, or their transferees, and
intermediaries to whom such securities may be sold may be deemed to be an
"underwriter" of the common stock offered hereby, as that term is defined under
the Securities Act. Each of the selling shareholders, or their transferees, may
sell these shares from time to time for his own account in the open market at
the prices prevailing therein, or in individually negotiated transactions at
such prices as may be agreed upon. The net proceeds from the sale of these
shares by the selling shareholders will inure entirely to their benefit and not
to ours.
Except as indicated under "Selling Shareholders" above, none of the
selling shareholders has held any position or office, or had any material
relationship with us or any of our predecessors or affiliates within the last
three years, and none will own any of our outstanding common stock after
completion of the offering of such shares. The shares
45
<PAGE>
reflected by each selling shareholder is based upon information provided to us
by our transfer agent and from other available sources.
These shares may be offered for sale from time to time in regular
brokerage transactions in the over-the-counter market, or, either directly or
through brokers or to dealers, or in private sales or negotiated transactions,
or otherwise, at prices related to the then prevailing market prices. Thus, they
may be required to deliver a current prospectus in connection with the offer or
sale of their shares. In the absence of a current prospectus, if required, these
shares may not be sold publicly without restriction unless held for two years,
or after one year subject to volume limitations and satisfaction of other
conditions. The selling shareholders have been advised that Rules 10b-6 and
10b-7 of the General Rules and Regulations promulgated under the Securities
Exchange Act of 1934 will be applicable to their sales of these shares. These
rules contain various prohibitions against trading by persons interested in a
distribution and against so-called "stabilization" activities.
The selling shareholders, or their transferees, might be deemed to be
"underwriters" within the meaning of Section 2(11) of the Act and any profit on
the resale of these shares as principal might be deemed to be underwriting
discounts and commissions under the Act. Any sale of these shares by selling
shareholders, or their transferees, through broker-dealers may cause the
broker-dealers to be considered as participating in a distribution and subject
to Rule 10b-6 promulgated under the Securities Exchange Act of 1934, as amended.
If any such transaction were a "distribution" for purposes of Rule 10b-6, then
such broker-dealers might be required to cease making a market in our equity
securities for either two or nine trading days prior to, and until the
completion of, such activity.
LEGAL MATTERS
Certain legal matters in connection with this offering are being passed
upon by the law firm of Graubard Mollen & Miller, New York, New York. Partners
of the firm may be deemed to own our Common Stock.
EXPERTS
Our audited financial statements as of December 31, 1999 and 1998 and
for the fiscal years then ended are included herein and in the registration
statement in reliance upon the reports of BDO Seidman, LLP, independent
certified public accountants, appearing elsewhere herein, and upon the authority
of said firm as experts in accounting and auditing. Such reports contain an
explanatory paragraph regarding the Company's ability to continue as a going
concern.
46
<PAGE>
CONTENTS PAGE
-------- ----
UNAUDITED FINANCIAL STATEMENTS
(AS OF MARCH 31, 2000)
Balance sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2
Statement of operations . . . . . . . . . . . . . . . . . . . . . . . F-3
Statement of stockholders' deficit . . . . . . . . . . . . . . . . . F-4
Statement of cash flows. . . . . . . . . . . . . . . . . . . . . . . F-5
Notes to financial statements. . . . . . . . . . . . . . . . . . . . F-6-7
AUDITED FINANCIAL STATEMENTS
(PERIOD FROM APRIL 8, 1997 (INCEPTION) TO DECEMBER 31, 1999)
Worlds Inc. (The "Company") Report of
Independent Certified Public Accountants. . . . . . . . . . . . . . F-8
FINANCIAL STATEMENTS:
Balance sheets. . . . . . . . . . . . . . . . . . . . . . . . . . . . F-9
Statement of operations . . . . . . . . . . . . . . . . . . . . . . . F-10
Statement of stockholders' deficit. . . . . . . . . . . . . . . . . . F-11
Statement of cash flows . . . . . . . . . . . . . . . . . . . . . . . F-12
Summary of accounting policies . . . . . . . . . . . . . . . . . . . F-13-17
Notes to financial statements . . . . . . . . . . . . . . . . . . . . F-18-33
F-1
<PAGE>
Worlds.com, Inc.
BALANCE SHEET
March 31, 2000
(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,707,163
Private placement proceeds receivable 1,255,373
Accounts receivable 136,706
Prepaid expenses and other current assets 64,941
Inventories 259,146
-------------
Total current assets 4,423,329
PROPERTY, EQUIPMENT AND SOFTWARE
DEVELOPMENT, NET OF ACCUMULATED
DEPRECIATION AND AMORTIZATION 1,243,502
INTANGIBLE ASSET 944,334
-------------
$ 6,611,165
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 755,473
Accrued expenses 744,900
Deferred revenue 519,936
Current maturities of notes payable 2,064,995
------------
Total current liabilities 4,085,304
LONG-TERM PORTION, NOTES PAYABLE 56,671
------------
Total liabilities 4,141,975
COMMITMENTS
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $.001 par value - authorized, 65,000,000
shares; issued, 18,930,128 shares 18,929
Additional paid-in capital 17,133,408
Accumulated deficit (14,683,147)
-----------
2,469,190
------------
$ 6,611,165
=============
The accompanying notes are an integral part of this statement.
F-2
<PAGE>
Worlds.com, Inc.
STATEMENTS OF OPERATIONS
Three months ended March 31,
(unaudited)
1999 2000
---------- ----------
Net revenues $ 35,177 $ 180,023
Costs and expenses
Cost of revenues 21,464 69,951
Selling, general and administrative 615,815 2,091,689
--------- ----------
Operating loss (602,102) (1,981,617)
-------- ----------
Other income (expense)
Interest income 12,786 15,751
Interest expense (38,922) (42,629)
--------- ------------
NET LOSS $(628,238) $(2,008,495)
======== ==========
Loss per share (basic and diluted) $(.04) $(.11)
==== ====
Weighted average common shares outstanding
Basic and diluted 17,918,531 17,776,845
========== ==========
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
Worlds.com, Inc.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
Period from December 31, 1998 to March 31, 2000
(unaudited)
<TABLE>
Deficit
accumulated Total
Common stock Additional during the stockholders
------------------------- paid-in development Treasury equity
Shares Amount capital stage stock (deficit)
----------- ------------ ------------- ------------ ------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998 18,031,996 $18,032 $ 8,401,970 $ (9,335,152) $(64,743) $ (979,893)
Issuance of warrants for
consulting services (April 1999) 465,000 465,000
Contribution of 1,500,000 shares
by founders to treasury (April 1999)
and subsequent cancellation (1,500,000) (1,500) 1,500
Exercise of stock options (April 1999) 75,000 75 74,925 75,000
Issuance of shares for content supply
agreement (June 1999) 93,750 93 374,907 375,000
Issuance of shares to agent for
content supply agreement (July 1999) 50,000 50 199,950 200,000
Sale of shares in private offering
memorandum, net (June through
September 1999) 892,500 893 3,263,081 3,263,974
Issuance of options for consulting
services and software development
costs (August and September 1999) 368,230 368,230
Issuance of shares for legal and
consulting services (September 1999) 20,000 20 79,980 80,000
Cancellation of treasury shares
(September 1999) (113,465) (113) (64,630) 64,743
Exercise of warrants (November 1999) 95,000 95 94,905 95,000
Issuance of shares for content
supply agreement (December 1999) 93,750 93 374,907 375,000
Net loss for the year ended
December 31, 1999 (3,339,500) (3,339,500)
--------------- -------- ----------- ---------- --------- -----------
Balance, December 31, 1999 17,738,531 17,738 13,634,725 (12,674,652) - 977,811
Exercise of stock options
(March 2000) 215,000 215 135,285 135,500
Sale of shares in private
offering memorandum, net
(March 2000) 976,597 976 3,242,981 3,243,957
Issuance of stock options for
consulting and advertising services 120,417 120,417
(March 2000)
Net loss for the three months
ended March 31, 2000 (2,008,495) (2,008,495)
--------------- -------- ----------- ---------- --------- -----------
Balance, March 31, 2000 18,930,128 $18,929 $17,133,408 $(14,683,147) $ - $ 2,469,190
=============== ======== =========== ============= ========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-4
<PAGE>
Worlds.com, Inc.
STATEMENTS OF CASH FLOWS
Three months ended March 31,
(unaudited)
<TABLE>
1999 2000
------------ --------
<S> <C> <C>
Cash flows from operating activities
Net loss $ (628,238) $(2,008,495)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization 50,000 337,100
Consulting and advertising expense related to the issuance
of stock options 120,417
Changes in operating assets and liabilities
Private placement proceeds receivable (1,255,373)
Accounts receivable 40,509
Inventories 21,464 (37,635)
Prepaid expenses and other current assets 27,353 9,729
Accounts payable and accrued expenses 56,078 318,893
Deferred revenue 19,936
------------ ------------
Net cash used in operating activities (473,343) (2,454,919)
------------ ----------
Cash flows from investing activities
Acquisition of property and equipment (38,555)
Additions to software development costs (214,000)
-----------
Net cash used in investing activities (214,000) (38,555)
------------ ------------
Cash flows from financing activities
Proceeds from sale of common stock in private offering memorandum 3,243,957
Proceeds from exercise of options 135,500
------------ -----------
Net cash provided by financing activities 3,379,457
----------- ----------
Net increase (decrease) in cash and cash equivalents (687,343) 885,983
Cash and cash equivalents, beginning of period 1,581,764 1,821,180
----------- ----------
Cash and cash equivalents, end of period $ 894,421 $ 2,707,163
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for
Interest $ - $ -
Income taxes - -
</TABLE>
Noncash investing and financing activities:
Issuance of an option to purchase 73,245 shares of common stock at $3.87
per share to the placement agent in connection with the private placement
in March 2000.
Issuance of stock options for consulting and advertising services of $120,417
in the period ended March 31, 2000.
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
Worlds.com, Inc.
NOTES TO FINANCIAL STATEMENTS
March 31, 2000 and 1999
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES
Nature of Business
The Company designs, develops and markets three-dimensional ("3D")
music-oriented Internet sites on the World Wide Web. These web sites
utilize 3D technologies. The Company also sells music and sports-related
merchandise through its website.
Basis of Presentation
The accompanying financial statements are unaudited; however, in the
opinion of management, all adjustments necessary for a fair statement of
financial position and results for the stated periods have been included.
These adjustments are of a normal recurring nature. Selected information
and footnote disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been
condensed or omitted. Results for interim periods are not necessarily
indicative of the results to be expected for an entire fiscal year. These
condensed financial statements should be read in conjunction with the
audited financial statements and accompanying notes for the Company for the
year ended December 31, 1999. In prior years, the Company was classified as
a development stage enterprise.
Software Development Costs
In accordance with the provisions of Statement of Financial Accounting
Standards No.86, "Accounting for the Costs of Computer Software to be Sold,
Leased, or Otherwise Marketed," software development costs incurred by the
Company subsequent to establishing technological feasibility of the
resulting product or enhancement and until the product is available for
general release to customers are capitalized and carried at the lower of
unamortized cost or net realizable value. Net realizable value is
determined based on estimates of future revenues to be derived from the
sale of the software product reduced by the costs of completion and
disposing of the product.
$214,000 was capitalized and included in property, equipment and software
development during the period ended March 31, 1999. No costs were
capitalized in the first quarter of 2000. 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 periods ended March 31, 1999 and 2000 was
$14,000 and $113,000, respectively.
F-6
<PAGE>
Worlds.com, Inc.
NOTES TO FINANCIAL STATEMENTS (continued)
March 31, 2000 and 1999
NOTE 1 (continued)
Loss Per Share
Basic and diluted loss per share is calculated by dividing the net loss by
the weighted average number of shares of common stock outstanding during
each period. 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 antidilutive. Therefore, the
amounts reported for basic and diluted loss per share are the same.
Stock-Based Compensation
In the first quarter of 2000, the Company granted options to purchase an
aggregate of 1,028,500 shares of common stock to directors, officers and
employees of, and certain consultants to the Company at exercise prices
ranging from $3.00 to $9.00. In connection with options issued to
nonemployees, the Company recorded consulting and advertising expense of
approximately $120,000 for the fair market value of the options using the
Black-Scholes calculation.
NOTE 2 - GOING CONCERN
As discussed in Note 3, the Company completed a private placement during
the first quarter of 2000, raising net proceeds of $3,243,957. In April of
2000, the Company raised an additional $500,000 through another private
placement of 142,045 shares of common stock.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. Since its inception, the Company
has had minimal revenues from operations. 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 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.
NOTE 3 - PRIVATE PLACEMENT
On March 31, 2000, the Company sold 976,597 shares of common stock through
a private placement. In connection with the Private Placement, the
placement agent received an option to purchase 73,245 shares of the
Company's common stock at $3.87 per share for five years. Cumulative net
proceeds, after commissions and expenses of the offering, aggregated
$3,243,957.
F-7
<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-8
<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-9
<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-10
<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-11
<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-12
<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-13
<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-14
<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-15
<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-16
<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-17
<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-18
<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-19
<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-20
<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-21
<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-22
<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-23
<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-24
<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-25
<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-26
<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-27
<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-28
<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-29
<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-30
<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-31
<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-32
<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-33
<PAGE>
<TABLE>
<S> <C>
=================== ===================
You should only rely on the information
contained in this document or other
information that we refer you to. We have not
authorized anyone to provide you with any
other information that is different.
You should note that even though you WORLDS.COM INC.
received a copy of this prospectus, there
may have been changes in our affairs since
the date of this prospectus. This prospectus
does not constitute an offer to sell securities 5,356,125 shares of Common Stock
in any jurisdiction in which such offer or
solicitation is not authorized.
TABLE OF CONTENTS PAGE
Where You Can Find More Information.................3 ----
Prospectus Summary..................................4
Summary Historical Financial........................5 PROSPECTUS
Risk Factors........................................6
Special Note Regarding Forward- ----
Looking Statements...............................15
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................................16
Business...........................................23
Management.........................................32
Security Ownership of Certain Beneficial
Owners and Management............................34
Executive Compensation.............................35
Certain Relationships and Related
Transactions.....................................37
Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities......................................38
Description of Securities..........................38
Selling Shareholders...............................41
Plan of Distribution...............................45
Legal Matters......................................46
Experts............................................46
Index to Financial Statements.....................F-1
June 29, 2000
=================== ===================
</TABLE>
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
Section 14A:3-5 of the New Jersey Business Corporation Act, as amended,
authorizes the Registrant to indemnify any director or officer under certain
prescribed circumstances and subject to certain limitations against certain
costs and expenses, including attorneys' fees actually and reasonably incurred
in connection with any action, suit or proceeding, whether civil, criminal,
administrative or investigative, to which such person is a party by reason of
being a director or officer of the Registrant if it is determined that such
person acted in accordance with the applicable standard of conduct set forth in
such statutory provisions. Article VIII of the Registrant's Certificate of
Incorporation and Article VI of the Registrant's By-Laws extend such indemnities
to the fullest extent permitted by the New Jersey Business Corporation Act.
The Registrant may also purchase and maintain insurance for the benefit
of any director or officer which may cover claims for which the Registrant could
not indemnify such persons.
Item 25. Other Expenses of Issuance and Distribution
The following statement sets forth the estimated expenses in connection
with the offering described in the Registration Statement, all of which will be
borne by the Registrant.
Securities and Exchange Commission......................... $ 4,252.60
Accountants' Fees.......................................... $ 25,000.00
Legal Fees................................................. $ 50,000.00
Printing and engraving..................................... $ 10,000.00
Miscellaneous.............................................. $ 40,747.00
------------
TOTAL...................................................... $ 139,999.60
Item 26. Recent Sales of Unregistered Securities
Except as may be otherwise indicated, we relied upon Section 4(2) of
the Securities Act as the basis for exemption from registration for all of the
following transaction because the transactions did not involve public offerings.
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. We also issued 1 1/3 units to the placement agent and
warrants to purchase 48,000 shares to broker-dealers in exchange for services
rendered in connection with the private placement.
In June and December 1999 we issued an aggregate of 187,500 shares of
common stock to an Internet Service Provider and 50,000 shares of common stock
to a brokerage agent in exchange for services rendered in connection with an
agreement with the Internet Service Provider.
Excluding the options granted in the first quarter of 2000, which are
listed below, we have also issued the following options to employees,
consultants and a director under our 1997 Incentive and Non-Qualified Stock
Plan, as amended ("Plan"):
<TABLE>
<CAPTION>
Employee Name Date of Grant No. of Shares Exercise Price - $
------------- ------------- ------------- ------------------
<S> <C> <C> <C>
M. Sivak 9/3/99 12,500 4.00
9/15/97 37,500 0.50
5/7/98 10,000 1.00
J. Renfro 9/3/99 12,500 4.00
9/15/97 22,500 0.50
5/7/98 10,000 1.00
C. Ellis 9/3/99 17,500 4.00
2/12/99 15,000 1.00
J. O'Neil 9/3/99 12,000 4.00
M. Pimco 8/3/98 30,000 1.00
9/28/98 9,000 1.00
9/3/99 9,000 4.00
T. Straub 9/3/99 10,000 4.00
9/28/98 9,000 1.00
S. Palacek 9/3/99 6,000 4.00
8/3/98 9,000 1.00
M. Goheen 8/10/99 60,000 2.46
5/7/98 10,000 1.00
9/3/99 10,000 4.00
D. Leahy 2/8/98 10,000 1.00
C. Laffan 9/15/97 20,000 0.50
Community Monitors (as a 9/99-4/00 15,500 $4.00
group)
F. Kane 8/10/99 45,000 2.46
D. Engel 5/7/98 100,000 1.00
P. Kym 9/28/98 6,000 1.00
C. Colemen 9/3/99 5,000 4.00
</TABLE>
<TABLE>
<CAPTION>
Consultant Name Date of Grant No. of Shares Exercise Price - $
--------------- ------------- ------------- ------------------
<S> <C> <C> <C>
J. Leader 5/7/98 15,000 1.00
9/3/99 10,000 4.00
L. Hasiuk 5/7/98 65,000 1.00
B. Adler 5/7/98 10,000 1.00
2/12/99 10,000 1.00
8/10/99 45,000 2.46
9/3/99 10,000 4.00
G. Mason 8/10/99 15,000 2.46
9/3/99 10,000 4.00
J. Fifield 5/7/98 150,000 1.00
R. Bizien 9/28/98 20,000 1.00
K. Chin 9/28/98 12,000 1.00
J. Konaxis 9/28/98 35,000 1.00
</TABLE>
<TABLE>
<CAPTION>
Director Name Date of Grant No. of Shares Exercise Price - $
------------- ------------- ------------- ------------------
<S> <C> <C> <C>
K. Locker 9/15/97 60,000 0.50
</TABLE>
Between May 1998 and November 1999, we also issued the following
non-Plan options and warrants to employees, directors, and consultants:
<TABLE>
<CAPTION>
Name Date of Grant No. of Shares Exercise Price - $
---- ------------- ------------- ------------------
<S> <C> <C> <C>
S. Colwell 8/10/99 300,000 2.46
K. Locker 5/7/98 40,000 1.00
D. Sito 9/3/99 150,000 4.00
9/3/99 50,000 7.50
9/3/99 50,000 10.00
T. Saleh 11/8/99 250,000 2.91
11/8/99 100,000 5.00
11/8/99 100,000 7.00
W. Harvey 11/8/99 50,000 2.91
SGC Advisory 4/13/99 1,000,000 0.50
</TABLE>
In the first quarter of 2000, we granted options to purchase an
aggregate of 1,030,100 shares of our common stock to directors, officers and
employees of, and certain consultants to, Worlds.com, at exercise prices ranging
from $3.00 to $9.00. as follows:
<TABLE>
<CAPTION>
Name Number Exercise Price
of shares
<S> <C> <C>
Steven Chrust 187,500 $5.68
50,000 6.00
50,000 9.00
Thom Kidrin 125,000 5.68
25,000 6.00
25,000 9.00
Debra Sito 31,250 5.68
Noel Kimmel 31,250 5.68
Hal Trencher 100,000 4.00
25,000 6.00
25,000 9.00
Ignition Inc. 15,000 4.00
3,000 4.00
Credo Interactive 75,000 2.50
Marty Scott 100,000 4.00
25,000 6.00
25,000 9.00
Chris Ryan 65,000 4.00
25,000 6.00
10,000 9.00
Todd Greene 1,500 4.00
Christina Oltmer 2,000 4.00
Brendan Whelan 2,000 4.00
RDA Designs 5,000 4.00
</TABLE>
II-1
<PAGE>
On March 31, 2000, we consummated an agreement to sell an aggregate of
976,598 shares of common stock pursuant to Regulation S. The shares of common
stock were sold by Hoodless Brennan & Partners, plc to ten non-U.S. principals
at $3.52 per share, less a discount of 5%. The total offering price was
$3,437,622 with net proceeds to us of $3,243,957, which includes approximately
$21,000 in fees invoices after March 31, 2000. In connection with the offering,
we issued a five-year Purchase Option to purchase an aggregate of 73,245 shares
of common stock at $3.87 per share to Hoodless Brennan.
Purchaser Shares Price Proceeds
Robert Newman 262,290 $3.52 $923,260.00
Archdream Ltd. 252,804 3.52 889,870.00
Atalanta Finance Ltd. 71,023 3.52 250,000.00
Netvest.com Plc 74,751 3.52 263,122.00
Bracken Partners 22,450 3.52 79,025.00
Barry Gold 11,264 3.52 39,650.00
Peter Old 45068 3.52 158,640.00
VoyagerIT.com 203,121 3.52 714,985.00
Marmara Resources SA 22,577 3.52 79,470.00
Pierson Resources 11,250 3.52 39,600.00
---------- -------------
Total 976,598 $3,437,622.00
On April 7, 2000, we entered into agreements with four investors to
sell an aggregate of 142,045 shares of common stock pursuant to Section 4(2) of
the Securities Act at $3.52 per share. As compensation for these subscriptions
we paid another agent, International Capital Growth, Ltd., a commission of 7%.
From the $500,000 total offering price, aggregate net proceeds to us from these
sales were $465,000.
Purchaser Shares Price Proceeds
Cehoff Opportunity Fund 56,818 $3.52 $200,000
Primo Capital Growth Fund 28,409 3.52 100,000
Rosebud Internet Fund 28,409 3.52 100,000
Ecom Growth Fund 28,409 3.52 100,000
---------- ------------
Total 142,045 $500,000
In May 2000, we issued 32,000 shares of common to one of our employees
in connection with an inventory purchase agreement.
II-2
<PAGE>
Item 27. Exhibits and Financial Statements Schedules.
<TABLE>
<CAPTION>
Incorporated
Exhibit By Reference No. in
Number Description from 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 of B 3.1.1
Incorporation
3.1.2 Certificate of Merger A 3.1.1
3.2 By-Laws A 3.2
3.2.1 By-Laws - Restated as Amended - - Filed
Herewith
4.1 Specimen common stock Certificate A 4.1
4.2 1997 Incentive and Non-Qualified Stock Option C 4.1
Plan, as amended
4.3 Form of Employee Incentive/Non-Incentive C 4.2
Stock Option Agreement under the 1997
Incentive and Non-Qualified Stock Option Plan
4.4 Form of Consultant Non-Incentive Stock Option C 4.3
Agreement under the 1997 Incentive and Non-
Qualified Stock Option Plan
4.5 Form of Director Non-Incentive Stock Option C 4.4
Agreement under the 1997 Incentive and Non-
Qualified Stock Option Plan
4.6 Form of Community Leader Stock Option C 4.5
Agreement under the 1997 Incentive and Non-
Qualified Stock Option Plan
4.10 Schedule of Option Grants under Benefit Plans C 4.9
5.1 Opinion of Graubard Mollen & Miller E 5.1
10.1 Merger Agreement between Worlds Acquisition D 99
Corp. and Academic Computer Systems, Inc.
10.2 Consulting Agreement between the Registrant B 10.2
and SGC Advisory, Inc.
23.1 Consent of BDO Seidman, LLP - - Filed
Herewith
</TABLE>
----------------------------
A Registrant's Registration Statement No. 2-31876.
B Registrant's Annual Report on Form 10-KSB filed on March 30, 2000.
C Registrant's Registration Statement on Form S-8 (File No. 333-89937).
D Registrant's Current Report on Form 8-K filed on December 18, 1997.
E Registrant's Post-Effective Amendment No.1 to Registrants'
Registration Statement on Form SB-2 (File No. 333-10838)
Item 28. Undertakings.
------------
The undersigned Registrant hereby undertakes:
(a) (1) To file, during any period in which it offers or sells
securities, a post-effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3)
of the Securities Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the information in
the registration statement; and notwithstanding the
II-3
<PAGE>
foregoing, any increase or decrease in volume of securities offered (if
the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high and of the
estimated maximum offering range may be reflected in the form of
prospectus filed with Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than a 20%
change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration
statement.
(iii) Include any additional or changed material information
on the plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration
any of the securities that remain unsold at the end of the offering.
(e) "Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors,
officers and controlling persons of the small business issuer pursuant
to the foregoing provisions, or otherwise, the small business issuer
has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed
in the Act and is, therefore unenforceable."
In the event that a claim for indemnification against such liabilities
(other than the payment by the small business issuer of expenses incurred or
paid by a director, officer or controlling person of the small business issuer
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the small business issuer will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
II-4
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and has authorized this registration
statement or amendment to be signed on its behalf by the undersigned, in the
City of New York on the 28th day of June, 2000.
WORLDS.COM INC.
By: /s/ Thomas Kidrin
-------------------------------
Thomas Kidrin, President
In accordance with the requirements of the Securities Act,
this registration statement or amendment was signed by the following persons in
the capacities and on the dates stated:
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/ Thomas Kidrin President and Chief Executive June 28, 2000
----------------------------- Officer
Thomas Kidrin
/s/ Steven G. Churst Chairman June 28, 2000
-----------------------------
Steven G. Chrust
/s/ Kenneth A. Locker Director June 28, 2000
-----------------------------
Kenneth A. Locker
/s/ William Harvey Director June 28, 2000
-----------------------------
William Harvey
/s/ Christopher J. Ryan Principal Financial and June 28, 2000
----------------------------- Accounting Officer
Christopher J. Ryan
</TABLE>
II-5
