As filed with the Securities and Exchange Commission on February 7, 2001
Registration No. 333-42960
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 1
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)
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)
1786 Bedford Street Thomas Kidrin, CEO
Stamford, Connecticut 06905 1786 Bedford Street
(203) 409-2100 Stamford, Connecticut 06905
(Address and Telephone Number of (203) 409-2100
Principal Executive Offices and (Name, Address and Telephone
Principal Place of Business) Number of Agent For Service)
------------------------------------------------
Copies to:
David Alan Miller, Esq.
Graubard Mollen & Miller
600 Third Avenue
New York, New York 10016
Telephone: (212) 818-8800
Approximate Date of Commencement of Proposed Sale to Public: At the discretion
of the selling shareholders.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. |X|
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, 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. |_|
----------------------------
CALCULATION OF REGISTRATION FEE
Proposed Proposed
Title of Each Amount Maximum Maximum Amount
Class of Securities to be Offering Price Aggregate of
to be Registered Registered Per Share(1) Offering Price Registration Fee
================================ ================== ===================== ==================== ======================
Common stock(2) 1,118,643 $0.31 $346,779.33 $86.69
Common stock(3) 198,245 $0.31 $61,455.95 $15.36
Common stock(4) 1,772,188 $0.31 $549,378.28 $137.34
Common stock(5) 17,964,644 $0.31 $5,569,039.64 $1,392.26
Common stock(6) 1,880,000 $0.31 $582,800 $145.70
Total.................................................................................. $1,777.35(7)
(1) Based upon the closing price of our common stock as reported on the OTC
Bulletin Board on January 31, 2001.
(2) Represents shares of common stock to be sold from time to time for the
account of certain persons. These shares were issued by us in private
placements in March and April 2000.
(3) Represents shares of common stock to be sold from time to time for the
account of certain persons and entities. These shares are issuable by us to
such persons upon exercise of stock purchase options granted in March 2000
and January 2001. This registration statement also covers the resale of any
additional shares which may be issued by virtue of the anti-dilution
provisions of the options.
(4) Represents shares of common stock to be sold from time to time for the
account of certain persons. These shares were purchased by these persons
from a principal shareholder of our company in private transactions in
March and April 2000.
(5) Represents shares of common stock to be sold from time to time for the
account of certain persons. These shares are issuable upon conversion of
outstanding 6% convertible promissory notes that were issued by us in a
private placement in January 2001.
(6) Represents shares of common stock to be sold from time to time for the
account of certain persons. These shares are issuable by us to such persons
upon exercise of warrants issued in our January 2001 private placement.
This registration statement also covers the resale of any additional shares
which may be issued by virtue of the anti-dilution provisions of the
warrants.
(7) $1,314.62 of this fee has been previously paid.
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.
Subject to Completion, February , 2001
Prospectus
WORLDS.COM INC.
--------------------------------
22,883,720 shares of common stock
This prospectus covers the sale from time to time of an aggregate of:
o 1,118,643 shares of common stock by the persons indicated in this
prospectus. All of these shares were issued by us to them in private
placements in March and April 2000.
o 1,772,188 shares of common stock by the persons indicated in this
prospectus. All of these shares were sold to them by a principal
shareholder of our company in private transactions in March and April
2000.
o 198,245 shares of common stock by the persons and entities indicated
in this prospectus. These are shares that would be issued by us to
them upon the exercise of stock purchase options that were
granted in March 2000 and in January 2001.
o 17,964,644 shares of common stock by the persons indicated in this
prospectus. These are shares that would be issued by us to them upon
conversion of 6% convertible promissory notes that we sold to them in
a private placement in January 2001.
o 1,880,000 shares of common stock by the persons indicated in this
prospectus. These are shares that would be issued by us to them upon
exercise of warrants that we sold to them in a private placement in
January 2001.
Our common stock is quoted on the OTC Bulletin Board under the symbol
"WDDD." On January 31, 2001, the last reported sale price of our common stock
was $0.31 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 $50,000.
See "Risk Factors" beginning on page 5 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 __________ ___, 2001.
2
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.
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.
3
Prospectus Summary
General
Worlds.com is a 3D entertainment and e-commerce portal which leverages
our proprietary technology to offer visitors a network of virtual, multi-user
environments which we call "worlds". These worlds are visually engaging online
communities where people can come together and, by navigating through the
website, shop, interact with others, attend events and be entertained.
In support of our 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 British Telecommunications, 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.
January 2001 Private Placement
In January 2001, we consummated a private placement of units, each unit
consisting of a $50,000 principal amount 6% convertible promissory note and a
warrant to purchase 50,000 shares of our common stock. We sold 37.6 units at a
per-unit price of $50,000 for aggregate proceeds of $1,880,000, of which
$1,345,000 was paid in cash and $535,000 was paid by converting certain of our
outstanding debt and other obligations. The notes are our unsecured obligations
and are due on July 2, 2002, subject to certain mandatory prepayments. The
conversion price of the notes and exercise price of the warrants is $0.10465,
representing 115% of the average last sale price of a share of common stock as
reported by the OTC Bulletin Board for the five consecutive trading days
immediately prior to January 2, 2001, the date of the initial closing of the
private placement. If the full amount of notes and warrants sold by us in the
private placement are converted and exercised pursuant to their respective
terms, we would be required to issue an additional 19,844,644 shares of our
common stock. This would, after conversion and exercise, represent approximately
51% of our issued and outstanding common stock, assuming no other currently
outstanding options and warrants are exercised, and 45% of our issued and
outstanding common stock if all such options and warrants are exercised.
Steven G. Chrust, our chairman of the board, purchased 13.1 units in
the private placement, of which $255,000 was invested in cash and $400,000 was
invested through the conversion of existing outstanding obligations we owed to
Mr. Chrust, including $250,000 pursuant to the terms of a convertible negotiable
promissory note evidencing Mr. Chrust's prior loan to us on November 8, 2000.
Pursuant to Mr. Chrust's note, all of the unpaid principal amount then due was
required to be converted into the securities being sold in our next offering
grossing net proceeds of at least $500,000. In addition, Mr. Chrust agreed to
forfeit warrants to purchase 375,000 shares of our common stock which were
issued to him in connection with the note. Other officers, directors and
employees purchased an additional 4.1 units, all of which was invested in cash.
Of the 19,844,644 shares of common stock issuable upon conversion of the notes
and exercise of the warrants, 6,913,958 shares would be issued to Mr. Chrust and
an aggregate of 2,163,911 would be issued to other officers, directors and
employees.
4
Extension of Outstanding Indebtedness
In November 2000, we had reached agreements in principal to extend the
maturity dates of outstanding notes in an aggregate amount of $2,023,771.60,
representing principal of $1,635,000 and accrued interest of $388,771.60, which
were due and payable in December 2000. We then embarked upon the process of
negotiating definitive agreements to finalize the extension of these notes. We
executed the last of these agreements on January 12, 2001. We issued new notes
in an aggregate principal amount of $1,391,821.60 maturing in January 2002 and
gave a credit toward future services to be provided by us in the amount of
$631,950 to replace the existing notes. In connection with the extension of
these notes, we granted options to purchase an aggregate of 150,000 shares of
our common stock.
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. 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."
We are in the process of leasing new office space to locate our
principal executive offices in Connecticut. Our mailing address is currently
1786 Bedford Street, Stamford, Connecticut 06905. Our telephone number is (203)
409-2100.
5
Summary Historical Financial Information
The following sets forth our summary historical financial information
for the nine months ended September 30, 2000, years ended December 31, 1999 and
1998, and 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).
Data for September 30, 2000 are derived from our unaudited financials
of the same date included in this prospectus. Data for the other periods 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 an explanatory paragraph regarding our
ability to continue as a going concern). Data for 1997 and 1996 are derived from
the audited financial statements previously filed in our reports with the SEC.
The following data should be read in conjunction with those financial
statements.
Statement of Operations Data
Worlds.com Inc. Predecessor
--------------------------------------------------------------- ---------------------------------
Nine Months
Ended From 4/8/97 For the Year
9/30/00 Year Ended Year Ended (Inception) For the Period Ended
(Unaudited) 12/31/99 12/31/98 to 12/31/97 Ended 12/3/97 12/31/96
------------- ------------- -------------- ---------------- -------------- --------------
Net revenues $ 918,710 $ 507,499 $ 29,110 1,420 $ 80,720 $ 3,784,019
Total cost and expense $ 7,191,134 $ 3,746,789 $ 3,672,914 6,810,568(b) $ 2,885,088 $ 13,871,984
Operating loss $ (6,272,424) $ (3,239,290) $ (3,643,804) (6,809,148) $ (2,804,368) $(10,087,965)
Other income and
(expenses) $ (47,215) $ (100,210) $ 822,576(a) (3,099) $ 134,863 $ 16,011
Net loss before taxes
and extraordinary item $ (6,319,639) $ (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 $ (6,319,639) $ (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 $ (6,319,639) $ (3,339,500) $ (2,648,681) (6,686,471) $ (2,285,220) $(10,186,954)
Loss per share - before
extraordinary item
(basic and diluted) $ (0.34) $ (0.19) $ (0.16) (0.73)
Loss per share (basic
and diluted) $ (0.34) $ (0.19) $ (0.15) (0.72)
Balance Sheet Data
September 30, 2000
(Unaudited) December 31, 1999
---------------------------------
Working capital.................. $ (3,339,984) (1,441,900)
Total assets..................... $ 3,574,335 4,780,957
Total liabilities................ $ 4,887,261 3,803,146
Shareholders' equity............. $ (1,312,296) 977,811
(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.
6
Risk Factors
You should carefully consider the risks described below before making a
decision to purchase our common stock. 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.
Risks related to our business
If we are unable to raise additional funds in the near future, we will have to
diminish or stop our operations.
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. As of December 31,
2000, we had only nominal cash and cash equivalents. We believe that our
existing capital resources, after giving effect to our private placement in
January 2001, together with cash generated by our operations, will be sufficient
to fund our operations through August 2001. Thereafter, we will need to raise
additional capital in order to maintain operations. Any future issuance of
equity securities to raise capital 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. The opinion of our auditors contains an
explanatory paragraph regarding our ability to continue as a going concern.
We have experienced relatively large losses during our development and, without
significant increases in the market penetration of our services and improvements
to our operating margins, we will not achieve profitability.
Since inception, we have incurred significant net losses as set forth
in the financial information included elsewhere in this memorandum. We
anticipate that we will continue to incur significant losses for at least the
short-term. We will not achieve profitable operations until we successfully
attract and retain a significant number of advertisers to and users of our 3D
sites and customers for our other services and generate revenues from these
sources that are sufficient to offset the substantial up-front expenditures and
operating costs associated with developing and commercializing our services. We
may never be able to accomplish these objectives.
It will be difficult for you to evaluate us based on our past performance
because we are a relatively new company with a limited operating history.
We have been engaged in the commercial sale of our 3D Internet-based
services for a relatively short period of time and, accordingly, have only
limited financial results on which you can evaluate our company and operations.
We are subject to, and may not be successful in addressing, the risks typically
encountered by new enterprises and companies operating in the rapidly evolving
Internet marketplace, including those risks relating to:
7
o the failure to develop brand name recognition and reputation;
o the failure to achieve market acceptance of our services;
o a slow down in general consumer acceptance of the Internet as
a vehicle for commerce; and
o an inability to grow and adapt our business and technology to
evolving consumer demand.
We may not be able to successfully compete in our markets, which are
characterized by the existence of large competitors and rapidly changing
technology.
Given our relatively limited resources, we may not be able to
effectively compete in our target markets. These markets are characterized by
intense competition, rapidly changing technology and increasing numbers of new
market entrants who have developed or are developing potentially competitive
products and services. Our competitors include others enterprises utilizing
3D-based technology for online entertainment and marketing purposes, 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 larger
Internet service providers and record labels, may determine to create and
distribute their own 3D Internet sites.
Our limited resources may restrict our ability to manage any growth we may
experience.
Growth of our business may place a significant strain on our management
systems and resources and may require us to implement new operating 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 technology backbone 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 are dependent, in part, on the sale of our services to foreign customers, and
accordingly, are subject to the risks of doing business internationally.
We market and provide our service in the United States and
internationally. Servicing our foreign clients and marketing our services abroad
requires the dedication of significant management and financial resources. Our
international operations are, and will be, subject to a variety of risks
associated with conducting business internationally, many of which are beyond
our control. Operating internationally subjects us to risks relating to the
following areas:
o expenses associated with customizing products for foreign
countries;
o political and economic instabilities;
8
o potentially adverse tax consequences and regulatory
requirements;
o uncertainty of product acceptance by different cultures;
o dependence on local partners who may not be able to meet the
needs of a growing international market;
o greater difficulty in accounts receivable collection and
longer collection periods;
o difficulties and costs of staffing and managing foreign
operations;
o unexpected changes in regulatory requirements related to the
Internet; and
o limited or unfavorable intellectual property protection.
If we are unable to protect our intellectual property rights, competitors may be
able to use our technology or trademarks, which could weaken our competitive
position.
We rely on a combination of copyright, trademark and trade secret laws
and restrictions on disclosure to protect our intellectual property rights. We
also enter into confidentiality or license agreements with our employees,
consultants and customers, and control access to and distribution of our
software, documentation and other proprietary information. Despite our efforts
to protect our proprietary rights, unauthorized parties may attempt to copy or
otherwise obtain and use our products or technology, particularly in foreign
countries where the laws may not protect our proprietary rights as fully as in
the United States. Although we have never been involved in any intellectual
property litigation, we could become a party to litigation in the future to
protect our intellectual property or as a result of alleged infringement of
others' intellectual property. These claims and any resulting lawsuits could
subject us to significant liability for damages and invalidation of our
proprietary rights.
If we lose any of our key personnel or fail to hire and retain other talented
employees, our operations could be harmed.
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.
9
Risks related to the Internet
Our future results depend on continued evolution of the Internet.
Our future results depend on continued growth in the use of the
Internet for information, publication, distribution and commerce. Our growth is
also dependent on increasing availability to residential consumers of broadband
Internet access which will allow such persons to access higher-capacity content
through the Internet. Our business could suffer if Internet usage and broadband
availability does not continue to grow and evolve.
In addition, changes in network infrastructure, transmission and
content delivery methods and underlying software platforms, and the emergence of
new Internet access, such as television set-top boxes, could dramatically change
the structure and competitive dynamic of the market for Internet realtime 3D
products. We may not be able to adopt our technology and services for use in
connection with other emerging technologies.
The recent downturn in stock prices of Internet companies may continue.
Stock prices of many Internet companies have fallen drastically over
the past several months. With this fall, many investors have grown reluctant to
invest in Internet companies until this downturn reverses itself. Other
investors have lost confidence in the Internet as a money-making medium and have
removed their investments in Internet companies. If investors do not regain
confidence in the Internet and this downturn does not change, more and more
people may become dissatisfied with Internet companies and choose to invest in
other more stable areas of commerce.
We may not be able to economically comply with any new government regulation
that may be adopted with respect to the Internet.
New Internet legislation or regulation, or the application of existing
laws and regulations to the Internet and e-commerce could add additional costs
and risks to doing business on the Internet. We are subject to regulations
applicable to businesses generally and laws or regulations directly applicable
to communications over the Internet and access to e-commerce. Although there are
currently few laws and regulations directly applicable to e-commerce, it is
possible that a number of laws and regulations may be adopted with respect to
the Internet, covering issues such as user privacy, pricing, content,
copyrights, distribution, antitrust, taxation and characteristics and quality of
products and services.
Legislation regarding privacy of personal information about users may affect our
communities.
We are subject to and must comply with data protection legislation
which restricts our ability to collect and exploit users' personal data. Our
business is particularly dependent on the existing and future data protection
laws in Europe, the United States and in each specific country where we operate.
European data protections legislation is drafted in very broad terms, and there
are few sources of guidance as to its interpretation. It is difficult to foresee
the extent to which its enforcement by relevant authorities will restrict our
operations. We believe that a rigid interpretation of data protection
10
legislation could hinder our ability to conduct our business as planned. Our
failure to comply with applicable law could subject us to severe legal sanctions
which could have a material adverse effect on our business and results of
operations. We maintain a privacy policy which is not to disclose individually
identifiable information about any user of our products or services to a third
party without the user's consent. Despite this policy, however, if third persons
were able to penetrate our network security or otherwise misappropriate users'
personal information, we could be subject to liability claims.
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.
Risks related to our common stock
Possible issuances of our capital stock would cause dilution to our existing
shareholders.
While we currently have approximately 19,204,000 shares of common stock
outstanding, we are authorized to issue up to 65,000,000 shares of common stock.
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 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. Additionally,
Steven Chrust, our chairman of the board, may be issued an additional 6,913,958
shares of our common stock and an aggregate of 2,163,911 additional shares may
be issued to various other officers, directors and employees of ours upon
conversion of the notes and exercise of the warrants purchased in our private
placement in January 2001. 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.
11
No dividends have been paid on our common stock.
To date, we have not paid any cash dividends on our common stock and we
do not expect to declare or pay dividends on the common stock in the foreseeable
future. In addition, the payment of cash dividends may be limited or prohibited
by the terms of any future loan agreements.
The market price of our common stock is very volatile.
The price of our common stock historically has been subject to wide
price fluctuations. In addition, the daily volume of our shares traded on the
OTC Bulletin Board has been relatively small. Therefore, our shareholders may
not always be able to sell their shares of common stock at the time they want or
at the most advantageous price.
We are subject to "penny stock" regulations which may adversely impact the
liquidity and price of our common stock.
Our common stock is deemed a "penny stock." 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 could 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.
The exercise or conversion of outstanding options and warrants into common stock
will dilute the percentage ownership of our other shareholders. The sale of such
common stock or other 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 6,904,000 shares of our common stock and more options will be
granted in the future under our employee benefit plans. In addition, if the full
amount of the notes sold by us in our January 2001 private placement are
converted pursuant to the terms of the notes, we will be required to issue an
additional 17,964,644 shares of common stock.
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Substantially all of the shares of common stock issuable upon conversion or
exercise of these 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 shareholders. In addition, 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 future. Sales or the expectation of sales of a
substantial number of shares of our common stock in the public market, including
shares of our common stock issuable upon exercise or conversion of our stock
options or warrants, 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.
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 first
quarter of 1997, our predecessor became insolvent and terminated most of its
personnel. We thereafter acquired the enterprise through merger 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 a 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
e-commerce web sites;
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 third-party Internet service
providers, such as Freeserve and Roadrunner;
o development and operation of 3D chat and entertainment sites
for third parties;
o on-line advertising revenues; and
o e-commerce commissions and fees.
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Expenses
We classify our expenses into two broad groups:
o cost of revenues; and
o selling, general and administration.
During the third 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 increasing the number of and maintaining our sites; and
o developing the infrastructure required to handle and promote
rapid growth.
Software development costs, consisting primarily of salaries and
related expenses, incurred prior to establishing technological feasibility are
expensed in accordance with Financial Accounting Standards Board (FASB)
Statement No. 86. In accordance with FASB 86, we will capitalize software
development costs at such time as the technological feasibility of the product
has been established. We began capitalizing our software costs in the fourth
quarter of 1998 with the commercial release of three products, AnimalHouse.com,
BowieWorld and Worlds Ultimate 3D Chat. At December 31, 1999, approximately
$1,353,000 of such expenditures had been capitalized. For the nine months ended
September 30, 2000, we capitalized $496,000 in software development
expenditures.
Results of Our Operations
Nine Months Ended September 30, 2000 compared to
Nine Months Ended September 30, 1999
For the nine months ended September 30, 1999, revenue was derived
primarily from VIP memberships, e-commerce and third-party licensing
arrangements. In the nine months ended September 30, 2000 revenues were $918,710
compared to revenues of $241,607 during the nine months ended September 30,
1999, an increase of 280%.
Selling, general and administrative expenses were $6,851,421 for the
nine months ended September 30, 2000 as compared to $2,852,723 for the nine
months ended September 30, 1999. This represented an increase of $3,998,698.
This increase was attributable to higher costs associated with building a new
management team and increasing the number of employees 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, implementing an advertising and
marketing campaign and legal and professional fees.
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Other income included $83,045 of interest income for the nine months
ended September 30, 2000 earned from the remainder of the proceeds of our share
offerings as compared to $38,019 for the nine months ended September 30, 1999.
Other expenses included interest expense of $130,260 directly attributable to
our predecessor's notes payable for the nine months ended September 30, 2000.
Interest expense for the nine months ended September 30, 1999 was $102,206.
As a result of the foregoing we incurred a net loss of $6,319,639 for
the nine months ended September 30, 2000, compared to a loss of $2,844,086 for
the nine months ended September 30, 1999, an increase of $3,475,553.
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.
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
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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 September 30, 2000, we had working capital deficit of $(3,339,984)
and cash and cash equivalents in the amount of $715,172. At December 31, 2000,
we had only nominal cash and cash equivalents and had a working capital deficit.
In November 2000, we had reached agreements in principal to extend the
maturity dates of outstanding notes in an aggregate amount of $2,023,771.60,
representing principal of $1,635,000 and accrued interest of $388,771.60, which
were due and payable in December 2000. We then embarked upon the process of
negotiating definitive agreements to finalize the extension of these notes. We
executed the last of these agreements on January 12, 2001. We issued new notes
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in an aggregate principal amount of $1,391,821.60 maturing in January 2002 and
gave a credit toward future services to be provided by us in the amount of
$631,950 to replace the existing notes. In connection with the extension of
these notes, we granted options to purchase an aggregate of 150,000 shares of
our common stock.
At September 30, 2000, our total liabilities were $4,887,261 including
the current term portion of notes payable of $2,074,994. Giving effect to our
renegotiation of certain debt and the private placement in January 2001, at
September 30, 2000, our liabilities would have been $5,923,123, including the
current term portion of notes payable of $3,954,994.
In January 2001, we consummated a private placement of units, each unit
consisting of a $50,000 principal amount 6% convertible promissory note and a
warrant to purchase 50,000 shares of our common stock. We sold 37.6 units at a
per-unit price of $50,000 for aggregate proceeds of $1,880,000, of which
$1,345,000 was paid in cash and $535,000 was paid by converting certain of our
outstanding debt and other obligations. The notes are our unsecured obligations
and are due on July 2, 2002, subject to certain mandatory prepayments. The
conversion price of the notes and exercise price of the warrants is $0.10465,
representing 115% of the average last sale price of a share of common stock as
reported by the OTC Bulletin Board for the five consecutive trading days
immediately prior to January 2, 2001, the date of the initial closing of the
private placement.
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, after giving effect to
our private placement in January 2001, together with cash from our operations,
will satisfy our capital requirements through August 2001. 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.
Additional capital may be raised in the form of equity or debt financing. Any
issuance of equity securities would dilute the interest of our shareholders.
Additionally, if we incur debt, we will become subject to risks that interest
rates may fluctuate and cash flow may be insufficient to pay the principal and
interest on any such debt. While we hope to raise additional financing, we have
no current arrangements with respect to, or sources of, additional financing and
there can be no assurance that any such financing, particularly the significant
amounts of financing that would be required, will be available to us on
commercially reasonable terms, or at all. Any inability to obtain additional
financing will have a material adverse effect on our business, including
possibly requiring us to significantly curtail or cease operations. The opinion
of our auditors contains an explanatory paragraph regarding our ability to
continue as a going concern.
Effect of Recent Accounting Pronouncements
In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting
for Certain Transactions Involving Stock Compensation, an Interpretation of APB
Opinion No. 25"(the "Interpretation"). The Interpretation is intended to clarify
certain issues that have arisen in practice since the issuance of APB 25. We
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adopted the Interpretation on July 1, 2000 and the adoption did not have a
significant impact on our results of operations, financial position or cash
flows.
Business
General
Worlds.com is a 3D entertainment and e-commerce portal which leverages
our proprietary technology to offer visitors a network of virtual, multi-user
environments which we call "worlds". Worlds are visually engaging online
environments where people can come together and, by navigating through the
website, shop, interact with others, attend events and be entertained.
In support of our 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.
Sites using our technology allow numerous simultaneous visitors to
enter, navigate and share interactive "worlds," which are virtual 3D
environments featuring multiuser capability, 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 goal is to be a provider of interactive 3D internet sites
where entertainment content, interactive chat and e-commerce opportunities meet
to provide a market for e-commerce and advertisers.
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. Currently, almost all Internet sites are entirely
two-dimensional with limited graphic and interactive capabilities because
existing technological barriers typically prevent the delivery of high-quality
3D graphics and motion imagery. Typically, in order for sites to provide users
with high-quality 3D graphics on the Internet, such users must have very
powerful computers and both the user and site provider must have access to
high-capacity communications channels for the movement of the large amount of
data that must be delivered to provide 3D motion. Our technology, however,
circumvents these limitations by delivering a large portion of the necessary
software and data through off-line channels, such as CDs and CD-ROMs, with only
the interactivity information being transmitted online. This allows almost any
home computer with a traditional modem to enjoy our interactive 3D sites.
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The 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:
Pursuing alliances and cross promotional opportunities. We are pursuing
opportunities to provide our 3D Internet technology and content to other
companies for their use in connection with the marketing and delivery of their
own products and services.
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.
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
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into relationships with companies representing David Bowie and the groups Hanson
and Aerosmith, and we are currently in negotiations with several major record
companies with respect to the distribution of our 3D technology and content.
Creating brand identity for Worlds.com through strategic partnerships.
Public awareness of our site and products is critical to our success. We will
build this awareness by building relationships with distribution and content
providers. 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 success in promoting
our brand also will depend on our success in providing high-quality products and
services and a high-level of customer satisfaction.
Initially producing interactive multimedia music-related 3d sites. We
believe that music readily lends itself to exploitation through web sites
utilizing our technology. Music is a universal theme that appeals to all people
and accordingly, music-based sites, such as Worlds Ultimate 3D Chat, have the
capability of drawing a wide range of users. We also believe that the highly
graphic, interactive nature of sites using our technology appeals to users drawn
to music-based sites, differentiates such sites from other music-based sites and
thereby encourages repeat visitation. Because our technology allows for the
creation of multiple worlds accessible from a web site, it allows such sites to
segregate users of different tastes and demographics. For example, the various
worlds of Worlds Ultimate 3D Chat focus on specific categories of music
including:
o alternative;
o jazz;
o rock;
o pop;
o country; and
o hip-hop.
Accordingly, advertisers at Worlds Ultimate 3D Chat are able to place their
online advertisements and e-commerce links in specific worlds, thereby focusing
their advertising efforts on targeted user groups.
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
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tool kit in the development of 3D content for David Bowie's 3D on-line
environment, BowieWorld, as well as our 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.
Worlds Gamma technology permits the development of virtual worlds which
have broad applications. These applications include but are not limited to: a
virtual meeting place (such as a fan club); a 3D e-commerce store (where
merchandise can be viewed in 3D and purchased online); and a virtual classroom
(where content can be viewed via video streaming and then discussed in real
time).
The Gamma tool kit has substantial elements written in Sun
Microsystem's programming language, Java, including the WorldsBrowser and the
WorldsShaper so we expect that it can be made portable across Windows, Apple and
UNIX/Linux Platforms because of Java's platform independence.
The Gamma technologies include:
o WorldsShaper: WorldsShaper is the visual authoring component of the
Worlds Gamma platform. It is meant to quickly assemble pieces to create
multi-user, shared state, virtual worlds. The WorldsShaper is an advanced
compositing 3D building tool that integrates pre-existing or custom content,
such as 3D models created in 3D Studio Max, 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 a tool well-suited for rapid world
creation.
o WorldsServer: The WorldsServer is the scalable software that we use
to control and operate our on-line virtual communities. The WorldsServer 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. The WorldsServer suite
consists of two primary types of server processes - the UserServer and the
RoomServer - which can be combined in a variety of ways for diverse situations.
The WorldsGamma platform also integrates an HTTP server for the delivery of
other content such as audio and video streaming and secure e-commerce
applications.
o WorldsPlayer: The WorldsPlayer allows users to view and experience
the multi-user, interactive Worlds Gamma technology. Any world created with the
WorldsShaper will be viewable and navigable with the WorldsPlayer. The
WorldsPlayer has a high frame rate for fast, high-quality graphics, an
easy-to-use graphic user interface, 2D web browser integration, automatic
upgrade capability over the internet and a complete communication tool set
including chat, voice-to-voice chat, e-mail and animation.
o WorldsBrowser : The WorldsBrowser 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.
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o Worlds Gamma Libraries: The Worlds Gamma Libraries are composed of
sample worlds, textures, models, avatars, actions, sensors, sounds, motion
sequences, and other behaviors.
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 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.
The Worlds Portal
We use our technology to create our own 3D entertainment portal as well
as to create, develop and maintain portals for third parties.
We own a proprietary online 3D Internet chat site known as Worlds
Ultimate 3D Chat (www.Worlds.com). 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.
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;
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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.
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. 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 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 establish market segment dominance in
order to increase sales to a large user base.
Alliances and Customers
Our strategy for expanding brand recognition through online advertising
depends to some extent on our relationships with our distribution and content
partners. In addition to the strategic partners set forth below, we plan to
enter into agreements with additional partners 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. 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
24
our attempts to enter into strategic relationships with such sites. If we cannot
secure or maintain these relationships on favorable terms, our business
prospects could be substantially harmed. To date, we have entered into
agreements with the following strategic partners:
British Telecommunications
In June 2000, we entered into an agreement with British
Telecommunications plc pursuant to which we will provide co-branded 3D web sites
featuring our interactive worlds to users of British Telecommunications'
Internet service. We will share with British Telecommunications revenues derived
from VIP subscription and e-commerce activities generated through these sites as
well as advertising revenues.
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 Hong Kong-based 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. We will share all VIP subscription, advertising and connectivity
revenue generated through the sites with e-New Media. We have also recently
developed CocaCola World, the first branded 3D advertising site of a significant
world brand, in conjunction with e-New Media for the market in China.
24/7 Media
In June 2000, we entered into a sales and marketing agreement with 24/7
Media to sell advertising on our entertainment portal and website pages. 24/7
Media is a leading global provider of end-to-end interactive technology and
marketing solutions and services for web publishers, online advertisers,
25
advertising agencies, e-marketers and e-commerce merchants. Under the terms of
the agreement, advertising and marketing clients of 24/7 Media will be able to
place advertising on our 3D entertainment portal.
Artisan Entertainment
We recently produced a 3D Blair Witch World for Artisan Entertainment's
Blair Witch WebFest, which ran live online from October 18-20, 2000. Blair Witch
World resides on www.BlairWitch.com, the official site for the new movie "Book
of Shadows: Blair Witch 2." Under the terms of our agreement with Artisan, we
created a 3D world where Blair Witch fans can interact using custom avatars.
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.
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.
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 April 2000, we produced a Hanson concert at the Bowery Ballroom in
New York City and obtained rights to Web-cast it four times. The first Web-cast
was in May 2000 in conjunction with a live chat that included the band's members
driving their own custom avatars in HansonWorld. In addition, the WorldsPlayer
was included on a Hanson enhanced CD that was bundled into the July issue of
Teen Magazine.
26
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.
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.
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.
Aerosmith
In January 2001, we entered into a revenue sharing agreement with
Aerosmith to create and operate an official 3D Aerosmith environment entitled
"AerosmithWorld" and to redesign Aerosmith's official website which currently
resides at www.Aerosmith.com.
World Wrestling Federation Entertainment
In January 2001, we entered into an agreement with the World Wrestling
Federation Entertainment to create and operate a co-branded 3D environment for
the World Wrestling Federation which would integrate the WWF's Times Square
restaurant with its official website which currently resides at www.wwf.com.
Competition
The markets in which we currently operate and those we intend to enter
are characterized by intense competition and an increasing number of new market
entrants which have developed or are developing competitive products. We will
face competition from numerous sources, including prospective customers which
may develop and market their own competitive products and services, software
companies, and online and Internet service providers. We believe that
competition will be based primarily on ease of use, price and features,
including communications capabilities and content.
In addition, certain companies have developed or may be expected to
develop technologies or products in related market segments which could compete
with certain technologies or products we are developing. We expect that such
companies, as well as other companies including established and newly formed
companies, may attempt to develop products that will be in direct competition
with us. Many of our competitors have advantages over us, including:
27
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.
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:
o tools for building 3D worlds known as shapers ;
o servers for distributing those worlds and making those worlds
multi-user ; and
o 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. 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. 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.
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. 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:
28
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.
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.
Properties
We lease approximately 1,300 square feet of office space at a base rent
of $12,970 per month at 1455 East Putnam Avenue, Old Greenwich, CT 06870. This
lease expires in February 2001 and we have decided not to renew it for another
term. We are currently in the process of looking for new office space to locate
our principal executive offices in Connecticut. We also lease approximately
2,500 square feet of office space at 15 Union Wharf, Boston, Massachusetts 02109
at a base rent of approximately $50,000 per year. This lease term expires in
September 2002. We 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 term in San Francisco expires in August 2002. We recently
entered into a lease for approximately 2,300 square feet of office space in
Edison, New Jersey at a base rent of approximately $40,000 per year. The initial
term of this lease expires in August 2003.
29
Legal Proceedings
We are not involved in any material legal proceeding.
Management
Officers and Directors
Our officers and directors are as follows:
Name Age Position
- ---- --- --------
Steven G. Chrust 51 Chairman of the Board
Thomas Kidrin 48 President, Chief Executive Officer,
Treasurer, Secretary and Director
Christopher J. Ryan 40 Vice President-Finance,
Principal Accounting and Financial
Officer
Thomas Saleh 51 Chief Operating Officer and Chief
Technology Officer
Kenneth A. Locker 54 Director
William Harvey 58 Director
Steven G. Chrust has been chairman of the board since April 1999. Mr.
Chrust has been involved with the telecommunications and financial services
industries for 25 years. Since May 2000, Mr. Chrust has served as chairman of
the board of Comtel Secure Fiber Telecommunications, Inc., which has a
proprietary technology that secures fiber optic transmissions. Mr. Chrust has
also served as a director of FiberNet Telecom Group, Inc., a facilities-based
carrier that designs, builds and operates intra-building and metropolitan area
broadband networks, since December 1999. Mr. Chrust was the vice chairman and
co-founder 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 has been the
30
chairman and president of Datastream Corporation, a designer and developer of
interactive products and services, since 1993. Since October 1999, Mr. Kidrin
has also served as a director of EMT Corporation, which is engaged in the
development and marketing of an interactive web-browser with user customized
features focused on affinity online marketing. 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 is a graduate of the New School of Social
Research.
Christopher J. Ryan has been Vice President- Finance since May 2000 and
principal accounting and finance officer since August 2000. From August 1991
through April 2000, Mr. Ryan held a variety of financial management positions at
Reuters America, an information services company. Mr. Ryan is a certified public
accountant. He is a graduate of Montclair State College in New Jersey and
received an M.B.A. degree from Fordham University in New York.
Thomas Saleh has been our chief technology officer since November 1999
and our chief operating officer since July 2000. From 1998 until November 1999,
Mr. Saleh acted as a consultant and advisor to several public and private
companies. In 1997, Mr. Saleh led an investor group in acquiring the network
services division of ADP. This acquisition served as the core of NetworkTwo. In
1998, Mr. Saleh left his active management role at NetworkTwo, remaining a
director and major shareholder. Mr. Saleh founded American Real Time Services
(ARTS) in 1983, which used standard technologies such as UNIX, Microsoft
Windows, X25, SNA and Internet protocols to replace special purpose hardware and
software. ARTS was acquired by Reuters in 1993. Mr. Saleh remained with Reuters
as vice president of new business development until 1997. Mr. Saleh was also the
founder of Applied Logic, an early provider of Virtual Private Network Services,
which was acquired by Raytheon in 1980. At Raytheon, he held several senior
engineering and business development positions.
Kenneth A. Locker has been a director since December 1997 and prior
thereto was a director of Worlds Acquisition Corp from the date of its formation
in April 1997 to its merger with us in December 1997. Since June 1998 he has
been a Senior Consultant to Intel Corporation on entertainment industry
strategies and has also served as an advisor to Ziff Davis, Inc., an Internet
consulting company, and to Digital Evolution, Inc., a technology publishing
company. From June 1996 to June 1998, he was the general manager and executive
producer for MGM Interactive, Inc., an interactive content and programming
company, where he was responsible for creating and implementing the MGM
Interactive online business strategy. From 1994 to March 1996, he was a founder
and vice president of our predecessor and from 1993 to 1994, he was Senior
Program Consultant for Ziff Davis Communications. From 1990 to 1993, Mr. Locker
was executive vice president and head of production for RHI Entertainment, Inc.,
a television production company, which at the time was 50% owned by New Line
Cinema. Mr. Locker is also on the board of directors of Softbank Forums, Inc., a
technology publishing company which is a division of Softbank Corp. Mr. Locker
is a graduate of Johns Hopkins University.
William Harvey has been a director since November 1999. In 1972 and
1991, respectively, Mr. Harvey founded New Electronic Media Science, Inc., and
Next Century Media, Inc., marketing, media and research consulting companies
31
specializing in the marketing, entertainment and interactive media industries.
Mr. Harvey has served as chief executive officer and president of both New
Electronic Media Science and Next Century since their respective inceptions.
Through New Electronic Media Science 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.
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.
Our audit committee is currently comprised of Kenneth Locker and
William Harvey. Each of these members is an "independent director" and is
"financially literate" as defined under the recently adopted Nasdaq listing
standards. The National Association of Securities Dealers' listing standards
define an "independent director" generally as a person, other than an officer of
the company, who does not have a relationship with the company that would
interfere with the director's exercise of independent judgment. The NASD's
listing standards define "financially literate" as being able to read and
understand fundamental financial statements (including a company's balance
sheet, income statement and cash flow statement). The function of our audit
committee is to:
o recommend annually to the board of directors the appointment
of our independent auditors;
o review with the independent auditors the scope of the annual
audit and review their report relating thereto;
o review with the independent auditors our accounting practices
and policies;
o review with the internal accountants and independent auditors
our overall accounting and financial controls; and
o be available to the independent auditors during the year for
consultation.
The audit committee has not adopted a formal written audit committee charter.
32
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. Each year, on the
date of our annual meeting of shareholders, our outside directors automatically
receive option grants to purchase 5,000 shares of common stock.
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of January 31, 2001, 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 of our directors, (iii) each current executive officer
whose compensation exceeded $100,000 in 2000, and (iv) all of our executive
officers and directors as a group.
Amount and Nature
Name and Address of Beneficial Owner of Beneficial Owner Percent of Class
- ------------------------------------ ------------------- ----------------
Steven G. Chrust 7,838,730(1) 29.5%
Thomas Kidrin 1,348,333(2)(3) 7.3%
Christopher J. Ryan 271,892(4) 1.4%
Kenneth A. Locker 26,666(5) *
William Harvey 16,666(6) *
Thomas Saleh 1,545,849(7) 7.4%
Steven A. Greenberg 2,046,562(2) 10.7%
Michael J. Scharf 1,381,250(2)(8) 7.2%
Primo Capital Growth Fund 1,507,199(9) 7.3%
Robert Newman 2,324,891(10) 11.0%
All Executive Officers and Directors
as a Group (6 persons) 11,048,136(11) 38.8%
_____________________
* less than 1%
(1) Includes (i) 1,000,000 shares of common stock issuable upon exercise
the warrants held by SGC; (ii) 60,000 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 Mr. Chrust's IRA, originally
acquired by the Steven Chrust BSSC Master Def Contribution Profit
Sharing Account; (v) 15,000 shares of common stock held of record by
the Eve Chrust 2000 Business Trust, for the benefit of Eve Chrust, Mr.
Chrust's daughter; (vi) 15,000 shares of common stock held of record by
the Liza Chrust 1999 Beneficiary's Trust, for the benefit of Liza
Chrust, Mr. Chrust's other daughter; (vii) 6,258,958 shares of common
stock issuable upon conversion of 6% convertible promissory notes;
33
(viii) 15,000 shares of common stock issuable upon the exercise of
presently exercisable warrants granted to Steven and Sharon Chrust,
jointly; and (ix) 95,833 shares of common stock issuable upon exercise
of options that become exercisable within 60 days. Does not include (a)
281,667 shares of common stock underlying stock options that are not
currently exercisable and (b) 655,000 shares of common stock underlying
warrants that are not currently exercisable.
(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) Includes 58,333 shares of common stock issuable upon exercise of stock
options that become exercisable within 60 days. Does not include
211,667 shares of common stock underlying stock options that are not
currently exercisable.
(4) Includes 238,892 shares of common stock issuable upon conversion of 6%
convertible promissory notes and 33,000 shares of common stock issuable
upon currently exercisable stock options. Does not include 142,000
shares of common stock underlying stock options and warrants that are
not currently exercisable.
(5) Represents 26,666 shares of common stock issuable upon exercise of
currently exercisable stock options. Does not include 28,334 shares of
common stock underlying stock options that are not currently
exercisable.
(6) Represents 16,666 shares of common stock issuable upon exercise of
currently exercisable stock options. Does not include 48,334 shares of
common stock underlying stock options that are not currently
exercisable.
(7) Represents 1,433,349 shares of common stock issuable upon conversion of
6% convertible promissory notes held jointly by Mr. Saleh and his wife
and 112,500 shares of common stock issuable upon exercise of currently
exercisable stock options. Excludes 562,500 shares of common stock
underlying stock options and warrants that are not currently
exercisable.
(8) Mr. Scharf resigned as a director, effective May 30, 2000.
(9) Represents 73,850 shares of common stock and 1,433,349 shares of common
stock issuable upon conversion of 6% convertible promissory notes.
Excludes 150,000 shares of common stock underlying warrants that are
not currently exercisable. Brett Friedland, investment manager,
exercises sole voting control over these shares.
(10) Represents 413,759 shares of common stock and 1,911,132 shares of
common stock issuable upon conversion of 6% convertible promissory
notes. Excludes 200,000 shares of common stock underlying warrants that
are not currently exercisable.
(11) Includes and excludes the shares referred to in footnotes 1, 2, 3, 4,
5, 6 and 7.
34
Executive Compensation
The following table sets forth the compensation for the three years
ended December 31, 2000, for our chief executive officer and other executive
officers whose compensation exceeded $100,000 (or would have exceeded $100,000
if employed for the full year) for the year ended December 31, 2000.
Summary Compensation Table
Annual
Compensation(1)(2) Long-Term Compensation
----------------------- --------------------------------------------
Restricted Securities All Other
Salary Bonus Stock Underlying Compensation
Name and Principal Position Year ($) ($) Awards Options ($)
- ----------------------------- ---- -------- ------ --------- ---------- -------------
Thomas Kidrin 2000 175,000 -0- -0- 270,000(3) -0-
President and CEO 1999 176,000 -0- -0- -0- -0-
1998 175,000 -0- -0- -0- -0-
Steven G. Chrust, 2000 270,000(4) -0- -0- 377,500(5) -0-
Chairman of the Board 1999 85,000(6) -0- -0- 1,000,000(6) -0-
1998 -0- -0- -0- -0- -0-
Thomas Saleh 2000 175,000 -0- -0- 75,000(7) -0-
Chief Operating Officer and 1999 25,000 -0- -0- 450,000(8) -0-
Chief Technology Officer 1998 -0- -0- -0- -0- -0-
Christopher J. Ryan 2000 80,000(9) -0- -0- 150,000(10) -0-
Vice President - Finance 1999 -0- -0- -0- -0- -0-
1998 -0- -0- -0- -0- -0-
(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) Represents options to purchase 125,000, 25,000, 25,000 and 95,000
shares of our common stock at $5.68, $6.00, $9.00 and $2.00 per share,
respectively.
(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 initially provided for an
annual consulting fee of $120,000 which fee was increased, pursuant to
the terms of the agreement, to $300,000 in March 2000. Of the $270,000
that was earned and accrued in 2000, $150,000 was converted into units
offered in our January 2001 private placement.
(5) Represents options to purchase 187,500, 50,000, 50,000 and 90,000
shares of our common stock at $5.68, $6.00, $9.00 and $2.00 per share,
respectively.
(6) Represents amounts paid by us to SGC Advisory Services, Inc. The
agreement provided for an annual consulting fee of $120,000, of which
$85,000 was earned and accrued in 1999. Upon execution of the
agreement, we granted warrants to SGC to purchase 1,000,000 shares of
our common stock at $0.50 per share.
35
(7) Represents options to purchase 75,000 shares of our common stock at
$2.00 per share.
(8) Represents options to purchase 250,000, 100,000 and 100,000
shares of our common stock at $2.91, $5.00 and $7.00 per share,
respectively.
(9) Mr. Ryan's employment with us began in May 2000 at an annual base
salary of $120,000. Mr. Ryan was paid a total of $80,000 in 2000.
(10) Represents options to purchase 65,000, 25,000, 10,000 and 50,000
shares of our common stock at $4.00, $6.00, $9.00 and $2.00 per share,
respectively.
Option Grants
The following table represents the stock options granted to the
executive officers listed in the above summary compensation table in the fiscal
year ended December 31, 2000.
Options Granted in the Last Fiscal Year
Number of Percent of
Securities Total Options
Underlying Granted to
Options Employees in
Granted Fiscal Year Exercise Price of
Name of Executive (#) (%) Options ($) Expiration Date
- ------------------------ --------- ------------ ----------------- ----------------
Steven G. Chrust 187,500 5.68 3/16/05
50,000 25 6.00 3/16/05
50,000 9.00 3/16/05
90,000 2.00 7/19/05
Thomas Kidrin 125,000 5.68 3/16/05
25,000 18 6.00 3/16/05
25,000 9.00 3/16/05
95,000 2.00 7/19/05
Thomas Saleh 75,000 5 2.00 7/19/05
Christopher J. Ryan 65,000 4.00 3/01/05
25,000 10 6.00 3/01/05
10,000 9.00 3/01/05
50,000 2.00 7/19/05
None of the executive officers listed in the above summary compensation
table exercised any stock options during 2000. The following table sets forth
certain information concerning the fiscal year end value of unexercised options
held by such persons.
Aggregated Fiscal Year End Option Values
Number of Securities Underlying Unexercised
Options at Fiscal Year End:
Name Exercisable (#) Unexercisable (#)
Steven G. Chrust 1,110,833(1) 281,667(1)
Thomas Kidrin 58,333(1) 281,667(1)
Thomas Saleh 112,500(1) 412,500(1)
Christopher J. Ryan 33,000(1) 117,000(1)
__________________________
36
(1) None of the unexercised options at fiscal year end are in-the-money
options, as determined by taking the difference between the closing
sale price of our common stock on January 31, 2001 ($0.31) and the
exercise prices of the options, multiplied by the number of shares of
common stock subject to the options.
1997 Stock Option Plan and Other Options
The 1997 incentive and non-qualified stock option plan, as amended has
been adopted by the board and the shareholders as an incentive for, and to
encourage share ownership by our 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 1997 Plan from
1,000,000 to 3,000,000. The plan also allows for the granting of stock
appreciation rights in tandem with, or independently of, stock options.
Independent (stand-alone) grants of stock appreciation rights are not counted
against the plan limit.
As of December 31, 2000, there were outstanding grants under the plan
of options to purchase an aggregate of approximately 2,508,575 shares of common
stock. Our directors and officers hold options to purchase an aggregate of
approximately 1,907,850 shares of common stock under the plan, at exercise
prices ranging from $0.4062 to $9.00.
At December 31, 2000, we had other outstanding options and warrants to
purchase an aggregate of approximately 2,515,645 shares of our common stock. Our
directors and officers hold non-plan options and warrants to purchase an
aggregate of approximately 1,790,000 shares of common stock at per-share prices
ranging from $1.00 to $10.00.
Certain Relationships and Related Transactions
In March 1999, we entered into a Financial Advisory and Consulting
Agreement with SGC Advisory Services, Inc., of which Mr. Chrust is the President
and sole shareholder. The agreement continues through March 2002 and currently
provides for an annual fee of $300,000. Upon execution of the agreement, 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 . In connection with the engagement of SGC Advisory Services, Inc.,
Messrs. Kidrin, Greenberg and Scharf (i) contributed to us for cancellation
300,000, 881,250 and 318,750 shares of our common stock, respectively, and (ii)
during the term of the consulting agreement, agreed 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.
37
In December 1997, we entered into a month-to-month consulting agreement
with Steven A. Greenberg, a founder of worlds Acquisition Corp. and a principal
shareholder of Worlds.com. The agreement provided for monthly compensation of
$15,000 plus reimbursement of reasonable expenses actually incurred. This
agreement was terminated in February 2000. During 1997, Mr. Greenberg loaned
$77,000 to Worlds Acquisition Corp. on an interest-free basis of which $73,000
was repaid as of December 31, 1998, and the balance was repaid as of June 30,
1999.
On March 10, 2000, Mr. Chrust, our chairman, and The Advent Fund LLC
purchased 302,939 shares and 151,469 shares of common stock, respectively, at a
purchase price of $3.301 per share from Steven A. Greenberg in private
transactions. Mr. Chrust also purchased options (for $.007335 per option) 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 (for $.007335 per option). All of such
transferred options were exercised. The remaining 45,562 options expired
unexercised. The shares purchased from Mr. Greenberg by Mr. Chrust, Advent and
the transferees of the options are registered for resale hereunder.
In January 2001, we consummated a private placement of units, each unit
consisting of a $50,000 principal amount 6% convertible promissory note and a
warrant to purchase 50,000 shares of our common stock. We sold 37.6 units at a
per-unit price of $50,000 for aggregate proceeds of $1,880,000, of which
$1,345,000 was paid in cash and $535,000 was paid by converting certain of our
outstanding debt and other obligations. The notes are our unsecured obligations
and are due on July 2, 2002, subject to certain mandatory prepayments. The
conversion price of the notes and exercise price of the warrants is $0.10465,
representing 115% of the average last sale price of a share of common stock as
reported by the OTC Bulletin Board for the five consecutive trading days
immediately prior January 2, 2001, the date of the initial closing of the
private placement. Steven Chrust, our chairman, purchased 13.1 units in the
private placement, of which $255,000 was invested in cash and $400,000 was
invested through the conversion of existing outstanding obligations we owed to
Mr. Chrust, including $250,000 pursuant to the terms of a convertible negotiable
promissory note evidencing Mr. Chrust's prior loan to us on November 8, 2000.
Pursuant to the terms of this note, the unpaid principal amount then due on the
note was required to be converted into securities being in our next offering
grossing net proceeds of at least $500,000. In addition, Mr. Chrust agreed to
forfeit warrants to purchase 375,000 shares of our common stock which were
issued to him in connection with the note. Various other officers, directors and
employees purchased an additional 4.1 units, all of which was invested in cash.
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
38
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. We currently
have approximately 19,204,000 shares of common stock outstanding.
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 majority of shares of our outstanding common stock may be deemed
"restricted securities," as that term is defined under Rule 144 promulgated
under the Securities Act. Such shares may be sold to the public, subject to
volume restrictions, as described below. Commencing at various dates, these
shares may be sold to the public without any volume limitations. In addition, we
are registering 22,883,720 of such shares for sale by the selling shareholders
hereunder. The remaining outstanding shares of common stock are freely
tradable. 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.
39
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.
Market for our Common Stock
Our common stock began trading on the OTC Bulletin Board on October 20,
1998 under the symbol "WLDI." On February 11, 2000, in connection with the
change in our name from Worlds Inc. to Worlds.com Inc., our symbol was changed
to "WDDD." The following table sets forth, for the periods indicated, the high
and low bids for our common stock as reported on the OTC Bulletin Board
(representing interdealer quotations, without retail mark-ups, mark-downs or
commissions, and may not necessarily represent actual transactions):
Period High($) Low($)
- ------ ------- ------
Fiscal 2001
First Quarter* .53 .09
Fiscal 2000
Fourth Quarter .75 .05
Third Quarter 2.13 .69
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
____________________________________
* Through January 31, 2001.
40
On January 31, 2001, the last sale price of the common stock as
reported on the OTC Bulletin Board was $0.31.
Holders
We believe there are currently 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.
6% Convertible Promissory Note
The notes are our unsecured obligations. Each note bears interest at
the rate of 6% per annum. The principal and interest due on the notes will be
payable on July 2, 2002, subject to the mandatory prepayment and conversion
rights described below.
Conversion
The principal and interest on the notes are convertible, in whole, but
not in part, at any time, at the election of the holder, into that number of
shares of our common stock determined by dividing the principal and interest
owing on the notes at the time of conversion by $0.10465, representing 115% of
the average last sale price of a share of our common stock as reported by the
OTC Bulletin Board for the five consecutive trading days immediately prior to
January 2, 2001.
Prepayment
We must prepay the principal and interest of the outstanding notes by
making monthly payments to each holder of the notes in an amount equal to (a)
the original principal amount of such holder's note divided by $1,880,000,
multiplied by (b) 50% of all revenues we receive through the sale of products
(excluding shipping, handling, discounts and taxes and not including revenues
received from advertising or services) through our online services during a
month, as reduced by any returns of products sold in previous months. The first
prepayment shall be made on March 20, 2001 with respect to revenues received, if
any, in February 2001. Thereafter, prepayments shall be made monthly with
respect to revenues received in the prior month and shall continue until all
notes have either been paid in full or converted. Any prepayments made by us
will be applied first to accrued interest and then to principal. Holders will be
notified of the amount of each prepayment to be made in each month at least 10
days prior to the date of such prepayment.
41
Warrants
The warrants entitle the holder to purchase shares of our common stock
at a per-share exercise price of $0.10465. The warrants are exercisable for
three years, commencing on July 2, 2001.
Redemption
We may call the warrants for redemption at a price of $.01 per warrant
if the average last sale price of a share of our common stock exceeds $2.00 for
a period of not less than ten consecutive trading days. Any such redemption
shall only be effective if we have sent notice of such redemption to each
investor within five days of the redemption pricing period and there is an
effective registration statement covering the resale of the shares of common
stock issuable upon exercise of the warrants.
Selling Shareholders
On March 10, 2000, Mr. Chrust, our chairman, and The Advent Fund LLC
purchased 302,939 shares and 151,469 shares of common stock, respectively, at a
purchase price of $3.301 per share from Steven A. Greenberg in private
transactions. Mr. Chrust also purchased options (for $.007335 per option) 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 (for $.007335 per option). All of such
transferred options were exercised. The remaining 45,562 options expired
unexercised. The shares purchased from Mr. Greenberg by Mr. Chrust, Advent and
the transferees of the options are registered for resale on this prospectus.
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. 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. The shares so purchased are registered for resale on this prospectus.
In February and March 2000, we issued options to purchase (1) 75,000
shares of common stock at $2.50 per share to a consultant and (2) an aggregate
of 73,245 shares of common stock at $3.87 per share to the placement agent for
our March private placement. The shares underlying these options are registered
for resale on this prospectus.
In January 2001, we consummated a private placement of units, each unit
consisting of a $50,000 principal amount 6% convertible promissory note and a
warrant to purchase 50,000 shares of our common stock. We sold 37.6 units at a
per unit price of $50,000.00 for aggregate proceeds of $1,880,000, of which
$1,345,000 was paid in cash and $535,000 was paid by converting certain of our
existing outstanding obligations. The shares issuable upon conversion of the
notes and upon exercise of the warrants are registered for resale on this
prospectus.
42
The following table provides certain information with respect to the
above-referenced selling shareholders' beneficial ownership of our common stock
as of January 31, 2001, and as adjusted to give effect to the sale of all of the
shares offered hereby. See "Plan of Distribution. " Except as otherwise
indicated, the number of shares reflected in the table has been determined in
accordance with Rule 13d-3 promulgated under the Exchange Act. Under this rule,
each selling shareholder is deemed to own beneficially the number of shares
issuable upon exercise of options it holds that are exercisable within 60 days
from the date of this prospectus. For purposes of presentation, it is assumed
that the selling shareholders will exercise all of the options and then resell
all of the shares received as a consequence of such exercise. Unless otherwise
indicated, each of the selling shareholders possesses sole voting and investment
power with respect to the securities shown. None of the selling shareholders
have entered into agreements, understandings or arrangements with any
underwriters or broker-dealers regarding the sale of their shares.
Except as indicated below or otherwise in this prospectus, none of the
selling shareholders has held any position or office, or had any material
relationship with us or any of our predecessors or affiliates within the last
three years, and none will own any of our outstanding common stock after
completion of the offering of such shares. The shares reflected by each selling
shareholder is based upon information provided to us by our transfer agent and
from other available sources. Please note that a number of Selling Shareholders
appear in more than one chart and each chart should be read in conjunction with
the other charts.
Shares Purchased from Steven A. Greenberg in March 2000
Shares Owned
Name Shares Held Shares Offered After Sale
- ---- ----------- -------------- -----------
Primo Capital Growth Fund(1) 1,657,199 45,441 0
eCom Growth Fund Ltd.(1) 134,437 106,028 0
Ken Cayre 75,734 75,734 0
The Advent Fund LLC(2) 793,323 302,938 226,493
Noel Kimmel(3) 70,935 15,147 3,000
Stanley Cayre & Sons(4) 75,734 75,734 0
Schottenfeld Associates, LP(5) 287,792 287,792 0
Hoodless Brennan & Partners, plc(6) 133,832 60,587 0
Robert Newman 2,524,891 151,469 0
E-New Media 3-D Limited(7) 302,938 302,938 0
547 Partners(8) 45,441 45,441 0
Steven G. Chrust 7,838,730(9) 302,939 1,181,000(9)
43
Shares Issued in March and April 2000 Private Placements
Shares Owned
Name Shares Held Shares Offered After Sale
- ---- ----------- -------------- ----------
Robert Newman 2,524,891 262,290 0
Archdream Ltd.(10) 252,804 252,804 0
Atalanta Finance Ltd.(11) 71,023 71,023 0
Netvest.com Plc(12) 74,751 74,751 0
Bracken Partners Ltd.(13) 22,450 22,450 0
Barry Gold 11,264 11,264 0
Peter Old 45,068 45,068 0
Voyager IT.com Plc(14) 203,121 203,121 0
Marmara Resources SA(15) 22,577 22,577 0
Pierson Resources Limited(16) 11,250 11,250 0
Cehoff Opportunity Fund(1) 56,818 56,818 0
eCom Growth Fund (1) 134,437 28,409 0
Primo Capital Growth Fund(1) 1,657,199 28,409 0
Rosebud Internet Fund(1) 28,409 28,409 0
Shares Issuable Upon Exercise of Options
Shares Owned
Name Shares Held Shares Offered After Sale
- ---- ----------- -------------- ----------
Credo Interactive Inc.(17) 75,000 75,000 0
Hoodless Brennan & Partners, plc.(6) 133,832 73,245 0
Compaq Computer Corp. 50,000 50,000 0
Shares Issuable Upon Conversion of Notes
Shares Owned
Name Shares Held Shares Offered After Sale
- ---- ----------- -------------- ----------
Steven G. Chrust 7,838,730(9) 6,258,958 1,181,000(9)
Chris Ryan 263,892 238,892 0
Harold Trencher 211,113 191,113 0
Gary Tobin 174,035 143,335 15,700
Tom Saleh (18) 1,583,349 1,433,349 0
44
Shares Owned
Name Shares Held Shares Offered After Sale
- ---- ----------- -------------- ----------
Marty Scott 105,557 95,557 0
Robert Newman 2,524,891 1,911,132 0
Spectrum Galaxy Fund re: Primo Capital Growth Fund(1) 1,583,349 1,433,349 0
Primo Capital Growth Fund L.P. 263,892 238,892 0
Magnum Capital Growth Fund(19) 422,226 382,226 0
Magnum Opportunity Fund(19) 158,335 143,335 0
Magnum Turbo Growth Fund(19) 158,335 143,335 0
Magnum US Equity Fund(19) 211,113 191,113 0
Brett and Rachel Friedland 105,557 95,557 0
Lenny Toboroff 1,176,788(20) 907,788 174,000
Needham Capital Management, Inc.(21) 263,892 238,892 0
Kings Point Capital, LLC 527,783 477,783 0
The Advent Fund LLC(2) 793,323 238,892 226,493
Valley Vascular Surgeons, L.P. 263,892 238,892 0
Murray Slimowitz 105,557 95,557 0
Marilyn Gordon Irrevocable Trust 158,335 143,335 0
Graubard Mollen & Miller 527,783 477,783 0
Ruby Corp. 527,783 477,783 0
J.E. McConnaughy Sr. 527,783 477,783 0
Paterson Financial Services, Inc. 263,892 238,892 0
Mermaid Investments Ltd. 527,783 477,783 0
Thomas Handler 105,557 95,557 0
Lee S. Weinstein 527,783 477,783 0
Shares Issuable Upon Exercise of Warrants
Shares Owned
Name Shares Held Shares Offered After Sale
- ---- ----------- -------------- ----------
Steven G. Chrust 7,838,730(9) 655,000 1,181,000(9)
Chris Ryan 263,892 25,000 0
Harold Trencher 211,113 191,113 0
Harold Trencher 211,113 20,000 0
Gary Tobin 174,035 15,000 15,700
Tom Saleh (18) 1,583,349 150,000 0
Marty Scott 105,557 10,000 0
Robert Newman 2,524,891 200,000 0
Spectrum Galaxy Fund re: Primo Capital Growth Fund(1) 1,657,199 150,000 0
Primo Capital Growth Fund L.P. 263,892 25,000 0
Magnum Capital Growth Fund(19) 422,226 40,000 0
Magnum Opportunity Fund(19) 158,335 15,000 0
Magnum Turbo Growth Fund(19) 158,335 15,000 0
Magnum US Equity Fund(19) 211,113 20,000 0
Brett and Rachel Friedland 105,557 10,000 0
Lenny Toboroff 1,176,788(20) 95,000 174,000
Needham Capital Management, Inc.(21) 263,892 25,000 0
Kings Point Capital, LLC 527,783 50,000 0
The Advent Fund LLC(2) 793,323 25,000 226,493
Valley Vascular Surgeons, L.P. 263,892 25,000 0
Murray Slimowitz 105,557 10,000 0
Marilyn Gordon Irrevocable Trust 158,335 15,000 0
Graubard Mollen & Miller 527,783 50,000 0
Ruby Corp. 527,783 50,000 0
J.E. McConnaughy Sr. 527,783 50,000 0
Paterson Financial Services, Inc. 263,892 25,000 0
Mermaid Investments Ltd. 527,783 50,000 0
Thomas Handler 105,557 10,000 0
Lee S. Weinstein 527,783 50,000 0
- ----------------------
(1) Brett Friedland, investment manager, exercises sole voting control over
these shares.
(2) Ben King, managing member, exercises sole voting control over these
shares.
(3) Director of Business Development of SGC.
(4) Stanley Cayre, general partner, exercises sole voting control over
these shares.
(5) Rick Schottenfeld, general partner, exercises sole voting control over
these shares.
47
(6) Placement Agent for our March 2000 private placement.
(7) Party to Content Supply Agreement with us. Directors of E-New Media
exercise voting control over these shares.
(8) Mark Chardack, general partner, exercises sole voting control over
these shares.
(9) Includes 1,015,000 shares underlying currently exercisable options and
warrants registered under a previously filed registration statement.
(10) Neil Gillam exercises sole voting control over these shares.
(11) Peter Borgas exercises sole voting control over these shares.
(12) Peter Catto, Barry Gold, Andrew Balcombe and Ian Ilsley exercise shared
voting control over these shares.
(13) Stuart Lucas and Margot Scallon exercise shared voting control over
these shares.
(14) Stephen Dean and Peter Holmes exercise shared voting control over these
shares.
(15) Sal Ozturk exercises sole voting control over these shares.
(16) Robert Anthony Clifford, Julian Marc Hayden and Phillip John Burton
exercise shared voting control over these shares.
(17) Bart Copeland, president, exercises sole voting control over these
shares.
(18) These shares are held jointly by Thomas Saleh and his wife.
(19) The shares held by these funds are controlled by Magnum Select Fund
Ltd.
(20) Includes 65,000 shares held by Mr. Toboroff's minor child.
(21) Ronald W. Kuzon, president, exercises sole voting control over these
shares.
(/R>
47
Plan of Distribution
The sale or distribution of the securities may be effected directly to
purchasers by the selling shareholders or by any donee, pledgee or transferee as
principals or through one or more underwriters, brokers, dealers or agents from
time to time in one or more public or private transactions, including:
o block trades;
o on any exchange or in the over-the-counter market;
o in transactions otherwise than on an exchange or in the
over-the-counter market;
o through the lending of such securities;
o through the distribution of the securities by any selling
shareholder to its partners, members or shareholders; or
o through a combination of any of the above.
Any of these transactions may be effected:
o at market prices prevailing at the time of sale;
o at prices related to such prevailing market prices;
o at varying prices determined at the time of sale; or
o at negotiated or fixed prices.
If the selling shareholders effect transactions by selling securities
to or through underwriters, brokers, dealers or agents, these underwriters,
brokers, dealers or agents may receive compensation in the form of discounts,
concessions or commissions from the selling shareholders or purchasers. These
discounts may be in excess of those customary for the types of transactions
involved.
The selling shareholders and any brokers, dealers or agents that
participate in the distribution of the securities may be deemed to be
underwriters. Any profit on the sale of securities by them and any discounts,
concessions or commissions received by any of the underwriters, brokers, dealers
or agents may be deemed to be underwriting discounts and commissions under the
Securities Act.
Under the securities laws of some states, the securities may be sold in
these states only through registered or licensed brokers or dealers. In
addition, in some states, the securities may not be sold unless the securities
have been registered or qualified for sale in the state or an exemption from
registration or qualification is available and is complied with.
48
Selling shareholders may also resell all or a portion of their
securities in open market transactions in reliance upon Rule 144 under the
Securities Act. In these cases, they must meet the criteria and conform to the
requirements of that rule.
We will pay all of the costs, expenses and fees incident to the
registration, offering and sale of these securities to the public other than
commissions, fees and discounts of underwriters, brokers, dealers and agents. We
have agreed to indemnify the selling shareholders and any underwriters against
certain liabilities, including liabilities under the Securities Act. We will not
receive any of the proceeds from the sale of any of the securities by the
selling shareholders.
Legal Matters
Certain legal matters in connection with this offering are being passed
upon by the law firm of Graubard Mollen & Miller, New York, New York.
Experts
Our audited financial statements as of December 31, 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.
We engaged new independent accountants as of April 27, 2000. There were
no disagreements with BDO Seidman, LLP on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, which
disagreements if not resolved to the satisfaction of BDO Seidman, LLP would have
caused them to make reference thereto in their report on our financial
statements for the fiscal years ended December 31, 1999 and 1998.
49
Worlds.com Inc.
INDEX TO FINANCIAL STATEMENTS
Page
UNAUDITED FINANCIAL STATEMENTS ----
Balance Sheet at September 30, 2000 F-2
Statements of Operations for the Three Months and Nine Months
September 30, 1999 and 2000 F-3
Statement of Stockholders' Equity (Deficit) for the
Period from December 31, 1998 to September 30, 2000 F-4 - F-5
Statements of Cash Flows for the Nine Months
Ended September 30, 1999 and 2000 F-6
Notes to Financial Statements F-7 - F-9
AUDITED FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants F-10
Financial Statements
Balance Sheets as of December 31, 1998 and 1999 F-11
Statements of Operations for the Period from April 8, 1997 F-12
(inception) to December 31, 1997, the Years Ended December 31,
1998 and 1999 and Cumulative, for the Period from April
8, 1997 (inception) to December 31, 1999
Statement of Stockholders' Equity (Deficit) for the F-13 - F-14
Period from April 8, 1997 (inception) to December 31, 1999
Statements of Cash Flows for the Period from April 8, 1997 (inception) F-15
to December 31, 1997, the Years Ended December 31, 1998 and
1999 and Cumulative, for the Period from April 8, 1997
(inception) to December 31, 1999
Summary of Accounting Policies F-16 - F-20
Notes to Financial Statements F-21 - F-36
F-1
Worlds.com Inc.
BALANCE SHEET
September 30, 2000
(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 715,172
Accounts receivable 183,546
Prepaid expenses and other current assets 267,523
Inventories 344,363
----------
Total current assets 1,510,604
DEPOSITS 25,000
PROPERTY, EQUIPMENT AND SOFTWARE
DEVELOPMENT, NET OF ACCUMULATED
DEPRECIATION AND AMORTIZATION 1,329,968
INTANGIBLE ASSET - NET 708,763
----------
$ 3,574,335
==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 1,346,470
Accrued expenses 688,671
Deferred revenue 730,454
Current maturities of notes payable 2,084,993
----------
Total current liabilities 4,850,588
LONG-TERM PORTION, NOTES PAYABLE 36,673
----------
Total liabilities 4,887,261
COMMITMENTS
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $.001 par value - authorized, 65,000,000
shares; issued, 19,204,177 shares 19,203
Additional paid-in capital 17,662,162
Accumulated deficit (18,994,291)
----------
(1,312,926)
----------
$ 3,574,335
==========
The accompanying notes are an integral part of this statement.
F-2
Worlds.com Inc.
STATEMENTS OF OPERATIONS
(unaudited)
Three months ended September 30, Nine months ended Sept. 30,
1999 2000 1999 2000
---- ---- ---- ----
Net revenues $ 148,682 $ 404,946 $ 241,607 $ 918,710
Costs and expenses
Cost of revenues 98,428 127,401 168,783 339,713
Selling, general and administrative 962,228 2,032,432 2,852,723 6,851,421
------------ ------------ ------------ ------------
Operating loss (911,974) (1,754,887) (2,779,899) (6,272,424)
------------ ------------ ------------ ------------
Other income (expense)
Interest income 20,053 14,992 38,019 83,045
Interest expense (33,284) (44,487) (102,206) (130,260)
------------ ------------ ------------ ------------
NET LOSS $ (925,205) $ (1,784,382) $ (2,844,086) $ (6,319,639)
============ ============ ============ ============
Loss per share (basic and diluted) $ (.06) $ (.09) $ (.16) $ (.34)
============ ============ ============ ============
Weighted average common shares outstanding
Basic and diluted 16,083,709 19,204,177 17,300,203 18,690,777
============ ============ ============ ============
The accompanying notes are an integral part of these statements.
F-3
Worlds.com Inc.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
Period from December 31, 1998 to September 30, 2000
(unaudited)
Common stock Additional
------------ paid-in
Shares Amount capital
------ ------ ----------
Balance, December 31, 1998 18,031,996 $18,032 $ 8,401,970
Issuance of warrants for consulting services (April 1999) 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
Issuance of shares for content supply agreement (June 1999) 93,750 93 374,907
Issuance of shares to agent for content supply agreement (July 1999) 50,000 50 199,950
Sale of shares in private offering memorandum, net (June through
September 1999) 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) (113,465) (113) (64,630)
Exercise of warrants (November 1999) 95,000 95 94,905
Issuance of shares for content supply agreement (December 1999) 93,750 93 374,907
Net loss for the year ended December 31, 1999
------------ -------- -------------
Balance, December 31, 1999 17,738,531 17,738 13,634,725
Exercise of stock options (March 2000) 215,000 215 135,285
Sale of shares in private offering memorandum, net (March 2000) 976,597 976 3,242,981
Issuance of stock options for consulting and advertising services
(March 2000) 138,231
Sale of shares in private offering memorandum, net (April 2000) 142,049 142 464,858
Issuance of shares for Inventory (April 2000) 32,000 32 67,968
Adjustment to capitalize software for options (200,000)
Issuance of shares to agent for content supply agreement (July 2000) 100,000 100 143,650
Issuance of Stock options for consulting services July through September 34,464
Net loss for the nine months ended September 30, 2000
------------ -------- -------------
Balance, September 30, 2000 19,204,177 $19,203 $17,662,162
========== ======= ===========
(continued on next page)
F-4
Worlds.com Inc.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
Period from December 31, 1998 to September 30, 2000
(unaudited)
(continued from previous page)
Deficit
accumulated Total
during the stockholders
development Treasury equity
stage stock (deficit)
------------ -------- ------------
Balance, December 31, 1998 $ (9,335,152) $(64,743) $ (979,893)
Issuance of warrants for consulting services (April 1999) 465,000
Contribution of 1,500,000 shares by founders to treasury (April 1999)
and subsequent cancellation
Exercise of stock options (April 1999) 75,000
Issuance of shares for content supply agreement (June 1999) 375,000
Issuance of shares to agent for content supply agreement (July 1999) 200,000
Sale of shares in private offering memorandum, net (June through
September 1999) 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) 64,743
Exercise of warrants (November 1999) 95,000
Issuance of shares for content supply agreement (December 1999) 375,000
Net loss for the year ended December 31, 1999 (3,339,500) (3,339,500)
--------------- ----------- ----------
Balance, December 31, 1999 (12,674,652) - 977,811
Exercise of stock options (March 2000) 135,500
Sale of shares in private offering memorandum, net (March 2000) 3,243,957
Issuance of stock options for consulting and advertising services
(March 2000) 138,231
Sale of shares in private offering memorandum, net (April 2000) 465,000
Issuance of shares for Inventory (April 2000) 68,000
Adjustment to capitalize software for options (200,000)
Issuance of shares to agent for content supply agreement (July 2000) 143,750
Issuance of Stock options for consulting services July through September 34,464
Net loss for the nine months ended September 30, 2000 (6,319,639) (6,319,639)
--------------- ----------- ----------
Balance, September 30, 2000 $(18,994,291) - $(1,312,926)
============== ============ ============
The accompanying notes are an integral part of these statements.
F-5
Worlds.com Inc.
STATEMENT OF CASH FLOWS
Nine months ended September 30,
(unaudited)
1999 2000
---- ----
Cash flows from operating activities
Net loss $ (2,844,086) $(6,319,639
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization 160,113 994,284
Consulting and advertising expense related to the issuance
of stock options and warrants 469,400 172,695
Issuance of shares for legal and consulting services 80,000
Changes in operating assets and liabilities
Accounts receivable (106,355) (6,331
Inventories (104,040) (54,852
Prepaid expenses and other current assets (106,838) (192,853
Long Term Deposit (25,000)
Accounts payable and accrued expenses 172,833 853,662
Deferred revenue 230,454
-------------- -------------
Net cash used in operating activities (2,278,973) (4,347,580
-------------- -------------
Cash flows from investing activities
Acquisition of property and equipment (23,178) (106,830
Additions to software development costs (573,865) (496,055
-------------- -------------
Net cash used in investing activities (597,043) (602,885
-------------- -------------
Cash flows from financing activities
Proceeds from sale of common stock in private offering memorandum 3,263,974 3,708,957
Proceeds from exercise of options 75,000 135,500
-------------- -------------
Net cash provided by financing activities 3,338,974 3,844,457
-------------- -------------
Net increase (decrease) in cash and cash equivalents 462,958 (1,106,008
Cash and cash equivalents, beginning of period 1,581,764 1,821,180
-------------- -------------
Cash and cash equivalents, end of period $ 2,044,722 $ 715,172
============== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for
Interest $ - $ -
Income taxes - -
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 $172,695
in the period ended September 30, 2000.
Issuance of stock valued at $68,000 for Inventory in April 2000.
Issuance of stock valued at $143,750 as an introduction fee.
The accompanying notes are an integral part of these statements.
F-6
Worlds.com Inc.
NOTES TO FINANCIAL STATEMENTS
September 30, 2000 and 1999
(unaudited)
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 have been prepared in accordance with generally
accepted accounting principles applicable to the interim financial
information and the rules and regulations promulgated by the Securities and
Exchange Commission. 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.
$574,000 was capitalized and included in property, equipment and software
development during the period ended September 30, 1999 and $496,000 was
capitalized in the nine months ending September 30, 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. Software
development costs are being amortized over a periods of between two and
three years. Amortization expense charged to operations for the nine months
ended September 30, 1999 and 2000 was $92,000 and $349,309, respectively.
F-7
Worlds.com Inc.
NOTES TO FINANCIAL STATEMENTS (continued)
September 30, 2000 and 1999
(unaudited)
NOTE 1 (continued)
Deferred Financing Costs
The Company has deferred costs associated with a planned offering
aggregating approximately $189,000, which are included in the accompanying
balance sheet in prepaid and other current assets. When the offering occurs
these costs will be offset against the proceeds. If the offering does not
occur, these costs will be expensed.
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 third quarter of 2000, the Company granted options to purchase an
aggregate of 840,000 shares of common stock to directors, officers and
employees of, and certain consultants to the Company at an exercise price
of $2. 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 $173,000 for the fair market value of the options
using the Black-Scholes calculation.
In May 2000, the Company issued 32,000 shares of common stock to an
employee in connection with an inventory purchase agreement.
In July 2000, the Company issued 100,000 shares of common stock to a
brokerage agent in connection with the contract with British
Telecommunications.
F-8
Worlds.com Inc.
NOTES TO FINANCIAL STATEMENTS (continued)
September 30, 2000 and 1999
(unaudited)
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 $465,000 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 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.
NOTE 3 - PRIVATE PLACEMENT
On March 31, 2000, the Company sold 976,598 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.
On April 7, 2000, the Company sold 142,045 shares of common stock through a
private placement. Cumulative net proceeds, after commissions and expenses
of the offering, aggregated $465,000.
In November 2000, the Company's Chairman, Steven Chrust, loaned the Company
$250,000. This loan is evidenced by a promissory note bearing interest at
the rate of 8% per annum and is payable in January 2002. In connection with
this loan, the Company also issued Mr. Chrust warrants to purchase 375,000
shares of its common stock at a per-share exercise price of $0.50 per
share. The principal of the loan will automatically convert into the
securities the Company sells in its next financing of at least $500,000 on
the same terms incurred by investors in such offering.
F-9
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-10
Worlds.com Inc.
(a development stage enterprise)
Balance Sheets
- --------------------------------------------------------------------------------
December 31, 1998 1999
----------------------------------------------------------------------- ---------------------- ----------------------
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
----------------------------------------------------------------------- ---------------------- ----------------------
See accompanying summary of accounting policies
and notes to financial statements.
F-11
Worlds.com Inc.
(a development stage enterprise)
Statements of Operations
- --------------------------------------------------------------------------------
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)
------------------------------------ ------------------- ------------------- -------------------- -----------------
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
------------------------------------ ------------------- ------------------- --------------------
--------------
(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-12
Worlds.com Inc.
(a development stage enterprise)
Statements of Stockholders' Equity (Deficit)
(Note 9)
- --------------------------------------------------------------------------------
Period from April 8, 1997 (inception) to December 31, 1999
- --------------------------------------------------------------------------------
Deficit
accumulated
Common stock Additional during the
---------------------------- paid-in development
Shares Amount capital stage
----------------------------------------------------------------------- -------------- -------------- -------------- -------------
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)
----------------------------------------------------------------------- -------------- -------------- -------------- -------------
F-13
(continued)
(continued)
Total
stockholders'
Treasury equity
stock (deficit)
- ----------------------------------------------------------------------- -------------- --------------
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
- ----------------------------------------------------------------------- -------------- --------------
See accompanying summary of accounting policies
and notes to financial statements.
F-14
Worlds.com Inc.
(a development stage enterprise)
Statements of Cash Flows
(Note 14)
- --------------------------------------------------------------------------------
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
---------------------------------------------------- -------------- ---------------- --------------- ---------------
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
------------------------------------------------------ -------------- --------------- --------------- ---------------
See accompanying summary of accounting policies
and notes to financial statements.
F-15
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-16
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-17
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-18
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-19
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-20
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-21
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-22
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-23
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
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
---------------------------------- ---------------------- ----------------------
F-24
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-25
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:
December 31, 1998 1999
--------------------------------------------- ---------------- -----------------
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
--------------------------------------------- ---------------- -----------------
--------------
(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-26
Worlds.com Inc.
(a development stage enterprise)
Notes to Financial Statements
- --------------------------------------------------------------------------------
Maturities of long-term debt are as follows:
Year ended December 31,
--------------------------------------------------------- ----------------------
2000 $2,054,996
2001 39,996
2002 26,674
--------------------------------------------------------- ----------------------
$2,121,666
--------------------------------------------------------- ----------------------
8. Commitments (a) The Company is obligated under noncancellable operating
leases for office space. Minimum annual rental
payments are approximately as follows:
Year ending December 31,
------------------------------------------------------ ------------------
2000 $75,000
2001 37,000
2002 18,000
------------------------------------------------------ ------------------
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-27
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-28
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-29
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:
Period from
inception to Year ended December 31,
December 31, ------------------ -----------------
1997 1998 1999
------------------------ ----------------- ------------------ -----------------
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)
------------------------ ----------------- ------------------ -----------------
F-30
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:
December 31, 1997 December 31, 1998 December 31, 1999
----------------------------- ---------------------------- ---------------------------
Weighted Weighted Weighted
average average average
exercise exercise exercise
Shares price Shares price Shares price
--------------------------- -------------- -------------- --- -------------- ------------- --- -------------- ------------
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
--------------------------- -------------- -------------- --- -------------- ------------- --- -------------- ------------
The following table summarizes information about stock options outstanding at
December 31, 1999.
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
------------------------ ------------------ ------------------ ------------------- -- ------------------- ----------------
$.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
------------------------ ------------------ ------------------ ------------------- -- ------------------- ----------------
F-31
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-32
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-33
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:
Period from
inception to Year ended December 31,
December 31, --------------- ---------------
1997 1998 1999
-------------------------------- -------------- --------------- ---------------
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)
-------------------------------- -------------- --------------- ---------------
F-34
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-35
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-36
You should only rely on the information
contained in this document or other
information that we refer you to. We have
not authorized anyone to provide you with
any other information that is different. You
should note that even though you received a WORLDS.COM INC.
copy of this prospectus, there may have been
changes in our affairs since the date of this
prospectus. This prospectus does not
constitute an offer to sell securities in any 22,883,720 shares of
jurisdiction in which such offer or solicitation common stock
is not authorized.
TABLE OF CONTENTS PAGE
Where You Can Find More Information.................
Prospectus Summary.................................. ------
Summary Historical Financial Information............. Prospectus
Risk Factors........................................ ------
Special Note Regarding Forward-
Looking Statements...............................
Management's Discussion and Analysis
of Financial Condition and Results
of Operations......................................
Business.............................................
Management.........................................
Security Ownership of Certain Beneficial
Owners and Management..............................
Executive Compensation.............................
Certain Relationships and Related
Transactions.....................................
Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities......................................
Description of Securities............................
Selling Shareholders...............................
Plan of Distribution.................................
Legal Matters........................................
Experts............................................
Index to Financial Statements.....................F-1
____________ __, 2001
===================== ===============
51
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.................. $ 1,777.35(1)
Accountants' Fees................................... $ 15,000.00
Legal Fees.......................................... $ 25,000.00
Printing and engraving.............................. $ 8,000.00
Miscellaneous....................................... $ 685.38
-------------
TOTAL............................................... $ 50,000.00
(1) $1,314.62 of this fee has been previously paid.
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 transactions 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.
II-1
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.
Between September 1997 and July 2000, we issued options to purchase an
aggregate of 1,964,350 shares of common stock at an average exercise price of
$3.02 per share to employees, consultants and a director under our 1997
Incentive and Non-Qualified Stock Plan, as amended.
Between May 1998 and September 2000, we also issued non-plan options
and warrants to purchase an aggregate of 2,866,161 shares of common stock at an
average exercise price of $3.97 per share to employees, directors, and
consultants.
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.
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.
In May 2000, we issued 32,000 shares of common to one of our employees
in connection with an inventory purchase agreement.
In January 2001, we consummated a private placement of units, each unit
consisting of a $50,000 principal amount 6% convertible promissory note and a
warrant to purchase 50,000 shares of our common stock. We sold 37.6 units at a
per-unit price of $50,000 for aggregate proceeds of $1,880,000, of which
$1,345,000 was paid in cash and $535,000 was paidi by converting of certain of
our outstanding debt and other obligations. If the full amount of notes and
warrants sold by us in the private placement are converted and exercised
pursuant to their respective terms, we would be required to issue an additional
19,844,644 shares of our common stock.
II-2
Item 27. Exhibits and Financial Statements Schedules.
Incorporated
By Reference
Exhibit from No. in
Number Description Document Document Page
- ---------- ----------- -------------- -------- ----
3.1 Certificate of Incorporation A 3.1
3.1.1 Certificate of Amendment of the Certificate B 3.1.1
of 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 F 3.2.1
4.1 Specimen common stock Certificate A 4.1
4.2 1997 Incentive and Non-Qualified Stock C 4.1
Option 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 C 4.3
Option 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
4.7 Form of Subscription Agreement used in D 4.1
January 2001 private placement
4.8 Form of 6% convertible promissory note D 4.2
issued in January 2001 Private Placement
4.9 Form of warrant issued in January 2001 D 4.3
Private Placement
4.10 Schedule of Option Grants under Benefit C 4.9
Plans
5.1 Opinion of Graubard Mollen & Miller - 5.1 Previously
Filed
Merger Agreement between Worlds E 99
10.1 Acquisition Corp. and Academic Computer
Systems, Inc.
10.2 Consulting Agreement between the B 10.2
Registrant and SGC Advisory, Inc.
23.1 Consent of BDO Seidman, LLP - - Filed
Herewith
II-3
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 January 19, 2001.
E Registrant's Current Report on Form 8-K filed on December 18, 1997.
F Registrant's Post-Effective Amendment No. 3 to 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
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, to 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) To 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
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 Old Greenwich, State of Connecticut the 5th day of February, 2001.
WORLDS.COM INC.
By: /s/ Thomas Kidrin
----------------------------------
Thomas Kidrin, President
Power of Attorney
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Steven G. Chrust and Christopher J. Ryan,
and each of them, with full power to act without the other, such person's true
and lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign this Registration Statement, any and all amendments thereto
(including post-effective amendments), any subsequent Registration Statements
pursuant to Rule 462 of the Securities Act of 1933, as amended, and any
amendments thereto and to file the same, with exhibits and schedules thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
necessary or desirable to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or their
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
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:
Signatures Title Date
/s/ Thomas Kidrin President and Chief February 5, 2001
- --------------------------- Executive Officer
Thomas Kidrin
/s/ Steven G. Chrust Chairman February 5, 2001
- ---------------------------
Steven G. Chrust
/s/ Christopher J. Ryan Vice President - Finance and February 5, 2001
-------------------------- Principal Accounting and
Christopher J. Ryan Financial Officer
/s/ Kenneth A. Locker Director February 5, 2001
- ---------------------------
Kenneth A. Locker
/s/ William Harvey Director February 5, 2001
- ---------------------------
William Harvey