-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, E13PuRLdvjZsLxfDLiv7Z1N/4M27uGjTPyvDDcUZaP24nrHXqStieiWDh2aRRJNg c0dJxO4oF1G7oMS9FFRimQ== /in/edgar/work/20000629/0000889812-00-003004/0000889812-00-003004.txt : 20000920 0000889812-00-003004.hdr.sgml : 20000920 ACCESSION NUMBER: 0000889812-00-003004 CONFORMED SUBMISSION TYPE: POS AM PUBLIC DOCUMENT COUNT: 3 FILED AS OF DATE: 20000629 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WORLDS COM INC CENTRAL INDEX KEY: 0000001961 STANDARD INDUSTRIAL CLASSIFICATION: [7372 ] IRS NUMBER: 221848316 STATE OF INCORPORATION: NJ FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: POS AM SEC ACT: SEC FILE NUMBER: 333-10838 FILM NUMBER: 665388 BUSINESS ADDRESS: STREET 1: 15 UNION WHARF CITY: BOSTON STATE: MA ZIP: 02109 BUSINESS PHONE: 6177258900 MAIL ADDRESS: STREET 1: 15 UNION WHARF CITY: BOSTON STATE: MA ZIP: 02109 FORMER COMPANY: FORMER CONFORMED NAME: WORLDS INC DATE OF NAME CHANGE: 19980213 FORMER COMPANY: FORMER CONFORMED NAME: ACADEMIC COMPUTER SYSTEMS INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: COMPUTER INDUSTRIES LTD DATE OF NAME CHANGE: 19690318 POS AM 1 0001.txt POST EFFECTIVE AMENDMENT NO. 3 As filed with the Securities and Exchange Commission on June 29, 2000 Registration No. 333-10838 - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------------------------------------ POST-EFFECTIVE AMENDMENT NO. 3 TO FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------------------------------ 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) 15 Union Wharf Thomas Kidrin, CEO Boston, Massachusetts 02109 15 Union Wharf (617) 725-8900 Boston, Massachusetts 02109 (Address and Telephone Number of (617) 725-8900 Principal Executive Offices and (Name, Address and Telephone Principal Place of Business) Number of Agent For Service)
------------------------------------------------ Copies to: David Alan Miller, Esq. Graubard Mollen & Miller 600 Third Avenue New York, New York 10016 Telephone: (212) 818-8800 Approximate Date of Commencement of Proposed Sale to Public: At the discretion of the selling shareholders. If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement of the earlier effective registration statement for the same offering. [ ] If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] ---------------------------- The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. We are filing this Post-Effective Amendment No. 3 to our Registration Statement on Form SB-2, which was declared effective on October 28, 1999 in order to meet our obligations pursuant to Rule 427 of the General Rules and Regulations under the Securities Act of 1933 concerning the date of our financial statements. WORLDS.COM INC. -------------------------------- 5,356,125 shares of common stock This Prospectus covers: o The sale from time to time of an aggregate of 2,609,500 shares of common stock by the persons indicated in this prospectus. All of these shares were issued by us to them in a private placement in December 1997. o The sale from time to time of an aggregate of 1,235,375 shares of common stock by the persons indicated in this prospectus. All of these shares are shares that would be issued by us to them upon the exercise of options and warrants. o The sale from time to time of an aggregate of 882,500 shares of common stock by the persons indicated in this prospectus. All of these shares were issued by us to them in or in connection with a private placement in June and August 1999. o The sale from time to time of an aggregate of 441,250 shares of common stock by the persons indicated in this prospectus. All of these shares are shares that would be issued by us to them upon the exercise of warrants issued in or in connection with the June and August 1999 private placement. o The sale from time to time of 187,500 shares of common stock by the persons indicated in this prospectus. These shares were issued by us in connection with our recent transaction with Freeserve. Our common stock is quoted on the OTC Bulletin Board under the symbol "WDDD." On June 23, 2000, the last reported sale price of our common stock was $1.44 per share. We will not receive any cash proceeds from the sale of any shares by any person under this prospectus. We will receive proceeds upon the exercise of the aforementioned options and warrants from time to time and will use such proceeds for working capital and general corporate purposes. We will bear all costs, expenses and fees in connection with the registration of the shares offered by this prospectus. Such expenses are estimated to be approximately $140,000. See "Risk Factors" beginning on page 6 of this prospectus for information that should be considered by prospective investors. ------------------------------------------------ Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this Prospectus is truthful or complete. Any representation to the contrary is a criminal offense. The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. The date of the Prospectus is June 29, 2000. 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. Our SEC filings are also available at the offices of the Nasdaq National Market in Washington, D.C. We have filed a registration statement on Form SB-2 under the Securities Act of 1933 with the SEC. This prospectus is part of that registration statement and, as permitted by the SEC's rules, does not contain all of the information included in the registration statement. For further information about us and our common stock, you may refer to the registration statement and its exhibits and schedules. You can review and copy these documents at the public reference facilities maintained by the SEC or on the SEC's website as described above. This prospectus may contain summaries of contracts or other documents. Because they are summaries, they will not contain all of the information that may be important to you. If you would like complete information about a contract or other document, you should read the copy filed as an exhibit to the registration statement or incorporated in the registration statement by reference. 3 PROSPECTUS SUMMARY General Worlds.com is a leading 3D entertainment portal which leverages our proprietary technology to offer visitors a network of virtual, multi-user environments. In support of this portal and our overall business strategy, we design and develop software, content and related technology for the creation of interactive, three- dimensional Internet web sites. Using our technology, we create our own Internet sites, as well as sites available through third-party online service providers, such as Freeserve, the largest Internet service provider in the United Kingdom, and Time Warner's Road Runner service, one of the two largest cable-modem based Internet service providers in the United States. Our goal is to become a leading provider of interactive 3D Internet sites where entertainment content, interactive chat and e-commerce opportunities converge to provide communities for users and advertisers. Corporate Background We were formed as a result of the contemporaneous mergers on December 3, 1997 of Worlds Inc., a Delaware corporation formed on April 26, 1994 with and into Worlds Acquisition Corp., a Delaware corporation formed on April 8, 1997 and of Worlds Acquisition Corp. with and into Academic Computer Systems, Inc., a New Jersey corporation formed on May 20, 1968 (the "Mergers"). Academic Computer Systems changed its name to Worlds Inc. after the Mergers. In December 1999, we changed our name from Worlds Inc. to Worlds.com Inc. in order to better reflect our business as a consumer Internet web site that offers virtual "worlds" in which consumers interact, conduct e-commerce and receive entertainment. The address of our principal executive offices is 15 Union Wharf, Boston, Massachusetts 02109. Our phone number is (617) 725-8900. Recent Transactions On March 31, 2000, we consummated an agreement to sell an aggregate of 976,598 shares of common stock pursuant to Regulation S. The shares of common stock were sold to ten non-U.S. principals at $3.52 per share, less a discount of 5%, for net proceeds to us of $3,243,957, which includes approximately $21,000 of fees invoiced after March 31, 2000. In connection with the offering, we issued a five-year Purchase Option to purchase an aggregate of 73,245 shares of common stock at $3.87 per share to the placement agent. On April 7, 2000, we consummated agreements with four investors to sell an aggregate of 142,045 shares of common stock pursuant to Section 4(2) of the Securities Act at $3.52 per share. As compensation for these subscriptions, we paid another agent a commission of 7%. Aggregate net proceeds to us from these sales were $465,000. 4 SUMMARY HISTORICAL FINANCIAL INFORMATION The following sets forth our selected financial operations data for the quarter ended March 31, 2000, years ended December 31, 1998 and 1999, and the selected financial operations data of Worlds.com Inc. (formerly Worlds Inc. and World's Acquisition Corp.) for the period April 8, 1997 (inception) through December 31, 1997, and of our predecessor for the year ended December 31, 1996 and for the period of January 1, 1997 through December 3, 1997 (the date we acquired our predecessor). The following also sets forth our selected balance sheet data at March 31, 2000 and December 31, 1999. Data for March 31, 2000 are derived from our unaudited financials of the same date included in this prospectus while those for the period from inception through December 31, 1999 are derived from the audited financial statements included in this prospectus (in which the independent certified public accountants report contained explanatory paragraphs regarding the Company's ability to continue as a going concern). Data for 1997 are derived from the audited financial statements previously filed. The following data should be read in conjunction with those financial statements.
Statement of Operations Data Worlds.com Inc. Predecessor ---------------------------------------------------------- ------------------------------ Three Months Ended From 4/8/97 For the Period For the Year 3/31/00 Year Ended Year Ended (Inception) Ended Ended (Unaudited) 12/31/99 12/31/98 to 12/31/97 12/3/97 12/31/96 ----------------------------------------------------------- ------------------------------ Net revenues............................ $ 180,023 $ 507,499 $ 29,110 $ 1,420 $ 80,720 $ 3,784,019 Total cost and expense.................. $ 2,161,640 $ 3,746,789 $ 3,672,914 $ 6,810,568(b) $ 2,885,088 $ 13,871,984 Operating loss.......................... $(1,981,617) $(3,239,290) $(3,643,804) $(6,809,148) $(2,804,368) $(10,087,965) Other income and (expenses)............. $ (26,878) $ (100,210) $ 822,576(a) $ (3,099) $ 134,863 $ 16,011 Net loss before taxes and extraordinary item..................... $(2,008,495) $(3,339,500) $(2,821,228) $(6,812,247) $(2,669,505) $(10,071,954) Income taxes............................ $ -0- $ -0- $ -0- $ -0- $ (5,000) $ (115,000) Net loss before extraordinary item...... $(2,008,495) $(3,339,500) $(2,821,228) $(6,812,247) $(2,674,505) $(10,186,954) Extraordinary item - gain on debt settlement............................. $ -0- $ -0- $ 172,547 $ 125,776 $ 389,285 $ -0- Net loss................................ $(2,008,495) $(3,339,500) $(2,648,681) $(6,686,471) $(2,285,220) $(10,186,954) Loss per share - before extraordinary item (basic and diluted) $ (.11) $ (0.19) $ (0.16) $ (0.73) Loss per share (basic and diluted)...... $ (.11) $ (0.19) $ (0.15) $ (0.72) Balance Sheet Data March 31, 2000 (Unaudited) December 31, 1999 -------------------------------------- Working capital................................ $ 338,025 (1,441,900) Total assets................................... $ 6,611,165 4,780,957 Total liabilities.............................. $ 4,141,375 3,803,146 Stockholders' equity........................... $ 2,469,190 977,811
- ------------------------ (a) Includes $810,140 gain resulting from reversal of certain predecessor liabilities. (b) Includes $6,135,538 of acquired research and development costs resulting from the Mergers. 5 RISK FACTORS You should carefully consider the risks described below before making a decision to invest in our company. The risks described below are not the only ones we face. Additional risks that are not presently known to us or which we currently believe are immaterial may also impair our business operations. Our business, financial conditions or results of operation could be materially adversely affected by any of these risks. We have a limited history of operations. We have limited experience in developing and commercializing new products based on innovative technologies and there is limited information available concerning our financial performance or the market acceptance of our existing and proposed products. Our business prospects are subject to all the risks, expenses and uncertainties encountered by any new company, as well as those encountered by companies operating in the rapidly evolving markets for Internet products and services. These risks include: o the failure to develop brand name recognition and reputation; o the failure to achieve market acceptance of our services; o slow down in general consumer acceptance of the Internet as a vehicle for commerce; and o an inability to grow and adapt our business and technology to evolving consumer demand. We may not be successful in addressing these risks or the other risks set forth herein. We have significant and continuing losses and our auditors have expressed concern about our ability to continue as a going concern. Since inception, Worlds.com (including our predecessor company) has incurred significant net losses. Our predecessor company incurred losses of $1,181,133, $7,582,832 and $10,186,954 for the years ended December 31, 1994, 1995, and 1996, respectively, and $2,285,220 for the period ended December 3, 1997, with an accumulated deficit from inception in April 1994 to December 3, 1997 of $21,236,139. We incurred additional losses of $6,686,471 from inception in April 1997 through December 1997, $2,648,681 for the year ended December 31, 1998, $3,339,500 for the year ended December 31, 1999 and $2,008,495 for the three-month period ended March 31, 2000. We anticipate that we will continue to incur significant losses until, at the earliest, we generate sufficient revenues to offset the substantial up-front expenditures and operating costs associated with developing and commercializing our products. We will not, and may never, generate any meaningful revenues or achieve profitable operations until we successfully attract and retain a significant number of advertisers and users to our 3D sites and other customers for our 3D technology. Further, 3D sites based on our technology may prove to not be commercially viable and superior technology to create and deliver 3D sites may exist or may be developed by our competitors. 6 We expect to spend a large amount of money in advance of profits as we introduce our products and expect to seek to raise additional capital through equity and debt offerings. Our capital requirements for the development and commercialization of our technology, creation of our 3D sites and our general operations have been and will continue to be significant. Historically, we have been dependent on financings to fund our development and working capital needs. We expect to continue to incur significant operating expenses and make relatively high capital expenditures as we roll out our Internet business and expand our product offerings. These operating expenses and capital expenditures will initially outpace revenues and result in significant losses in the near term. During the periods that we experience net losses, we expect to be dependent upon sales of our capital stock and debt securities to finance our working capital requirements. Based upon our current plans and assumptions relating to our business plan, we anticipate that our existing capital resources will satisfy our capital requirements through at least November 2000. However, if our plans change or our assumptions prove to be inaccurate, we may need to seek additional financing sooner than currently anticipated or curtail our operations. We will need to raise additional capital during 2001, which may be in the form of equity or debt financing. Any issuance of equity securities would dilute the interest of our shareholders. Additionally, if we incur debt, our company will become subject to risks that interest rates may fluctuate and cash flow may be insufficient to pay the principal and interest on any such debt. If financing is not available as we require it, we could be forced to slow down the growth of our business or suspend operations entirely. We may not be able to successfully develop marketable products based upon our technology. Although we recently have introduced the first commercial applications based on our technology, we may encounter problems in our continuing efforts to refine our technology and to utilize this technology in other commercial applications. In connection with these efforts, we may experience unanticipated delays, expenses, technical problems or other difficulties. It is also possible that we will not have access to the funds necessary to satisfactorily complete any development efforts we undertake, which could result in abandonment or substantial change in product commercialization. In addition, there can be no assurance that we will be able to successfully adapt our technology to satisfy specific requirements of potential customers. Upon completion and introduction of any commercial application, there can be no assurance that such application will perform all of the functions for which it has been designed or prove to be sufficiently reliable in widespread commercial use. Applications based on complex technologies such as ours may contain errors which only become apparent subsequent to commercial introduction. If we introduce commercial applications which prove to contain errors or which otherwise do not perform as intended, we would have to remedy such errors, which could delay our plans with respect to other applications and which could cause us to incur substantial, unanticipated additional expense. We may not be able to develop and maintain marketing relationships with other Internet companies. Our strategy for expanding brand recognition through online advertising depends to some extent on our relationship with other Internet companies. We plan to enter into marketing agreements with these companies that will permit us to advertise our products and services on their web pages. There can be no assurance that we will be able to negotiate these agreements on favorable terms or at all. Additionally, other e-commerce and music-related sites which advertise on popular web sites may have exclusive advertising relationships with such sites or may otherwise object to our attempts to enter into marketing agreements or 7 relationships with such sites. If we cannot secure or maintain these marketing agreements on favorable terms, our business prospects could be substantially harmed. In addition to our own technology, we use the technology of others in the creation of our products. Although our proprietary technology is the foundation of our products, we also use the technology of other companies in the creation and delivery of our products. Accordingly, any delay or termination by any of these third-party providers in the provision of their technologies to us could cause a disruption in the commercial distribution of our own products. Further, any material increases in the prices these providers charge us for use of their technologies could force us to increase the prices we charge for our own products or possibly make the creation and distribution of our products no longer economically feasible or desirable. We cannot assure you that any of these companies will continue to provide their technology to us in an efficient and cost-effective manner. An interruption or termination in our access to any necessary third party technologies, and our subsequent inability to make alternative arrangements in a timely manner, if at all, would have a material adverse effect on our business and financial condition. The market may not readily accept our products. Demand and market acceptance for new products, such as our Worlds Ultimate 3D Chat site, are subject to a high level of uncertainty. The successful introduction of any new product requires a focused, efficient strategy to create awareness of and desire for the products. For example, in order to achieve market acceptance for Ultimate 3D Chat, we will need to educate the members of the music industry, such as record companies, record labels and recording artists, about the marketing benefits this product could provide them. Similarly, we will have to make music buyers and Internet consumers aware of this product's existence, draw users to the site and compel them to return to the site for repeat visitations. We have conducted only limited marketing activities to date and have only limited experience and financial, technical, personnel and other resources to independently undertake extensive marketing activities. Our marketing strategy may be unsuccessful and is subject to change as a result of a number of factors, including changes in market conditions (including the emergence of market segments other than music which in our judgment can be readily exploited through the use of our technology), the nature of possible license and distribution arrangements and strategic alliances which may become available to us in the future and general economic, regulatory and competitive factors. There can be no assurance that our strategy will result in successful product commercialization or that our efforts will result in initial or continued market acceptance for our proposed products. We operate in very competitive markets characterized by the existence of large competitors and rapidly changing technology. The markets for our products are characterized by intense competition and increasing numbers of new market entrants who have developed or are developing potentially competitive products. We face competition from a growing number of companies, including online and Internet service providers, online shopping malls, online direct music retailers, online music and book sites and traditional music retailers. In addition, the very companies with which we do business, such as the record labels, may determine to create and distribute their own 3D Internet sites. Many of our competitors have advantages over us, including: 8 o longer operating histories and greater financial, technical, marketing and other resources; o a wider range of services and financial products; o greater name recognition and larger customer bases; o more extensive promotional activities; and o cooperative relationships among themselves and with third parties to enhance services and products. Our products are based upon our proprietary technology. Competitors may develop superior technology or determine as a group to adopt standards with which our technology is not compatible. Currently, there are many companies collaborating to establish standardization of the Virtual Reality Modeling Language for 3D usage on the Internet, the adoption of which may require changes to our technology. We will need to introduce new services and products in a timely manner in order to remain competitive. The markets in which we compete are characterized by rapid changes in technology and customer requirements, frequent new service and product introductions and evolving industry standards which could result in product obsolescence or short product life cycles. Accordingly, our ability to compete will be dependent upon our ability to develop and successfully introduce new products into the marketplace in a timely manner and to continually enhance and improve our technology to meet the increasingly sophisticated and varied needs of our users and prospective users. The development and enhancement of services and products entails significant risks, including: o the inability to effectively adapt new technologies to our business; o the failure to conform our services and products to evolving industry standards; o the inability to develop, introduce and market service and product enhancements or new services and products on a timely basis; and o the nonacceptance by the market of such new service and products. If we fail to recognize or address the need for new service or product introductions, or if we encounter any of the foregoing problems, our business and financial condition could be materially adversely effected. Disruption in any element of our technology backbone could harm our business or limit our growth. We are highly dependent on our systems to process, on a daily basis, a large and growing number of transactions. We rely heavily on our web service providers, data processing systems and telecommunications systems. If any of these systems do not operate properly or are unavailable due to problems with our physical infrastructure, we could suffer disruptions of our business and damage to our reputation and the development of our brand name, any and all of which could have a material adverse effect on our business and limit our ability to grow. 9 We also must ensure that users do not experience significant or frequent disruptions in their access to our web sites. Our web sites could become inaccessible for numerous reasons, including as a result of failure by our servers and/or software glitches. Web site failures could result in loss of existing users and missed opportunities to garner additional users. Accordingly, any failure to have adequate systems in place to ensure the constant monitoring and maintenance of, and accessibility to, our sites could have a material adverse effect on our business and financial results. Access to our sites is also directly dependent on the operating condition of the Internet in general. Our success, therefore, will depend in part upon the development and maintenance of the Internet's infrastructure to cope with increased user traffic. This will require a reliable network backbone possessing the necessary bandwidth, and the timely development of complementary products, such as high-speed modems, for providing reliable Internet access and services to users. The Internet has experienced a variety of outages and other delays as a result of damage to portions of its infrastructure and could face similar outages and delays in the future, which could have a material adverse effect on our business and financial condition. We cannot be certain that our network security systems won't be circumvented. The need to securely transmit confidential information over the Internet has been a significant barrier to electronic commerce and communications. We are potentially vulnerable to attempts by unauthorized computer users to penetrate our network security. If successful, those individuals could misappropriate proprietary information or cause interruptions in our services. We may be required to expend significant capital and resources to protect against the threat of such security breaches or to alleviate resulting problems. In addition to security breaches, inadvertent transmission of computer viruses could expose us to the risk of disruption of our business, loss and possible liability. Continued concerns over the security of Internet transactions and the privacy of its users may also inhibit the growth of the Internet generally as a means of conducting commercial transactions. We rely upon encryption and authentication technology, including public key cryptography technology licensed from third parties, to provide the security and authentication necessary to effect secure transmission of confidential information over the Internet. Advances in computer capabilities, new discoveries in the field of cryptography or other developments could result in a compromise or breach of the procedures we use to protect customer transaction data. If any such compromise of our security occurs, our business, financial condition and operating results could be materially adversely affected. We are subject to the risks associated with fluctuations in the sales of prerecorded music and related products. The recorded music industry has experienced an overall slowdown during the late 1990s relative to the early 1990s, a trend which is expected to continue. During the mid-1990s, several of the country's largest record store chains and many independent music shops either declared bankruptcy or went out of business as sales of prerecorded music experienced this slowdown. Industry analysts suggest several causes for this trend, including a glut of products on the market. In addition, each recording is an individual artistic work, and its commercial success is primarily determined by consumer taste, which is unpredictable and constantly changing. Generally, in the record industry, prerecorded music is shipped to wholesalers and/or retailers on a returnable basis. Accordingly, there can be no assurance as to the financial success of any particular release, the timing of such success or the popularity of any particular artist. There can be no assurance that any of the prerecorded music producers, artists or distributors that may use our technology or our sites will be able to generate any significant revenue through such use or, if they do, that such revenue will be sufficient to recoup costs. 10 We are dependent on the success of the Internet as a commercial market place. Consumers have started to use the Internet only recently and market acceptance of the Internet as a medium for commerce and advertising is therefore still uncertain. The rapid growth of global commerce and the exchange of information on the Internet and other online networks is relatively new and still evolving, making it difficult to predict whether the Internet will prove to be a viable commercial marketplace. We believe that our future success may depend on our ability to significantly increase revenues which may require the development and widespread acceptance of the Internet and online services as a medium for commerce and advertising. The Internet may not prove to be a viable commercial marketplace because of inadequate development of the necessary infrastructure, such as reliable network backbones, or complementary services, such as high speed modems and security procedures for financial transactions. Consumer concern over Internet security has been, and could continue to be, a barrier to commercial activities requiring consumers to send their credit card information over the Internet. The Internet has experienced, and is expected to continue to experience, significant growth in the number of users and amount of traffic. There can be no assurance that the Internet infrastructure will continue to be able to support the demands placed on it by sustained growth. In addition, the viability of the Internet may prove uncertain due to delays in the development and adoption of new standards and protocols, the inability to handle increased levels of Internet activity or due to increased government regulation. If use of the Internet does not continue to grow, or if the necessary Internet infrastructure or complementary services are not developed to effectively support growth that may occur, our business, result of operations and financial condition would be materially adversely affected. We face potential liability for the content delivered over our sites. While we intend to acquire all licenses and other rights necessary to conduct our business without violating any copyrights, there can be no assurance that we will be able to do so. Due to the nature of our business, we could become involved in litigation regarding the music, video and other content transmitted over our sites which could force us to incur significant legal defense costs, could result in substantial damage awards against us and could otherwise damage our brand name and reputation. In addition, because music materials may be downloaded from our sites and may be subsequently distributed to others, claims could be made against us for "pirating" and copyright or trademark infringement. Claims could also be made against us if material deemed inappropriate for viewing by children is accessed or accessible through our sites. While we carry insurance policies, our insurance may not cover these types of claims or may not be otherwise adequate to cover liability that may be imposed. Any partially or completely uninsured claim against us, if successful and of sufficient magnitude, would have a material adverse effect on us. Government regulation may impact our operations. Notwithstanding the U.S. Supreme Court's decision upholding the principle that the Constitutional protections relating to freedom of speech extend to content delivered on the Internet, there are currently few laws or regulations directly applicable to the Internet and the content thereon. As a result of the increasing popularity and use of the Internet, it is possible that laws and regulations covering user privacy, responsibility for content, service pricing and quality and other issues may be adopted, modified, or changed. The adoption of any such laws or regulations may limit the growth of the Internet, which could in turn decrease the demand for our products and services and increase our cost of doing business. Inasmuch as the applicability to the Internet of the existing laws governing issues such as property ownership, libel and personal privacy is 11 uncertain, any such new legislation or regulation or the application of existing laws and regulations to the Internet could have an adverse effect on our business and prospects. We are dependent on certain technology we deem proprietary and may not be able to protect this technology or defend our right to use it. We regard our technology and various elements relating thereto as proprietary. We have not determined whether we will attempt to protect our technology with copyrights, trade secret laws, proprietary rights agreements, internal nondisclosure agreements or other intellectual property safeguards. Even if we do use such safeguards, they ultimately may not afford us complete protection and we may not be able to prevent others from independently developing know-how or accessing our know-how or software codes, concepts, ideas and related documentation. Although we believe that our products do not violate the proprietary rights of others, it is possible that infringement of existing or future proprietary rights of others have occurred or may occur. If our products infringe on the proprietary rights of others, we may be required to modify the design of our products or obtain licenses from the owners of the proprietary rights involved. In the event we are required to obtain any such license, there can be no assurance that we will be able to do so in a timely manner, upon acceptable terms and conditions or at all. There can be no assurance that we will have the financial or other resources to enforce our proprietary rights or to defend a patent infringement action against us. Our growth may be difficult to manage. Growth of our business may place a significant strain on our management systems and resources and may require us to implement new operational and financial systems, procedures and controls. Our failure to manage our growth and expansion could adversely affect our business, results of operations and financial condition. Moreover, our present systems may not be adequate to accommodate rapid growth in user demand. Our inability to add additional hardware and software to upgrade our existing technology or network infrastructure to accommodate increased traffic may cause decreased levels of customer service and satisfaction. Failure to implement new systems effectively or within a reasonable period of time could adversely affect our business, results of operations and financial condition. We also intend to introduce additional or enhanced features and services to retain current users and attract new users to our web site. If we introduce a feature or a service that is not favorably received, our current users may not use our web site as frequently and we may not be successful in attracting new users. We also may experience difficulties that could delay or prevent us from introducing new services and features. Furthermore, these new services or features may contain errors that are discovered only after they are introduced. We may need to significantly modify the design of these services or features to correct errors. If users encounter difficulty with or do not accept new services or features, our business, results of operations and financial condition could be adversely affected. It is important that we build awareness of our brand and business. Although we intend to devote increased amounts of capital to creating and maintaining brand loyalty and raising awareness of our products and services, our failure to advertise and market our products and services or brand effectively could cause our business to suffer. Our success in promoting our brand also will depend on our success in providing our customers high-quality products and services and a high-level of customer satisfaction. 12 Our business could be significantly disrupted if our systems and the systems of others prove not to be year 2000 compliant. We may realize exposure and risk if the systems on which we are dependent to conduct our operations are not Year 2000 compliant. Because we are largely dependent on our ability to conduct our operations through the Internet, any significant disruption of this computer infrastructure caused by the Year 2000 problem could significantly interfere with our business operations. Our potential areas of exposure include products purchased from third parties, computers, software, telephone systems and other equipment used internally. Although we have not experienced any disruptions in our operations due to Year 2000 issues, disruptions may occur in the future. If our efforts to address Year 2000 compliance issues turn out to be unsuccessful, or if vendors with whom we conduct business unsuccessfully addressed such issues, our business, operating results and financial position could be materially and adversely affected. We are dependent on key personnel and need to hire and retain other talented employees. Our success is dependent, in part, on the personal efforts of Steven Chrust, our Chairman of the Board, Thomas Kidrin, our Chief Executive Officer, and other key personnel. We have a consulting agreement with Mr. Chrust's consulting company which has a term through April 2002, but this agreement does not require Mr. Chrust to devote any specified amount of time with respect to our company. We do not currently have an employment agreement with Mr. Kidrin, although, we maintain "key-man " insurance on his life in the amount of $1,000,000. The loss of either Mr. Chrust's or Mr. Kidrin's services could have a material adverse effect on our business and prospects. Our success is also dependent upon our ability to hire and retain additional qualified management, marketing, technical, financial, and other personnel. Competition for qualified personnel is intense and we may not be able to hire or retain additional qualified personnel. Any inability to attract and retain qualified management and other personnel would have a material adverse effect on our business and operations. Possible issuances of our capital stock would cause dilution to our existing shareholders. While we currently have approximately 19,100,000 shares of common stock outstanding, we are authorized to issue up to 65,000,000 shares. Therefore, we will be able to issue a substantial number of additional shares without obtaining shareholder approval. In the event we elect to issue additional shares of common stock in connection with any financing, acquisition or otherwise, current shareholders could find their holdings substantially diluted, which means they will own a smaller percentage of the our company. Certain shareholders control a substantial portion of our outstanding common stock. Our executive officers, directors and principal shareholders own a significant portion of the outstanding shares of our common stock. Accordingly, these persons, acting together, will be able to influence the election of our directors and thereby influence or direct our policies. Further, a director and two principal shareholders have agreed to vote all of their approximately 4,700,000 shares for the election of Mr. Steven Chrust, our Chairman of the Board, as a director through April 2002. No dividends have been paid on our common stock. To date, we have not paid any cash dividends on our common stock and we do not expect to declare or pay dividends on the common stock in the foreseeable future. In addition, the payment of cash dividends may be limited or prohibited by the terms of any future loan agreements. 13 The market price of our common stock is very volatile. The price of our common stock historically has been subject to wide price fluctuations. In addition, the daily volume of our shares traded on the OTC Bulletin Board has been relatively small. Therefore, our shareholders may not always be able to sell their shares of common stock at the time they want or at the most advantageous price. We are subject to "penny stock" regulations. Broker-dealer practices in connection with transactions in "penny stocks" are regulated by certain penny stock rules adopted by the SEC. Penny stocks generally are equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges or quoted on the Nasdaq system). The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document that provides information on penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, and if the broker-dealer is the sole market-maker, the broker-dealer must disclose this fact and the broker- dealer's presumed control over the market, and monthly account statements showing the market value of each penny stock held in the customer's account. In addition, broker-dealers who sell such securities to persons other than established customers and accredited investors (generally, those persons with assets in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 together with their spouse), the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written agreement to the transaction. These requirements may reduce the level of trading activity, if any, in the secondary market for our common stock. As a result of the foregoing, our shareholders may find it more difficult to sell their shares. We intend to apply for inclusion of our securities in the Nasdaq Stock Market as soon as we meet the applicable requirements. We may not meet such requirements in the near future or at any time. The exercise or conversion of outstanding options and warrants into common stock will dilute the percentage ownership of our other stockholders. The sale of such common stock in the open market could adversely affect the market price of our common stock. There are outstanding options and warrants to purchase an aggregate of approximately 4,710,000 shares of our common stock and more options will be granted in the future under our employee benefit plans. Substantially all of the shares of common stock underlying such securities are or will be registered for resale under the Securities Act. The exercise or conversion of outstanding stock options, warrants or other convertible securities will dilute the percentage ownership of our other stockholders. In addition, any sales in the public market of shares of our common stock issuable upon the exercise or conversion of such stock options or warrants, or the perception that such sales could occur, may adversely affect the prevailing market price of our common stock. The sale of a substantial number of shares of our common stock in the public market could adversely affect the market price of our common stock. The majority of our currently outstanding shares of common stock have been registered for sale under the Securities Act, are eligible for sale under an exemption from the registration requirements or are subject to registration rights pursuant to which holders may require us to register such shares in the 14 future. Sales or the expectation of sales of a substantial number of shares of our common stock in the public market could adversely affect the prevailing market price of our common stock. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Some of the statements under "Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business" and elsewhere in this prospectus are forward-looking statements that involve risks and uncertainties. These forward-looking statements include statements about our plans, objectives, expectations, intentions and assumptions and other statements contained in this prospectus that are not statements of historical fact. You can identify these statements by words such as "may," "will," "should," "estimates," "plans," "expects," "believes," "intends" and similar expressions. We cannot guarantee future results, levels of activity, performance or achievements. Our actual results and the timing of certain events may differ significantly from the results discussed in the forward- looking statements. Factors that might cause such a discrepancy include those discussed in "Risk Factors" and elsewhere in this prospectus. You are cautioned not to place undue reliance on any forward-looking statements. 15 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the financial statements and related notes which are included elsewhere in this prospectus. Statements made below which are not historical facts are forward-looking statements. Forward-looking statements involve a number of risks and uncertainties including, but not limited to, general economic conditions, our ability to complete development and then market our products, competitive factors and other risk factors detailed herein. See "Risk Factors" and "Special Note Regarding Forward-Looking Statements." Corporate Background Our predecessor was formed in April 1994 to design, develop and commercialize 3D multi-user tools and technologies for the Internet market. From inception through 1997, our predecessor's operations were limited and consisted primarily of start-up activities, including recruiting personnel, raising capital, custom production work, and research and development. In the third quarter of 1996, our predecessor launched its first commercial user-oriented 3D chat site, Worlds Chat 1.0, and began selling the client interface software through direct sales channels. These sales were nominal. In October 1996, our predecessor introduced its first commercial toolset for developing 3D multi-user applications. In the first quarter of 1997, our predecessor became insolvent and terminated most of its personnel. We thereafter acquired the enterprise through the Mergers in December 1997. Overview During the fourth quarter of 1998, we completed the development of our Gamma development tool kit. This technology is the foundation of our existing and planned product offerings. In early 1999, we embarked on our strategy to commercialize our technology. We are following an aggressive growth strategy by rapidly exploiting our technology to create 3D chat, entertainment, information and e-commerce sites for our company and for third parties. We seek to establish Worlds.com as the leading producer of 3D portals, web sites and content. Revenues Historical revenues prior to 1998 were generated by our predecessor primarily through production service activities and sales of technology licenses. Following our strategy, we generate revenues in the following manner: o sales of music and sports related products through our 35 e-commerce web sites which essentially are artist-specific online stores and include sites such as DavidBowieStore.com, RickyMartinStore.com, U2Store.com, EltonJohnStore.com and BruceSpringsteenStore.com, among others; o the production of 3D promotion sites for third parties; o VIP subscriptions to our Worlds Ultimate 3-D Chat service and services that we provide to Freeserve and Roadrunner; o development and operation of 3D chat and entertainment sites for third parties; o on-line advertising revenues; and 16 o e-commerce commissions and fees. To date, we have used our technology to develop numerous 3D chat sites and promotional sites and related products for our company and third parties. We have also been actively pursuing strategic alliances with a number of companies that can provide exposure and distribution of our products and technology. We recently entered into agreements with six major companies in the Internet arena, including Excite@Home, Road Runner and Freeserve, among others, under which we produce 3D sites and related products. We are also in negotiations with other entities for numerous additional projects. No assurance can be given that any negotiations will lead to the consummation of any additional agreements. During 1999, we put an experienced management team in place to manage the expected growth in our businesses in 2000. We expect our e-commerce sales to grow as we add music and sports related as well as other online stores at an anticipated rate of four a quarter. During the first quarter of 2000, we began to generate increased advertising revenue through our relationship with Freeserve. We expect our advertising and related revenue to grow as we add advertising to our 3D chat sites on Freeserve and continue to receive advertising revenue from our 2D sites. We also expect to see our revenue grow as we rollout 3D entertainment sites we are developing with e- New Media and ShinWon Telecom. Our VIP subscriptions are continuing to grow in 2000. Our subscriptions for the first quarter of 2000 were higher than the first three quarters of 1999. Expenses We classify our expenses into three broad groups: o research and development; o cost of revenues; and o selling, general and administration. During the first quarter of 2000, we continued the implementation of our new business plan. Significant expenditures were incurred in connection with: o the commercialization of our Gamma technology; o maintaining our new-commerce sites; and o building a management team to develop the infrastructure required to handle and promote rapid growth. Software development costs, consisting primarily of salaries and related expenses, incurred prior to establishing technological feasibility are expensed in accordance with Financial Accounting Standards Board (FASB) Statement No. 86. In accordance with FASB 86, we will capitalize software development costs at such time as the technological feasibility of the product has been established. We began capitalizing our 17 software costs in the fourth quarter of 1998 with the commercial release of three products, AnimalHouse.com, BowieWorld and Worlds Ultimate 3D Chat. At December 31, 1999, approximately $1,353,000 of such expenditures had been capitalized. For the three months ended March 31, 2000, we did not capitalize any software development expenditures. Results of Our Operations The following data extracted from our unaudited financial statements compares the results of our operations for the three months ended March 31, 2000 to the three months ended March 31, 1999. The following data extracted from our audited financial statements compares the results of our operations for the twelve months ended December 31, 1999 to the twelve months ended December 31, 1998 and the period April 8, 1997 to December 31, 1997.
Period from Three Months Ended March 31, April 8, 1997 Year ended December 31, ---------------------------- (inception) to ----------------------- (unaudited) December 31, 1999 2000 1997 1998 1999 -------------------------------------------------------------------------------------- Net revenues............................ $ 35,177 $ 180,023 $ 1,420 $ 29,110 $ 507,499 Costs and expenses: Cost of revenues................... (21,464) (69,951) - (29,279) (318,553) Selling, general and administrative..................... (615,815) (2,091,689 (675,030) (2,650,703) (3,428,236) Research and development........... - - - (992,932) - Acquired research and development........................ - - (6,135,538) - - Operating loss (602,102) (1,981,617) (6,809,148) (3,643,804) (3,239,290) Other income (expenses): Gain resulting from reversal of certain predecessor liabilities.... - - - 810,140 - Interest income.................... 12,786 15,751 13,593 124,006 56,945 Interest expense................... (38,922) (2,008,495) (16,692) (111,570) (157,155) Loss before extraordinary item - - (6,812,247) (2,821,228) (3,339,500) Extraordinary item - gain on debt settlement.............................. - - 125,776 172,547 - Net loss................................ $(628,238) $(2,008,495) $(6,686,471) $(2,648,681) $(3,339,500)
18 Three months ended March 31, 2000 compared to three months ended March 31, 1999 We continued generating advertising revenue in the first quarter of 2000 through our relationship with Freeserve. We also realized other royalty revenues by licensing our technology to third parties. Our first quarter of 2000 revenues were $180,023, compared to revenues of $ 35,177 during the first quarter of 1999, an increase of 411%. Compared to the last quarter of 1999 our revenues decreased by 32% due to seasonality of our e-commerce merchandise business. Selling, general and administrative expenses were $2,091,689 for the three months ended March 31, 2000 as compared to the three months ended March 31, 1999 of $615,815. This represented an increase of $1,475,874. This increase was attributable to higher costs associated with building a new management team to develop the infrastructure required to handle and promote rapid growth, implementation of our contractual relationships with our strategic partners, increasing the number of and maintaining our new e-commerce sites and legal and professional fees. Other income included $15,751 of interest income for the three months ended March 31, 2000 earned from the remainder of the proceeds of our share offerings as compared to $12,786 for the three months ended March 31, 1999. Other expenses included interest expense of $42,629 directly attributable to our predecessor's notes payable for the three months ended March 31, 2000. Interest expense for the three months ended March 31, 1999 was $38,922. As a result of the foregoing we incurred a net loss of $2,008,495 for the three months ended March 31, 2000, compared to a loss of $628,238 for the three months ended March 31, 1999, an increase of $1,380,257. Year Ended December 31, 1999 Compared to Year Ended December 31, 1998 Revenues consisted primarily of e-commerce sales through our website. Further, we started generating advertising revenue in November 1999 through our relationship with Freeserve. We also realized nominal royalty revenues by licensing our technology to third parties. Our fourth quarter revenue growth was significant, with revenues generated during the fourth quarter representing 52% of our total revenue for 1999. Revenue for 1999 was $507,499 and had associated direct costs of $318,553, compared to $29,110 in revenue and $29,279 of direct costs for the same period in 1998. Selling, general and administrative expenses were $3,428,236 for the year ended December 31, 1999. This represented an increase of $777,533 from $2,650,703 for the year ended December 31, 1998. This increase was attributable to the higher costs associated with maintaining our new-commerce sites, legal and professional fees, and building a management team to develop the infrastructure required to handle and promote rapid growth. We incurred no research and development costs during the year ended December 31, 1999 as compared to $992,932 for the year ended December 31, 1998. This is directly attributable to the fact that since our technology is now technologically feasible, (i.e., it works), all expenses for research and development are now capitalized. For 1999, $1,193,190 of such expenditures were capitalized. Other income included $56,945 of interest income for the year ended December 31, 1999 earned from the remainder of the proceeds of our share offerings as compared to $124,006 for the year ended December 31, 1998. Other expenses included interest expense of $157,155 directly attributable to our predecessor's notes payable for the year ended December 31, 1999. Interest expense for the year ended December 31, 1998 was $111,570. 19 As a result of the foregoing we incurred a net loss of $3,339,500 for the year ended December 31, 1999, compared to a loss of $2,648,681 for the year ended December 31, 1998, an increase of $690,819. The loss in the 1998 period was after an extraordinary gain of $172,547. Year Ended December 31, 1998 Compared With Period from April 8, 1997 (inception) through December 31, 1997 Our primary activities during 1998 were signing three contracts to produce content for music related web sites, completing a small financing and attempting a merger for additional financing that was not consummated, completing development of certain products, releasing a new version of Worlds Chat and developing and operating a web site for the sale of music related merchandise. Our primary activities during the period from April 8, 1997 through December 31, 1997 consisted of the start-up activities of our predecessor and our formation of WAC, negotiation and consummation of the Mergers, administration of post- Merger legal and business matters, the completion of a private placement, and the negotiation and compromise of debts of our predecessor. Revenues were nominal at $29,110 during 1998 as compared to $1,420 in 1997, due to almost total lack of sales directly attributable to the fact that its WorldsStore.com web site was not operational until November 1997. Selling, general and administrative expenses were $2,650,703 during 1998 as compared to $675,030 in 1997 for this period and consisted largely of overhead, expenses relating to development of our predecessor's web sites and content for the contracts within the music industry, professional fees and other expenses incurred in connection with the Mergers and other transactions, representing an increase of $1,975,673. An expense of $6,135,538 was incurred during 1997 for the acquisition of research and development from our predecessor, being the sum of the negative net worth of our predecessor, plus the value of the 1,999,996 shares of our common stock given in exchange for all the outstanding stock of our predecessor at the time of the Mergers. We invested $992,932 during 1998 in research and development for the completion of the development of our Gamma technology. We had net interest income during 1998 of $12,436 as compared to net interest expense of $3,099 in 1997, primarily attributable to more earned on the funds raised in financings than accumulated on our predecessor's notes payable. We also realized an extraordinary gain of $172,547 during 1998 as compared to $125,776 during 1997, by settling debts of predecessor at less than face value. As a result of the above, plus a recorded gain of $810,140 resulting from the reversal of certain items previously recorded as liabilities of our predecessor, our net loss for 1998 (including the extraordinary gain on debt settlement of $172,547) was $2,648,681 as compared to a net loss of $6,686,471 during 1997. Liquidity and Capital Resources At March 31, 2000, we had working capital of $338,025 and cash and cash equivalents in the amount of $2,707,163. At March 31,2000 we had proceeds from a private placement in transit of $1,255,373. Included in the working capital calculation is a convertible promissory note payable to one of our stockholders (maturing December 3, 2000) for $1,685,000, and a note payable to such stockholder (maturing December 2000) for $250,000. 20 At March 31, 2000, our total liabilities were $4,141,975, including the current term portion of notes payable of $2,064,995. In March 2000, we consummated a private placement, selling an aggregate 976,598 shares of common stock. Each share cost $3.52. We raised net proceeds of $3,243,957. In April 2000, we entered into agreements with four investors to sell an aggregate of 142,045 shares of common stock at $3.52 per share. From the $500,000 total offering price, aggregate net proceeds to us from these sales were $465,000. Net cash provided from financing activities, net of operating and investing activities from January 1, 1999 through December 31, 1999 was $239,416. At December 31, 1999, we had a working capital deficit of $1,441,900 and cash and cash equivalents in the amount of $1,821,180. The negative working capital is primarily the result of a convertible promissory note payable to one of our stockholders (maturing December 3, 2000) for $1,685,000, and a note payable to such stockholder (maturing December 2000) for $250,000. On December 3, 1997, the Mergers were deemed to close as well as the first round of a private placement of our common stock raising gross proceeds of $3.8 million, by selling 3.8 million shares, of which we netted approximately $3,166,000. We also acquired approximately an additional $560,000 from one of the other parties to the Mergers. In addition, as a result of the Mergers by operation of law, we assumed our predecessor's then liabilities of approximately $4.6 million, the majority of which has since been paid or renegotiated. At December 31, 1999, our total liabilities were $3,803,146, including the current term portion of notes payable of $2,054,996. Prior to the Mergers, we had 910,000 shares outstanding. Effective December 31, 1997, we closed on an additional $585,000 of gross proceeds from the private offering, of which we netted $529,000, and issued an additional 585,000 shares of common stock and on January 2, 1998 received an additional $30,000, of which we netted $26,500, and issued an additional 30,000 shares. In June 1998, we closed on a secondary offering of $1,832,000 gross proceeds, of which we netted $1,715,800 by selling 1,832,000 shares at $1.00 per share. In June and August 1999, we consummated two tranches of a private placement, selling an aggregate of 59 units. Each unit cost $60,000 and consisted of 15,000 shares of common stock and warrants to purchase 7,500 shares of common stock. At September 30, 1999, we had raised gross proceeds of $3,540,000. Our capital requirements relating to the commercialization of our technology and the development of our web sites and related content have been and will continue to be significant. Commercialization will require capital resources greater than what we have now currently available to us. During the periods that we experience net losses, we expect to be dependent upon sales of our capital stock and debt securities to finance our working capital requirements. Based upon our current plans and assumptions relating to our business plan, we anticipate that our existing capital resources will satisfy our capital requirements through at least November 2000. However, if our plans change or our assumptions prove to be inaccurate, we may need to seek additional financing sooner than currently anticipated or curtail our operations. We will need to raise additional capital during 2001, which may be in the form of equity or debt financing. Any issuance of equity securities would dilute the interest of our shareholders. Additionally, if we incur debt, we will become subject to risks that interest rates may fluctuate and cash flow may be insufficient to pay the principal and interest on any such debt. While we hope to raise additional financing, we have no current arrangements with respect to, or sources of, additional financing and there can be no assurance that any such financing, particularly the significant amounts of financing that would be required, will be available to us on 21 commercially reasonable terms, or at all. Any inability to obtain additional financing will have a material adverse effect on our business, including possibly requiring us to significantly curtail or cease operations. Effect of Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities," which requires entities to recognize all derivative financial instruments as either assets or liabilities in the balance sheet and measure these instruments at fair value. SFAS No. 133, as amended by SFAS No. 137, is effective for all fiscal years beginning after June 15, 2000. We do not presently enter into any transactions involving derivative financial instruments and, accordingly, we do not anticipate that the new standard will have any effect on our financial statements. 22 BUSINESS General Worlds.com is a leading 3D entertainment portal, which leverages our proprietary technology to offer visitors a network of virtual, multi-user environments. In support of this portal and our overall business strategy, we design and develop software, content and related technology for the creation of interactive, three- dimensional Internet web sites. Using our technology, we create our own Internet sites, as well as sites available through third-party online service providers, such as Freeserve, the largest Internet service provider in the United Kingdom, and Time Warner's Road Runner service, one of the two largest cable-modem based Internet service providers in the United States. Sites using our technology allow numerous simultaneous visitors to enter, navigate and share interactive "worlds," which are 3D spaces featuring animation, motion and content. Our 3D Internet sites are designed to promote frequent, repeat and prolonged visitation by users by providing them with unique online communities featuring dynamic graphics, highly useful and entertaining information content, and interactive capabilities. We believe that our sites are highly attractive to advertisers because they offer access to demographic-specific user bases comprised of people that visit the site frequently and stay for relatively long periods of time. Our premiere site is Worlds Ultimate 3D Chat (www.worlds.com), an interactive site employing our 3D technology which is targeted towards the music industry. Visitors to Worlds Ultimate 3D Chat adopt an alter ego in the form of one of hundreds of avatars, which are 3D characters that can be moved through the many virtual "worlds" of Worlds Ultimate 3D Chat. The user moves his or her avatar through these worlds using a mouse or keyboard arrow keys and can: o engage other avatars in one-on-one text-based or real voice-to-voice discussions; o enter theme-based chat rooms featuring group discussions on numerous music styles, specific recording artists and other topics; o experience interactive advertising and promotions; o access information on various recording artists, concert schedules and other music-related and nonmusic-related information; o view new music videos by leading recording artists; o listen to selections from newly released CDs by numerous recording artists; o purchase music and recording artist-related merchandise online; and o enter pay-access areas as a VIP subscriber. Currently, almost all Internet sites are entirely two-dimensional with limited graphic and interactive capabilities because existing technological barriers typically prevent the delivery of high-quality 3D graphics and motion imagery. Typically, in order for sites to provide users with high-quality 3D graphics on the Internet, such users must have very powerful computers and both the user and site provider must have access to high-capacity communications channels for the movement of the large amount of data that must be 23 delivered to provide 3D motion. Our technology, however, circumvents these limitations by delivering a large portion of the necessary software and data through off-line channels, such as CDs and CD-ROMs, with only the interactivity information being transmitted online. This allows almost any home computer with a traditional modem to enjoy our interactive 3D sites. The Market A growing number of people access the Internet as a part of their daily routine. They are embracing the Internet as a point of access for communications, entertainment and shopping. The emergence of broadband delivery capabilities, such as that provided by Road Runner to its customers through cable modems, and other technologies will promote even greater growth in the use of the Internet. The Internet has extended the capabilities of traditional media products such as music. By making these products, which were previously used by consumers on a passive basis, interactive, the Internet can broaden and prolong their appeal. The Internet is also creating new opportunities for businesses to reach customers on a cost-efficient, demographic-specific basis. Advertisers are increasingly giving their online advertising business to sites that can provide them with access to user bases comprised of repeat users who tend to stay at the site for meaningful periods of time. The Internet is currently a flat, 2D media. However, it can be a robust, immersive, interactive world, with 3D capabilities enhancing the Internet experience as color enhanced the TV experience. We believe that sites that provide users with exciting 3D interactivity via the Internet, a sense of community and attractive online purchasing opportunities will garner user bases that have the characteristics that appeal to users, sponsors and advertisers. We have a unique opportunity to exploit our technology to create Internet sites that represent concrete e-commerce revenue generation models because they are unique, fun and helpful to users on a repeat- visitation basis. In turn, these users can be targeted by advertisers on a demographic-specific basis to create meaningful revenue opportunities. Our Strategy Our goal is to become a leading provider of interactive 3D Internet sites where entertainment content, interactive chat and e-commerce opportunities converge to provide communities for users and advertisers. Keys to achieving our goal are: Initially producing interactive multimedia music-related 3D sites. We believe that music readily lends itself to exploitation through web sites utilizing our technology. Music is a universal theme that appeals to all people and accordingly, music-based sites, such as Worlds Ultimate 3D Chat, have the capability of drawing a wide range of users. We also believe that the highly graphic, interactive nature of sites using our technology appeals to users drawn to music-based sites, differentiates such sites from other music-based sites and thereby encourages repeat visitation. Because our technology allows for the creation of multiple worlds accessible from a web site, it allows such sites to segregate users of different tastes and demographics. For example, the various worlds of Worlds Ultimate 3D Chat focus on specific categories of music including: o alternative; o jazz; 24 o rock; o pop; o country; and o hip-hop. Accordingly, advertisers at Worlds Ultimate 3D Chat are able to place their online advertisements and e- commerce links in specific worlds, thereby focusing their advertising efforts on targeted user groups. Creating effective offline distribution partnerships with recording artists and their record companies. We regularly seek to enter into alliances with recording artists and their record companies by which we gain access to the excess capacity on their music CDs to distribute our Worlds Ultimate 3D Chat and other software. CDs utilizing such excess capacity in this or a similar manner are commonly referred to as CD+ or enhanced CDs. We believe that the distribution of music on these types of CDs is an attractive alternative to recording artists and their record companies as it creates opportunities for them to expand the sale of their music through differentiation of their CDs, creates a new channel of distribution for the sale of products related to the artists, and aids in the promotion of the artists in general. We have entered into relationships with companies representing David Bowie and the group Hanson, and we are currently in negotiations with several major record companies with respect to the distribution of our 3D technology and content. Creating Other Services Using Our Interactive 3D Technology. In addition to Worlds Ultimate 3D Chat, we seek to create other marketable products and services based on our technology. During late 1998, we completed development of our technology tool kit "Gamma." Gamma is our software platform for the creation and delivery of 3D graphics and multiuser functionality for Internet web sites, such as those we have developed for Freeserve and Road Runner. Pursuing Alliances and Cross Promotional Opportunities. We are also pursuing opportunities to provide our 3D Internet technology and content to other companies. In this regard, we recently entered into agreements with: o Road Runner, pursuant to which we provide them with a co-branded area on the Road Runner music channel and its new "Hang" channel, which allows their subscribers to access 3D interactive chat and music-related content; o Freeserve, pursuant to which we are creating co-branded traditional 2D and proprietary 3D chat sites which are accessible by Freeserve's members; o Recording artist Hanson, pursuant to which we used our technology to create a special CD+ for distribution to the Hanson fan club during June and July 1999; o Polygram Merchandising, pursuant to which we market and sell Polygram Merchandising's recording-artist merchandise on our sites; and o Excite@Home, pursuant to which we will provide Excite@Home with high-quality e-commerce content. 25 Creating Brand Identity for Worlds.com. Public awareness of our site and products is critical to our success. We will build this awareness through a high-profile public relations and marketing effort and by building relationships with other Internet companies and music companies. Worlds Ultimate 3D Chat and our other products will be marketed through online and other efforts. Ultimately, we seek to build a reputation as a leader in 3D technology and content for the Internet. Our Technology During 1998, we directed our efforts toward completing development of our Gamma development tool kit. Our development efforts are now focused on adapting the Gamma tool kit to produce three-dimensional portals and web sites for Worlds.com and third parties. The Gamma Development Kit, our third generation and newest 3D toolset, was completed in the second half of 1998. We believe that Gamma delivers a considerably faster frame rate for user experiences and, in some cases, a meaningful productivity increase in art production and integration over its previous generation production tools. We have successfully utilized the Gamma tool kit in the development of 3D content for David Bowie's 3D on-line environment, BowieWorld, as well as our recently released Worlds Ultimate 3D Chat. A major part of the Gamma platform was also utilized in the 3D AnimalHouse project which we created for Universal/Hyundai and in our e-commerce site, WorldsStore.com. The Gamma tool kit has substantial elements written in Sun Microsystem's programming language, Java, including the WorldsBrowser Gamma and the WorldsShaper Gamma so we expect that it can be made portable across Windows and UNIX Platforms because of Java's platform independence. The Gamma technologies include: o WorldsShaper Gamma: The WorldsShaper Gamma is an advanced compositing 3D building tool that integrates pre-existing or custom content, such as 3D models created in Kinetix's 3D Studio, textures or images created in Adobe's Photoshop, or midi or wave sound files, with foundation world architectural geometry and interactive behaviors and actions written in Java. The architectural building blocks for creating 3D worlds, the flexibility and power of integrating professional modeling and imaging tools, and the extensibility via Java make the WorldsShaper Gamma a tool well-suited for rapid world creation. Additional Application Programming Interfaces for more sophisticated, programmatic control of the spaces will also be included. Initially, the WorldsShaper Gamma will only output in our proprietary file format. o WorldsServer Gamma: The WorldsServer Gamma is the server software that we anticipate using to control and operate its on-line virtual community, Worlds of Worlds. The WorldsServer Gamma manages the registration and authentication of users, the locations of users within the 3D environment, the physical structure of the 3D environment, all information regarding objects that are "shared" by the participants and any of the interactions between the users such as text chat. o WorldsBrowser Gamma: The WorldsBrowser Gamma is used to access the 3D environments created with the Worlds Gamma Development Kit. The browser is optimized for speed, delivering relatively fast frame rates per second in highly textured virtual 3D worlds. o Worlds Gamma Libraries: The Worlds Gamma Libraries are composed of sample worlds, textures, models, avatars, actions, sensors, sounds, motion sequences, and other behaviors. 26 The markets for our products are characterized by rapidly changing technology and evolving industry standards, often resulting in product obsolescence or short product life cycles. Accordingly, our ability to compete will be dependent on our ability to enhance and upgrade Worlds Gamma in a timely manner. There can be no assurance that competitors will not develop technologies or products that render our products obsolete or less marketable or that we will be able to successfully enhance our products or develop new products. Our Products Worlds Ultimate 3D Chat We own a proprietary online 3D Internet chat site known as Worlds Ultimate 3D Chat. Originally launched as Worlds Chat, another proprietary 3D chat site we still operate, it is an upgraded version using our newest technology. The 3D environment was originally created by our predecessor and launched in 1996 to test its technologies and to learn about user behaviors and preferences in 3D environments. Our 3D technology enhances users' chat experiences by allowing users to see a representation of each other in the form of highly textured characters, known as avatars, and to explore a 3D environment together. Avatars can be created by the individual or chosen from pre-defined figures in our library. Users communicate with each other through text chat, as well as voice-to-voice chat. The client interface for the Worlds Chat environment was originally distributed through a free download and later was sold on a CD which has a greater selection of avatars, persistent user names, and access to six virtual worlds with over 500 rooms, compared to 100 available in the free demo version. We believe that the user base to the Worlds Ultimate 3D Chat site will develop into a valuable asset. Although we have no plans to build advertising or subscription revenues through the original Worlds Chat site, such revenues may be generated in the future. We are also attempting to market a customized version of this product for Intranet applications by corporations. Currently, we collect the name and e-mail address from our Worlds Ultimate 3D Chat users and the name, address, and credit card information from our direct customers. Worlds Ultimate 3D Chat also contains an e-commerce component, which we believe is the first commercial real 3D virtual store online, selling music merchandise of major recording artists including Elton John, David Bowie, Spice Girls, U2, Hanson, John Mellencamp, Shania Twain and others. In order to rapidly increase the number of potential subscribers to our 3D music sites, we recently began to offer a modified demo version of our Worlds Ultimate 3D Chat product as a free download. By reducing the price barrier, we hope to generate new members to our Chat service. These new members may be matriculated to the 3D music sites when launched and to our e-commerce web site. The proliferation of Worlds Ultimate 3D Chat may also increase corporate brand identity that could translate into valuable consumer data and related advertising potential. The strategy of a free distribution model is comparable to the marketing strategy implemented by Netscape, Hotmail, Geocities and Tripod. The strategic objective is to rapidly establish market segment dominance in order to increase sales to a large user base. 27 Freeserve In 1999, we entered into two agreements with Freeserve, the largest Internet service provider in the United Kingdom and a subsidiary of Dixons Group. Pursuant to these agreements, we serve as the official and exclusive 2D and 3D Internet broadband chat service and content provider for Freeserve. The agreement calls for a sharing of advertising and related revenues generated by these sites. In November 1999, we began selling advertising on Freeserve's site. Road Runner In 1999, we entered into an agreement with Road Runner to create Road Runner/Worlds.com, a co- branded area on the Road Runner service. Road Runner is a high-speed online service owned by Time Warner, MediaOne Group, Microsoft Corp., Compaq, and Advance/Newhouse. Our agreement with Road Runner permits all Road Runner subscribers to participate in an entirely new, interactive online experience. The co-branded area we created highlights the latest technology in the Road Runner music channel. Road Runner's agreement with us is the first entered into by Road Runner with a 3D technology and broadband content provider for the Road Runner music channel. e-New Media In 1999, we entered into an agreement with e-New Media 3D Company Ltd. in which we will create 10 virtual Asian language and style chat and entertainment worlds for the Far East region. Pursuant to the agreement, we will provide two customized web sites with real time text chat capability in the traditional Chinese, simplified Chinese, Japanese, Bahasa (for Indonesia) and Thai languages. ShinWon Telecom In early 2000, we entered into an agreement with ShinWon Telecom, a privately held telecommunications and cable television provider in South Korea, pursuant to which we will create a Korean language chat and entertainment web site which will be available through our portal and which will take advantage of our proprietary 3-D technology. We believe that by having the ShinWon site reside on our portal, we will be accessible to the large and growing Korean population in the United States. Powernet Telecom In 2000, we entered into an agreement with Powernet Telecom, an Internet service provider in the United Kingdom. We will provide Powernet with 3D interactive chat and entertainment sites through the Worlds.com 3D entertainment portal. GQ Magazine Enhanced CD In 1999, we entered into an agreement with GQ magazine pursuant to which more than 700,000 enhanced CDs containing our Worlds Ultimate 3D Chat software were included with the November 1999 issue of GQ. 28 Hanson In 1999, we entered into an agreement with Hansonopoly Inc. to create a special CD with our 3D Internet technology and content. This CD includes various 3D environments for Hanson's fan club, "MOE." Hanson is a platinum recording group that has sold more than 10 million CDs worldwide since 1997. The CD allows the members of Hanson's fan club to enter, explore, and meet each other in a visually rich environment. This fan club CD also includes several songs by Hanson as well as video footage. The CD was distributed in June and July 1999. In addition, in March 2000, we entered into an agreement to carry a live cybercast to users of our site and other sites of Hanson's performance at the Bowery Ballroom in New York City. Universal/Hyundai - Animal House.com In 1999, we entered into a contract with Universal Studios in partnership with Hyundai to create a 3D Animal House site which has been encoded on a music CD containing songs from 10 Universal recording artists. As part of the launch of Animal House.com, Universal distributed 1,000,000 of the enhanced CD's targeted to college students. We currently have the 3D Animal House site created for this project encoded on the Worlds Ultimate 3D Chat CD. Polygram We also entered into an agreement with Polygram merchandising to develop and maintain the SuperStarSuperstore.com web site employing an e-commerce engine to sell music merchandise of major recording artists including Elton John, Hanson, U2, Spice Girls, Sting, Shania Twain and others. We developed the 3D stores for these artists and they are included on the Worlds Ultimate 3D Chat CD. In conjunction with this 3D site, we launched our WorldsStore.com, an HTML, 2D, commerce site that offers the same merchandise as the 3D store to consumers who wish to access these artists' stores through traditional HTML pages on the Internet. David Bowie In 1999, we entered into an agreement with UltraStar Internet Services LLP to create and operate the official 3D David Bowie environment entitled "BowieWorld." The development of BowieWorld was completed and released in January 1999. As part of the agreement, we have the exclusive rights to create the 3D DavidBowieStore.com to sell selected Bowie merchandise and the non-exclusive rights to operate a traditional HTML, or 2D, DavidBowieStore.com. A direct link from David Bowie's official site, DavidBowie.com, has recently been placed on the home page of DavidBowie.com that directs the user to our David Bowie Internet store. Competition The markets in which we currently operate and those we intend to enter are characterized by intense competition and an increasing number of new market entrants which have developed or are developing competitive products. We will face competition from numerous sources, including prospective customers which may develop and market their own competitive products and services, software companies, and online and Internet service providers. We believe that competition will be based primarily on ease of use, price and features, including communications capabilities and content. 29 In addition, certain companies have developed or may be expected to develop technologies or products in related market segments which could compete with certain technologies or products we are developing. We expect that such companies, as well as other companies including established and newly formed companies, may attempt to develop products that will be in direct competition with us. Certain of these competitors have substantially greater financial, technical, marketing, distribution personnel and other resources than we do, permitting such companies to implement more extensive marketing campaigns than we can. Technologically, our target market is sought after by a combination of numerous recent start-ups and well established 3D graphics companies. Each company has a slightly different focus and each claims a different combination of product offerings. Our product solution includes three major components: tools for building 3D worlds known as shapers, servers for distributing those worlds and making those worlds multi-user, and browsers that enable end-users to enter and experience those worlds. Many of our competitors in this market have adopted VRML and VRML 2.0 scene description language as their file format and have limited their expertise and scope to only one of the above categories. VRML is an early industry attempt to provide standard protocols for 3D Internet experiences. Many companies now compete with us in one way or another and new ones may emerge in the future. The competition may be through entry into the same markets, or through technology that either obviates our advantages or lowers the barrier to entry in one of our markets. Besides technological competition, we will be competing with established online music retailers that have substantial resources and established user bases. Among the leaders in non-3D online music web sites are Amazon.com and CDNow. Each of these companies, as well as others that are currently selling on-line music related products, including CDs and other merchandise, have financial and management resources significantly in excess of our resources. These companies have established themselves with consumers as music merchandise and music review destinations; they all sell music-related products and have generated revenues in online sales. Notwithstanding the foregoing, to the best of our knowledge, no other company is currently offering a product that integrates 3D Internet technology with a music industry content application similar to that which we are now offering. Employees We currently have 25 full time employees. None of our employees are represented by a labor union. We believe that relations with our employees are good. Community Leaders Monitoring Program We recently implemented a program through which certain users of Worlds Ultimate 3D Chat are given the opportunity to volunteer as online Community Leader Monitors. These volunteers monitor our community chat rooms, making sure that users comply with our terms of service and otherwise refrain from obscene or inappropriate behavior. We reward each of these volunteers with free V.I.P. service for our Worlds Ultimate 3D Chat. 30 Properties Our principal executive offices are located at 15 Union Wharf, Boston, Massachusetts 02109 where we lease approximately 2,500 square feet of office space at a base rent of approximately $50,000 per year. The initial term of the lease expires in September 2000. We also have a facility in San Francisco, California where we lease approximately 2,500 square feet of office space at a base rent of $2,500 per month. The lease in San Francisco is on a month-to-month basis. Legal Proceedings We are not involved in any material legal proceeding. 31 MANAGEMENT Officers and Directors Our officers and directors are as follows:
Name Age Position ---- --- -------- Steven G. Chrust 50 Chairman of the Board Thomas Kidrin 47 President, Chief Executive Officer, Treasurer, Secretary and Director Kenneth A. Locker 49 Director William Harvey 56 Director
Steven G. Chrust has been Chairman of the Board since April 1999. He is also the Co-Chairman of UMagic Systems, Inc., a provider of subscription-based and free online, interactive information services featuring expert-led advice services and discussions. Mr. Chrust was the Vice Chairman of Winstar Communications, Inc. and a member of its Board of Directors from 1994 through December 1998. At Winstar he was responsible for corporate development, strategic and capital planning and acquisitions. Mr. Chrust has been involved with the telecommunications and financial services industries for 25 years. He was formerly a Chairman and Chief Executive Officer of AMNEX, Inc., an operator services long distance company, and was Executive Vice President of Executone Information Services, Inc., a telecommunications company. Prior to becoming an executive in the telecommunications industry, Mr. Chrust was Director of Technology Research at Sanford C. Bernstein & Co., a Wall Street investment firm, where he was named a top telecommunications analyst each year for more than a decade by Institutional Investor and ranked as the #1 analyst in the sector for five consecutive years in its all-star ranking. Mr. Chrust is Chairman of the Association for Local Telecommunications Services, the national organization representing facilities-based competitive local exchange carriers and is the founder and President of SGC Advisory Services, Inc., a discretionary money- management service firm specializing in telecommunications and technology. Mr. Chrust is a graduate of Baruch College in New York. Thomas Kidrin has been President, Chief Executive Officer, Secretary and Treasurer since December 1997. Mr. Kidrin was also President and a director of Worlds Acquisition Corp. from April 1997 to December 1997. He is Chairman and President of Datastream Corporation, a designer and developer of interactive products and services. From December 1991 to June 1996, Mr. Kidrin was a founder, director, and President of UC Television Network Corp., a company engaged in the design and manufacture of interactive entertainment/advertising networks in the college market under the brand name College Television Network(TM), the largest private network on college campuses in the United States. Mr. Kidrin attended Drake University and received a B.A. degree from the New School of Social Research. Kenneth A. Locker has been a director since December 1997 and prior thereto was a director of Worlds Acquisition Corp. Since June 1998 he has been a Senior Consultant to Intel Corporation on entertainment industry strategies and has also served as an advisor to Ziff Davis, Inc., an Internet consulting company, and to Digital Evolution, Inc., a technology publishing company. From June 1996 to June 1998, he was the General Manager and Executive Producer for MGM Interactive, Inc., an interactive content and programming company, where he was responsible for creating and implementing the MGM Interactive online business strategy. From 1994 to March 1996, he was a founder and Vice President of our predecessor and from 1993 to 1994, he was Senior Program Consultant for Ziff Davis Communications. From 1990 to 1993, Mr. Locker was Executive Vice President and Head of Production for RHI Entertainment, Inc., a television 32 production company, which at the time was 50% owned by New Line Cinema. Mr. Locker is also on the Board of Directors of Softbank Forums, Inc., a technology publishing company which is a division of Softbank Corp. Mr. Locker received a B.A. degree from Johns Hopkins University and attended the Massachusetts Institute of Technology and Oxford University. William Harvey, 56, has been a director since November 1999. In 1972 and 1991, respectively, Mr. Harvey founded New Electronic Media Science, Inc. ("NEMS"), and Next Century Media, Inc. ("Next Century"), marketing, media and research consulting companies specializing in the marketing, entertainment and interactive media industries. Mr. Harvey has served as Chief Executive Officer and President of both NEMS and Next Century since their respective inceptions. Through NEMS and Next Century, Mr. Harvey has worked with major television and cable networks, several RBOCs, major film studios, IBM, AT&T, advertising agencies, videotex companies and advertisers on the integration of advertising into various new media. Mr. Harvey invented the marketing tool known as the Area Dominant Influence for Arbitron and co- founded International Ratings Services, Inc., the first company to provide United States movie studios, including Warner Brothers, Columbia and CBS International, with ratings for their television programs broadcast in foreign countries. Since 1979, Mr. Harvey has also been the publisher of "The Marketing Pulse," a monthly advertising and media trade newsletter. Our Audit Committee is currently comprised of Kenneth Locker. The function of our Audit Committee is to recommend annually to the Board of Directors the appointment of our independent auditors; review with the independent auditors the scope of the annual audit and review their report relating thereto; review with the independent auditors our accounting practices and policies; review with the internal accountants and independent auditors our overall accounting and financial controls; and be available to independent auditors during the year for consultation. Messrs. Locker and Chrust serve on our Compensation Committee. The Compensation Committee administers our 1997 Incentive and Nonqualified Stock Option Plan, as amended, to the extent not administered by the full Board of Directors, and reviews and makes recommendations with respect to compensation of officers, consultants and key employees. We do not have a standing Nominating Committee. Compensation of Directors Non-employee directors, excluding Mr. Chrust, will be reimbursed for reasonable travel and lodging expenses incurred in attending meetings of the Board of Directors and any committee on which they may serve. 33 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth, as of May 31, 2000, information regarding the beneficial ownership of our common stock based upon the most recent information available to us for (i) those persons or group of persons known by us to beneficially own more than five percent (5%) of our voting securities, (ii) each director of Worlds.com, (iii) each current executive officer whose compensation exceeded $100,000 in 1999, and (iv) all executive officers and directors of Worlds.com, as a group.
Amount and Nature Name and Address of Beneficial Owner of Beneficial Owner Percent of Class - ------------------------------------ ------------------- ---------------- Steven G. Chrust 1,465,939(1) 7.8% Thomas Kidrin 1,290,000(2)(4) 6.8% Kenneth A. Locker 100,000(3) * William Harvey -0- (5) * Steven A. Greenberg 2,046,562(2) 10.7% Michael J. Scharf(6) 1,381,250(2) 7.2% All Executive Officers and Directors as a Group (4 persons) 2,953,771(7) 14.6
- ---------- * less than 1% (1) Includes (i) 1,000,000 shares of common stock issuable upon exercise the warrants held by SGC;(ii) 42,000 shares of common stock held of record by Steven and Sharon Chrust jointly; (iii) 60,000 shares of common stock held of record by Bear Stearns Securities Corp., as custodian for Mr. Chrust's Individual Retirement Account; (iv) 16,000 shares of common stock held of record by Steven Chrust BSSC Master Def Contribution Profit Sharing Account; (v) 15,000 shares of common stock held of record by Eve Chrust, Mr. Chrust' daughter; (vi) 15,000 shares of common stock held of record by Liza Chrust, Mr. Chrust's other daughter; and (vii) 15,000 shares of common stock issuable upon the exercise of presently exercisable warrants granted to Steven and Sharon Chrust, jointly. Does not include options to purchase a total of 287,500 shares which vest in three equal annual installments, commencing in March 2001. (2) Messrs. Kidrin, Greenberg and Scharf have agreed to vote shares owned by them for the election of Mr. Chrust as a director through March 2002. (3) Represents shares of common stock issuable upon exercise of currently exercisable stock options. Does not include 5,000 shares of common stock issuable upon exercise of options, which vest in three equal annual installments, commencing in December 2000. (4) Does not include options to purchase a total of 175,000 shares which vest in three equal annual installments, commencing in March 2001. (5) Does not include 50,000 ahres of common stock issuable upon exercise of options, which vest in three equal annual installments, commencing in November 2000. (6) Mr. Scharf resigned as a director, effective May 30, 2000. (7) Does not include shares owned by Mr. Scharf. 34 EXECUTIVE COMPENSATION The following table sets forth the compensation for the three years ended December 31, 1999, for our Chief Executive Officer and other executive officers whose compensation exceeded $100,000 (or would have exceeded $100,000 if employed for the full year) (the "Named Executive Officers") for the year ended December 31, 1999. SUMMARY COMPENSATION TABLE
- ------------------------------------------------------------------------------------------------------------ Annual Long-Term Compensation Compensation(1)(2) ----------------------------------------------------------- Name and Principal Position Year Salary Bonus ($) Restricted All Other ($) Stock Compensation Awards ($) - ------------------------------------------------------------------------------------------------------------ Thomas Kidrin 1999 176,000 -0- -0- -0- President and CEO 1998 175,000 -0- -0- -0- 1997 21,903(3) -0- -0- -0- - ------------------------------------------------------------------------------------------------------------ Steven G. Chrust, 1999 $85,000(4) -0- -0- -0- Chairman of the Board 1998 -0- -0- -0- -0- 1997 -0- -0- -0- -0- - ------------------------------------------------------------------------------------------------------------ Debra Sito 1999 39,375(5) -0- -0- -0- Executive Vice President 1998 -0- -0- -0- -0- 1997 -0- -0- -0- -0- - ------------------------------------------------------------------------------------------------------------
(1) The above compensation does not include other personal benefits, the total value of which do not exceed the lesser of $50,000 or 10% of such person's or persons' cash compensation). (2) Pursuant to the regulations promulgated by the SEC, the table omits columns reserved for types of compensation not applicable to us. (3) Paid by us from December 3, 1997 to December 31, 1997. No compensation was paid to Mr. Kidrin by our predecessor during the remainder of 1997. (4) Represents amounts paid by us to SGC Advisory Services, Inc., a firm which provides us with consulting services, and of which Mr. Chrust is President and sole stockholder. The agreement provides for an annual consulting fee of $120,000, of which $85,000 was earned and accrued in 1999. (5) Ms. Sito began her employment with the Company in September 1999 at an annual salary of $135,000. 35 Option Grants The following table represents the stock options granted in the fiscal year ended December 31, 1999 to our executive officers identified in the Summary Compensation table above.
- ---------------------------------------------------------------------------------------------------- Options Granted in the Last Fiscal Year - ---------------------------------------------------------------------------------------------------- Number of Percent of Securities Total Options Underlying Granted to Options Employees in Exercise Price of Name of Executive Granted (#) Fiscal Year (%) Options ($) Expiration Date - ---------------------------------------------------------------------------------------------------- Steven G. Chrust 1,000,000 51% 0.50 4/13/06 - ---------------------------------------------------------------------------------------------------- Thomas Kidrin -0- N/A N/A N/A - ---------------------------------------------------------------------------------------------------- Debra Sito 150,000 13% 4.00 9/03/04 50,000 7.50 9/03/04 50,000 10.00 9/03/04 - ---------------------------------------------------------------------------------------------------- None of the Named Executive Officers exercised any stock options during 1999. The following table sets forth certain information concerning the fiscal year end value of unexercised options held by such persons. - ---------------------------------------------------------------------------------------------------- Aggregated Option Exercises in Last Fiscal Year and FY-End Option Values - ---------------------------------------------------------------------------------------------------- Number of Securities Underlying Unexercised Options at FY-End Value of Unexercised In-The-Money Name of Executive (#) Options at FY-End ($)(1) - ---------------------------------------------------------------------------------------------------- Exercisable Unexercisable Exercisable Unexercisable - ---------------------------------------------------------------------------------------------------- Steven G. Chrust 1,000,000 -0- $2,190,000 -0- - ---------------------------------------------------------------------------------------------------- Thomas Kidrin -0- -0- -0- -0- - ---------------------------------------------------------------------------------------------------- Debra Sito -0- 250,000 -0- -0- - ----------------------------------------------------------------------------------------------------
(1) Represents the difference between the aggregate market value at December 31, 1999 of the common stock underlying the options, based on a last sale price of $2.59 on that date, and the options' exercise prices. 1997 Stock Option Plan and Other Options The 1997 Incentive and Non-Qualified Stock Option Plan, as amended ("Plan") has been adopted by the Board and the shareholders as an incentive for, and to encourage share ownership by, the Company's directors, officers and other key employees and/or consultants and management of possible future acquired companies. The Plan was amended at our annual meeting of shareholders in December 1999 to increase the number of shares of common stock available under the Plan from 1,000,000 to 3,000,000. The Plan also allows for the granting of stock appreciation rights in tandem with, or independently of, stock options. Independent (stand-alone) grants of stock appreciation rights are not counted against the Plan limit. As of May 31, 2000, there were outstanding grants under the Plan of options to purchase an aggregate of 1,825,100 shares of common stock. The number of outstanding options includes options to purchase 60,000 shares for $0.50 each, held by Kenneth Locker, a director, options to purchase 125,000 shares of our stock at $5.68 each, 25,000 shares at $6.00 each and 25,000 shares at $9.00 each, held by Thomas Kidrin, our President, Chief Executive Officer and President, and options to purchase 187,500 shares at $5.68 each, 50,000 at $6.00 each and 50,000 at $9.00 each, held by Steven G. Chrust, the Chairman of the Board. As of May 31, 2000, there were 1,064,900 additional shares of common stock available for grant under the Plan. 36 The purpose of the Plan is to make both "incentive stock options" within the meaning of Section 422A of the Internal Revenue Code of 1986, as amended, and non-qualified options and stock appreciation rights available to our officers, directors and other key employees and/or consultants in order to give such individuals a greater personal interest in our success and, in the case of employees, an added incentive to continue and advance in their employment. The Board designates those persons to receive grants under the Plan and determines the number of options and/or stock appreciation rights, as the case may be, to be granted. The price payable for the shares of common stock underlying each option will be fixed by the Board at the time of the grant, but, for incentive stock options, must be not less than 100% of the fair market value of common stock at the time the option is granted. The Board also determines the term and vesting schedule of all options and stock appreciation rights granted, provided that no option may be exercisable later than ten years after the date of grant. We have other outstanding options to purchase an aggregate of 2,888,875 shares of our common stock. These securities are exercisable at prices ranging from $0.67 to $10.00 and include options to purchase 1,000,000 shares for $0.50 each held by SGC Advisory Services, a company owned by Mr. Chrust, our chairman of the board. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS On March 10, 2000, Mr. Chrust, our Chairman, purchased 302,939 shares of common stock at a purchase price of $3.301 per share in a private transaction from Steven A. Greenberg, a founder of Worlds Acquisition Corp. and a principal stockholder of Worlds.com, and purchased options at $.007335 per share to purchase 1,363,342 additional shares of common stock owned by Mr. Greenberg at $3.301 per share. On April 27, 2000, Mr. Chrust, in a private transaction, assigned 1,317,780 of these options at a price of $.007335 per share. The remaining 45,562 options were cancelled for no value. We have entered into a Financial Advisory and Consulting Agreement, dated March 23, 1999, with SGC Advisory Services, Inc., of which Mr. Chrust is the President and sole shareholder. The agreement continues through March 2002 and provides for an annual fee of $120,000. The annual fee will rise to $300,000 if we raise $5 million in cash from investors and the market value of our issued and outstanding common stock is at least $100 million. In addition, we granted warrants to SGC Advisory Services, Inc. to purchase 1,000,000 shares of our common stock at $.50 per share. The warrants are exercisable through April 13, 2006 and contain anti-dilution provisions and both "demand" and "piggy-back" registration rights. In connection with the engagement of SGC Advisory Services, Inc., Messrs. Scharf, Kidrin and Greenberg agreed (i) to contribute to us for cancellation 318,750, 300,000 and 881,250 shares of our common stock, respectively, and (ii) during the term of the consulting agreement, to vote any shares of our common stock owned by them for the election of Mr. Chrust as a director. In June and August 1999, we consummated two tranches of a private placement, selling an aggregate of 59 units. Each unit cost $60,000 and consisted of 15,000 shares of common stock and warrants to purchase 7,500 shares of common stock (at an exercise price of $5.00 per share). Mr. Chrust purchased two units in this private placement. In December 1997, we entered into a month-to-month consulting agreement with Steven A. Greenberg. The agreement provided for monthly compensation of $15,000 plus reimbursement of reasonable expenses actually incurred. This agreement was terminated in February 2000. During 1997, Mr. Greenberg 37 loaned $77,000 to Worlds Acquisition Corp. on an interest-free basis of which $73,000 was repaid as of December 31, 1998, and the balance was repaid as of June 30, 1999. DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES Section 14A:3-5 of the New Jersey Business Corporation Act, as amended, authorizes us to indemnify any director or officer under certain prescribed circumstances and, subject to certain limitations, against certain costs and expenses, including attorneys' fees actually and reasonably incurred in connection with any action, suit or proceeding, whether civil, criminal, administrative or investigative, to which such person is a party by reason of being one of our directors or officers if it is determined that such person acted in accordance with the applicable standard of conduct set forth in such statutory provisions. At our annual meeting of shareholders on December 15, 1999, our shareholders adopted an amendment to our Certificate of Incorporation which limited the liability of our directors to the fullest extent permitted under the New Jersey Business Corporation Act. Article VI of our By-Laws also provides for indemnification of our directors to the fullest extent permitted under the New Jersey Business Corporation Act. We may also purchase and maintain insurance for the benefit of any director or officer which may cover claims for which we could not indemnify such person. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore unenforceable. DESCRIPTION OF SECURITIES Common Stock We are currently authorized by our Certificate of Incorporation to issue 65,000,000 shares of common stock, par value $.001 per share. The holders of our common stock are entitled to one vote per share on all matters to be voted upon by our shareholders. The holders of common stock do not have cumulative voting rights, which means that the holders of more than 50% of such outstanding shares can elect all of our directors. The holders of our common stock are entitled to receive such dividends, if any, as may be declared from time to time by our Board of Directors out of funds legally available therefor. In the event we are liquidated or dissolved, the holders of our common stock are entitled to receive all assets available for distribution to the shareholders. The holders of common stock have no preemptive or other subscription rights, and there are no conversion rights or redemption or sinking fund provisions with respect to our common stock. All outstanding shares of common stock are, and the shares offered hereby are, validly issued, fully paid and nonassessable. Shares Available for Future Sale A large majority of our outstanding common stock may be deemed "restricted securities," as that term is defined under Rule 144 promulgated under the Securities Act. Such shares may be sold to the public, subject to volume restrictions, as described below. Commencing at various dates, these shares may be sold to 38 the public without any volume limitations. The remaining outstanding shares of common stock are freely tradable. In general, under Rule 144 as currently in effect, subject to the satisfaction of certain other conditions, a person, including one of our affiliates, or persons whose shares are aggregated with affiliates, who has owned restricted shares of common stock beneficially for at least one year is entitled to sell, within any three-month period, a number of shares that does not exceed 1% of the total number of outstanding shares of the same class. In the event our shares are sold on an exchange or are reported on the automated quotation system of a registered securities association, you could sell during any three-month period the greater of such 1% amount or the average weekly trading volume as reported for the four calendar weeks preceding the date on which notice of your sale is filed with the SEC. Sales under Rule 144 are also subject to certain manner of sale provisions, notice requirements and the availability of current public information about us. A person who has not been one of our affiliates for at least the three months immediately preceding the sale and who has beneficially owned shares of common stock for at least two years is entitled to sell such shares under Rule 144 without regard to any of the limitations described above. Transfer Agent Continental Stock Transfer & Trust Company, 2 Broadway, New York, New York 10004, acts as Transfer Agent for our common stock. 39 Market for the Company's Securities Our common stock began trading on the OTC Bulletin Board on October 20, 1998 under the symbol "WLDI." On February 11, 2000, in connection with the change in our name from Worlds Inc. to Worlds.com Inc., our symbol was changed to "WDDD." The following table sets forth, for the periods indicated, the high and low bids for our common stock as reported on the OTC Bulletin Board (representing interdealer quotations, without retail mark-ups, mark-downs or commissions, and may not necessarily represent actual transactions):
Period High($) Low($) ------ ------- ------ Fiscal 2000 Second Quarter* 6.38 1.13 First Quarter 6.88 2.25 Fiscal 1999 Fourth Quarter 4.53 1.81 Third Quarter 5.43 2.31 Second Quarter 6.50 1.31 First Quarter 1.63 0.72 Fiscal 1998 Fourth Quarter 2.00 0.25
* Through May 30, 2000. On June 23, 2000, the last sale price of the common stock as reported on the OTC Bulletin Board was $1.44. Holders As of May 31, 2000, there were more than 550 beneficial owners of our common stock. Dividends We have never paid a dividend on our common stock and do not anticipate paying any dividends in the near future. 40 SELLING SHAREHOLDERS This Prospectus covers: o The sale from time to time of an aggregate of 2,609,500 shares of common stock by the persons indicated in this prospectus. All of these shares were issued by us to them in a private placement in December 1997. o The sale from time to time of an aggregate of 1,235,375 shares of common stock by the persons indicated in this prospectus. All of these shares are shares that would be issued by us to them upon the exercise of options and warrants. o The sale from time to time of an aggregate of 882,500 shares of common stock by the persons indicated in this prospectus. All of these shares were issued by us to them in a private placement in June 1999. o The sale from time to time of an aggregate of 441,250 shares of common stock by the persons indicated in this prospectus. All of these shares are shares that would be issued by us to them upon the exercise of warrants issued in or in connection with the June and August 1999 private placement. o The sale from time to time of 187,500 shares of common stock by the persons indicated in this prospectus. These shares were issued by us in connection with our recent transaction with Freeserve. The following tables set forth relevant information about the selling shareholders: Shares Issued in 1997 Private Placement
- -------------------------------------------------------------------------------------------------------------- Shares Shares Shares Owned Name Held Offered After Sale - -------------------------------------------------------------------------------------------------------------- Ian Barnett 2,700 2,700 0 - -------------------------------------------------------------------------------------------------------------- Jerome Baron 7,200 7,200 0 - -------------------------------------------------------------------------------------------------------------- Barington Capital Group, L.P. 75,500 75,500 0 - -------------------------------------------------------------------------------------------------------------- Bear Stearns Securities Corp. f/b/o Dan Brecher-IRA 6,300 6,300 0 - -------------------------------------------------------------------------------------------------------------- Napier Brown Holdings, Ltd. 120,000 120,000 0 - -------------------------------------------------------------------------------------------------------------- Lawrence Burstein(1) 17,000 17,000 0(8) - -------------------------------------------------------------------------------------------------------------- Cameo Trust Corporation Limited 4,000 4,000 0 - -------------------------------------------------------------------------------------------------------------- Cass & Co. - Magnum U.S. Equity Fund 81,660 81,660 0(8) - -------------------------------------------------------------------------------------------------------------- Cass & Co. - Magnum Capital Growth Fund 40,830 40,830 0(8) - -------------------------------------------------------------------------------------------------------------- Cass & Co. - Magnum Tech Fund 33,010 33,010 0(8) - -------------------------------------------------------------------------------------------------------------- Steven Chrust & Sharon Chrust JTWROS(2) 42,000 42,000 (7) - -------------------------------------------------------------------------------------------------------------- Steven Chrust IRA(2) 60,000 60,000 (7) - -------------------------------------------------------------------------------------------------------------- CML Strategic Investment Fund, Ltd. 20,000 20,000 0 - -------------------------------------------------------------------------------------------------------------- Cowen & Company custodian FBO William Waters IRA 25,000 25,000 0 - -------------------------------------------------------------------------------------------------------------- Dine Investors, L.P. 60,000 60,000 0 - -------------------------------------------------------------------------------------------------------------- Domaco Venture Capital 900 900 0 - -------------------------------------------------------------------------------------------------------------- Heidrun Eckes-- Chantre 195,800 195,800 0 - -------------------------------------------------------------------------------------------------------------- Engel Investors 240,000 240,000 0 - --------------------------------------------------------------------------------------------------------------
41
- -------------------------------------------------------------------------------------------------------------- Shares Shares Shares Owned Name Held Offered After Sale - -------------------------------------------------------------------------------------------------------------- Equity Interest Inc. 900 900 0 - -------------------------------------------------------------------------------------------------------------- Leo I. George 90,000 90,000 0(8) - -------------------------------------------------------------------------------------------------------------- Charles L. & Donna Greenberg(3) 120,000 120,000 0(8) - -------------------------------------------------------------------------------------------------------------- Charles L. Greenberg IRA(3) 120,000 120,000 0(8) - -------------------------------------------------------------------------------------------------------------- DLJSC, Custodian f/b/o Stewart Greisman 20,000 20,000 0 - -------------------------------------------------------------------------------------------------------------- Heptagon Capital Management, Inc. 900 900 0 - -------------------------------------------------------------------------------------------------------------- International Capital Growth, Ltd.(4) 384,000 384,000 0(8) - -------------------------------------------------------------------------------------------------------------- Katarina Kalda 5,000 5,000 0 - -------------------------------------------------------------------------------------------------------------- Ronald Koenig(5) 1,500 1,500 0 - -------------------------------------------------------------------------------------------------------------- Elizabeth G. Konaxis 40,000 40,000 0 - -------------------------------------------------------------------------------------------------------------- Joseph G. and Lillian P. Matulich(6) 8,000 8,000 0 - -------------------------------------------------------------------------------------------------------------- Steven Millner 6,800 6,800 0(8) - -------------------------------------------------------------------------------------------------------------- Robert E. Mullane 120,000 120,000 0 - -------------------------------------------------------------------------------------------------------------- Patricia Bartlett Nemes 30,000 30,000 0(8) - -------------------------------------------------------------------------------------------------------------- Barry Ridings 3,600 3,600 0 - -------------------------------------------------------------------------------------------------------------- Rosebud Capital Growth Fund, Ltd. 103,000 103,000 0 - -------------------------------------------------------------------------------------------------------------- Jonathan Rothschild 900 900 0 - -------------------------------------------------------------------------------------------------------------- S-A Capital LLC 30,000 30,000 0 - -------------------------------------------------------------------------------------------------------------- Murray Slimowitz, IRA 20,000 20,000 0(8) - -------------------------------------------------------------------------------------------------------------- Murray Slimowitz 30,000 30,000 0(8) - -------------------------------------------------------------------------------------------------------------- Chad Spodek Educational Trust 9,000 9,000 0(9) - -------------------------------------------------------------------------------------------------------------- David Spodek Educational Trust 9,000 9,000 0(9) - -------------------------------------------------------------------------------------------------------------- Michael & Marjorie Stern JTWROS 240,000 240,000 0 - -------------------------------------------------------------------------------------------------------------- Peter Stern Family Trust U.A.D. 8/21/90 180,000 180,000 0 - -------------------------------------------------------------------------------------------------------------- Elizabeth Varabiev 5,000 5,000 0 - --------------------------------------------------------------------------------------------------------------
- ---------------- (1) A former director prior to the Mergers. (2) Our Chairman. Does not include 1,000,000 shares underlying currently exercisable warrants held by an entity controlled by Mr. Chrust. (3) Charles L. Greenberg is the brother of Steven Greenberg, our principal stockholder. (4) Placement Agent for the 1997 private offering. (5) Chairman and CEO of International Capital Growth, Ltd. (6) Parents of a Senior Vice President of International Capital Growth, Ltd. (7) Steven Chrust, our Chairman, is deemed to have beneficial ownership of 1,465,939 shares of common stock. Under this prospectus, a total of 1,147,000 of these shares, including the 1,000,000 shares owned by SGC Advisory Services (see Note 3 under the table "Shares Issuable Upon Exercise of Options and Warrants."), will be freely tradeable. If all shares registered under the prospectus were sold, Mr. Chrust would currently have beneficial ownership of 318,939 shares of common stock, not including options to purchase a total of 287,500 shares of common stock which vest in three equal annual installments, commencing in March 2001. 42 (8) Upon sales of all shares being registered under this prospectus. (9) Received as a gift from Steven & Sharon Chrust JTWROS in March 2000. Shares Issuable Upon Exercise of Options and Warrants
- ---------------------------------------------------------------------------------------------------------- Shares Shares Owned Names Shares Held Offered After Sale - ---------------------------------------------------------------------------------------------------------- Lawrence Burstein 50,000(1) 50,000 0(5) - ---------------------------------------------------------------------------------------------------------- John Cattier 86,000(6) 50,000 36,000 - ---------------------------------------------------------------------------------------------------------- International Capital Growth Ltd. 85,375(2) 85,375 0(5) - ---------------------------------------------------------------------------------------------------------- Steven Millner 50,000(1) 50,000 0(5) - ---------------------------------------------------------------------------------------------------------- SGC Advisory Services(3) 1,000,000(4) 1,000,000 0 - ----------------------------------------------------------------------------------------------------------
- --------------------- (1) Represents shares issuable upon exercise of currently exercisable warrants, exercisable at a per-share price of $0.67. (2) Represents shares issuable upon exercise of warrants, exercisable at a per-share price of $1.00. International Capital Growth was the placement agent for our December 1997 private placement. (3) SGC is owned by Mr. Chrust, our Chairman of the Board. (4) Represents shares issuable upon exercise of warrants, exercisable at a per-share price of $0.50. (5) Upon sales of all shares being registered under this prospectus. (6) Includes 50,000 shares issuable upon exercise of currently exercisable warrants, exercisable at a per-share price of $0.67. Mr. Cattier is an affiliate of Heptagon Capital Management. Shares Issued in 1999 Private Placement(1)
- ---------------------------------------------------------------------------------------------------------- Shares Shares Owned Names Shares Held Offered After Sale - ---------------------------------------------------------------------------------------------------------- The Advent Fund L.L.C. 375,438 52,500 322,938 - ---------------------------------------------------------------------------------------------------------- AMPM Enterprises 22,500 22,500 0 - ---------------------------------------------------------------------------------------------------------- Robert Amster(2) 7,500 7,500 0 - ---------------------------------------------------------------------------------------------------------- Shelly Bergman 11,250 11,250 0 - ---------------------------------------------------------------------------------------------------------- Irwin H. Braunstein 22,500 22,500 0 - ---------------------------------------------------------------------------------------------------------- Matias Bullrich 22,500 22,500 0 - ---------------------------------------------------------------------------------------------------------- Camelot Trust Corporation Limited 67,500 67,500 0 - ---------------------------------------------------------------------------------------------------------- James I. Cash 22,500 22,500 0 - ---------------------------------------------------------------------------------------------------------- Steven Chrust(3) 45,000 45,000 (3) - ---------------------------------------------------------------------------------------------------------- David E. Dorman 22,500 22,500 0 - ---------------------------------------------------------------------------------------------------------- Mark Edelstein 22,500 22,500 0 - ---------------------------------------------------------------------------------------------------------- Wayne Eisenbaum 22,500 22,500 0 - ----------------------------------------------------------------------------------------------------------
43
- ---------------------------------------------------------------------------------------------------------- Shares Shares Owned Names Shares Held Offered After Sale - ---------------------------------------------------------------------------------------------------------- Kenneth Frolick 22,500 22,500 0 - ---------------------------------------------------------------------------------------------------------- Janice C. Gale, Trustee f/b/o Ariena J. Galc 22,500 22,500 0 - ---------------------------------------------------------------------------------------------------------- Leo I. George 45,000 45,000 0(7) - ---------------------------------------------------------------------------------------------------------- Giant Trading Co. 67,500 67,500 0(7) - ---------------------------------------------------------------------------------------------------------- GlobalNet Financial Com, Inc. 67,500 67,500 0 - ---------------------------------------------------------------------------------------------------------- Jay Gottlieb 11,250 11,250 0 - ---------------------------------------------------------------------------------------------------------- Graubard Mollen & Miller(4) 11,250 11,250 0 - ---------------------------------------------------------------------------------------------------------- Charles Greenberg(5) & Dana Greenberg 22,500 22,500 0(7) - ---------------------------------------------------------------------------------------------------------- Charles Greenberg(5) & Dana Greenberg 45,000 45,000 0(7) - ---------------------------------------------------------------------------------------------------------- Craig Greenberg 11,250 11,250 0 - ---------------------------------------------------------------------------------------------------------- Fred Greenberg 22,500 22,500 0 - ---------------------------------------------------------------------------------------------------------- Lori Greenberg 11,250 11,250 0 - ---------------------------------------------------------------------------------------------------------- Paul Hochhauser 22,500 22,500 0 - ---------------------------------------------------------------------------------------------------------- Hillswood Holdings Limited 45,000 45,000 0 - ---------------------------------------------------------------------------------------------------------- Ira Holtz 22,500 22,500 0 - ---------------------------------------------------------------------------------------------------------- Peter Hyman 22,500 22,500 0 - ---------------------------------------------------------------------------------------------------------- Herman Kagan 22,500 22,500 0 - ---------------------------------------------------------------------------------------------------------- Ron Kuzon 22,500 22,500 0 - ---------------------------------------------------------------------------------------------------------- James E. Lambert 45,000 45,000 0 - ---------------------------------------------------------------------------------------------------------- The Lawrence Trust 22,500 22,500 0 - ---------------------------------------------------------------------------------------------------------- Cass & Co. - Magnum Capital Growth Fund 22,500 22,500 0(7) - ---------------------------------------------------------------------------------------------------------- Cass & Co. - Magnum Select U.S. Equity Fund 45,000 45,000 0(7) - ---------------------------------------------------------------------------------------------------------- Cass & Co. - Magnum Tech Fund 22,500 22,500 0(7) - ---------------------------------------------------------------------------------------------------------- Stanley Muss 45,000 45,000 0 - ---------------------------------------------------------------------------------------------------------- Needham Capital Group 11,250 11,250 0 - ---------------------------------------------------------------------------------------------------------- Patricia Bartlett Nemes 22,500 22,500 0(7) - ---------------------------------------------------------------------------------------------------------- Christiane Olsen 22,500 22,500 0 - ---------------------------------------------------------------------------------------------------------- Harold Rothstein 22,500 22,500 0 - ---------------------------------------------------------------------------------------------------------- Rush & Co. 22,500 22,500 0 - ---------------------------------------------------------------------------------------------------------- Lawrence Siebert 20,250 20,250 0 - ---------------------------------------------------------------------------------------------------------- Murray Slimowitz 22,500 22,500 0(7) - ---------------------------------------------------------------------------------------------------------- Joseph Stansky 11,250 11,250 0 - ---------------------------------------------------------------------------------------------------------- Gary Tobin(6) 11,250 11,250 0 - ---------------------------------------------------------------------------------------------------------- Summit Bank Trustee 22,500 22,500 0 - ---------------------------------------------------------------------------------------------------------- Summit Bank Trustee 22,500 22,500 0 - ---------------------------------------------------------------------------------------------------------- Swiss American 22,500 22,500 0 - ---------------------------------------------------------------------------------------------------------- Wel Partners 11,250 11,250 0 - ---------------------------------------------------------------------------------------------------------- Raphael Wizman 22,500 22,500 0 - ----------------------------------------------------------------------------------------------------------
- ------------------- (1) Each person set forth above purchased units or a fraction of a unit in our June 1999 private placement. Each unit consisted of 15,000 shares of common stock and warrants to purchase 7,500 shares of common stock. The number of shares set forth in the above table represents both shares of common stock and shares issuable upon exercise of warrants. 44 (2) Issued in consideration of certain consulting services. (3) See Note 7 under the table "Shares Issued in 1997 Private Placement." (4) Issued in consideration of certain legal services. (5) Brother of Steven A. Greenberg, our principal shareholder. (6) Issued in consideration of certain public relations services. (7) Upon sales of all shares being registered in this prospectus. (8) Receive as gift from Steven and Sharon Chrust, JTWROS in March 2000. PLAN OF DISTRIBUTION The sale of the shares of common stock by the selling shareholders may be effected by them from time to time in the over-the-counter market or in such other public forum where our shares are publicly traded or listed for quotation. These sales may be made in negotiated transactions through the timing of options on the shares, or through a combination of such methods of sale, at fixed prices, which may be charged at market prices prevailing at the time of sale, at prices related to such prevailing market prices or at negotiated prices. The selling shareholders may effect such transactions by selling the shares to or through broker-dealers, and such broker-dealers may receive compensation in the form of discounts, concessions or commissions from the selling shareholders and/or the purchasers of the shares for which such broker-dealer may act as agent or to whom they sell as principal, or both. The compensation as to a particular broker-dealer may be in excess of customary compensation. The selling shareholders and any broker-dealers who act in connection with the sale of the shares hereunder may be deemed to be underwriters within the meaning of Section 2(11) of the Securities Act, and any commissions received by them and any profit on any sale of the shares as principal might be deemed to be underwriting discounts and commissions under the Securities Act. Other than the costs of preparing this prospectus and a registration fee to the SEC, we are not paying any costs relating to the sales by the selling shareholders. Each of the selling shareholders, or their transferees, and intermediaries to whom such securities may be sold may be deemed to be an "underwriter" of the common stock offered hereby, as that term is defined under the Securities Act. Each of the selling shareholders, or their transferees, may sell these shares from time to time for his own account in the open market at the prices prevailing therein, or in individually negotiated transactions at such prices as may be agreed upon. The net proceeds from the sale of these shares by the selling shareholders will inure entirely to their benefit and not to ours. Except as indicated under "Selling Shareholders" above, none of the selling shareholders has held any position or office, or had any material relationship with us or any of our predecessors or affiliates within the last three years, and none will own any of our outstanding common stock after completion of the offering of such shares. The shares 45 reflected by each selling shareholder is based upon information provided to us by our transfer agent and from other available sources. These shares may be offered for sale from time to time in regular brokerage transactions in the over-the-counter market, or, either directly or through brokers or to dealers, or in private sales or negotiated transactions, or otherwise, at prices related to the then prevailing market prices. Thus, they may be required to deliver a current prospectus in connection with the offer or sale of their shares. In the absence of a current prospectus, if required, these shares may not be sold publicly without restriction unless held for two years, or after one year subject to volume limitations and satisfaction of other conditions. The selling shareholders have been advised that Rules 10b-6 and 10b-7 of the General Rules and Regulations promulgated under the Securities Exchange Act of 1934 will be applicable to their sales of these shares. These rules contain various prohibitions against trading by persons interested in a distribution and against so-called "stabilization" activities. The selling shareholders, or their transferees, might be deemed to be "underwriters" within the meaning of Section 2(11) of the Act and any profit on the resale of these shares as principal might be deemed to be underwriting discounts and commissions under the Act. Any sale of these shares by selling shareholders, or their transferees, through broker-dealers may cause the broker-dealers to be considered as participating in a distribution and subject to Rule 10b-6 promulgated under the Securities Exchange Act of 1934, as amended. If any such transaction were a "distribution" for purposes of Rule 10b-6, then such broker-dealers might be required to cease making a market in our equity securities for either two or nine trading days prior to, and until the completion of, such activity. LEGAL MATTERS Certain legal matters in connection with this offering are being passed upon by the law firm of Graubard Mollen & Miller, New York, New York. Partners of the firm may be deemed to own our Common Stock. EXPERTS Our audited financial statements as of December 31, 1999 and 1998 and for the fiscal years then ended are included herein and in the registration statement in reliance upon the reports of BDO Seidman, LLP, independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. Such reports contain an explanatory paragraph regarding the Company's ability to continue as a going concern. 46 CONTENTS PAGE - -------- ---- UNAUDITED FINANCIAL STATEMENTS (AS OF MARCH 31, 2000) Balance sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2 Statement of operations . . . . . . . . . . . . . . . . . . . . . . . F-3 Statement of stockholders' deficit . . . . . . . . . . . . . . . . . F-4 Statement of cash flows. . . . . . . . . . . . . . . . . . . . . . . F-5 Notes to financial statements. . . . . . . . . . . . . . . . . . . . F-6-7 AUDITED FINANCIAL STATEMENTS (PERIOD FROM APRIL 8, 1997 (INCEPTION) TO DECEMBER 31, 1999) Worlds Inc. (The "Company") Report of Independent Certified Public Accountants. . . . . . . . . . . . . . F-8 FINANCIAL STATEMENTS: Balance sheets. . . . . . . . . . . . . . . . . . . . . . . . . . . . F-9 Statement of operations . . . . . . . . . . . . . . . . . . . . . . . F-10 Statement of stockholders' deficit. . . . . . . . . . . . . . . . . . F-11 Statement of cash flows . . . . . . . . . . . . . . . . . . . . . . . F-12 Summary of accounting policies . . . . . . . . . . . . . . . . . . . F-13-17 Notes to financial statements . . . . . . . . . . . . . . . . . . . . F-18-33 F-1 Worlds.com, Inc. BALANCE SHEET March 31, 2000 (unaudited) ASSETS CURRENT ASSETS Cash and cash equivalents $ 2,707,163 Private placement proceeds receivable 1,255,373 Accounts receivable 136,706 Prepaid expenses and other current assets 64,941 Inventories 259,146 ------------- Total current assets 4,423,329 PROPERTY, EQUIPMENT AND SOFTWARE DEVELOPMENT, NET OF ACCUMULATED DEPRECIATION AND AMORTIZATION 1,243,502 INTANGIBLE ASSET 944,334 ------------- $ 6,611,165 LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES Accounts payable $ 755,473 Accrued expenses 744,900 Deferred revenue 519,936 Current maturities of notes payable 2,064,995 ------------ Total current liabilities 4,085,304 LONG-TERM PORTION, NOTES PAYABLE 56,671 ------------ Total liabilities 4,141,975 COMMITMENTS STOCKHOLDERS' EQUITY (DEFICIT) Common stock, $.001 par value - authorized, 65,000,000 shares; issued, 18,930,128 shares 18,929 Additional paid-in capital 17,133,408 Accumulated deficit (14,683,147) ----------- 2,469,190 ------------ $ 6,611,165 ============= The accompanying notes are an integral part of this statement. F-2 Worlds.com, Inc. STATEMENTS OF OPERATIONS Three months ended March 31, (unaudited) 1999 2000 ---------- ---------- Net revenues $ 35,177 $ 180,023 Costs and expenses Cost of revenues 21,464 69,951 Selling, general and administrative 615,815 2,091,689 --------- ---------- Operating loss (602,102) (1,981,617) -------- ---------- Other income (expense) Interest income 12,786 15,751 Interest expense (38,922) (42,629) --------- ------------ NET LOSS $(628,238) $(2,008,495) ======== ========== Loss per share (basic and diluted) $(.04) $(.11) ==== ==== Weighted average common shares outstanding Basic and diluted 17,918,531 17,776,845 ========== ========== The accompanying notes are an integral part of these statements. F-3 Worlds.com, Inc. STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) Period from December 31, 1998 to March 31, 2000 (unaudited) Deficit accumulated Total Common stock Additional during the stockholders ------------------------- paid-in development Treasury equity Shares Amount capital stage stock (deficit) ----------- ------------ ------------- ------------ ------------------------ Balance, December 31, 1998 18,031,996 $18,032 $ 8,401,970 $ (9,335,152) $(64,743) $ (979,893) Issuance of warrants for consulting services (April 1999) 465,000 465,000 Contribution of 1,500,000 shares by founders to treasury (April 1999) and subsequent cancellation (1,500,000) (1,500) 1,500 Exercise of stock options (April 1999) 75,000 75 74,925 75,000 Issuance of shares for content supply agreement (June 1999) 93,750 93 374,907 375,000 Issuance of shares to agent for content supply agreement (July 1999) 50,000 50 199,950 200,000 Sale of shares in private offering memorandum, net (June through September 1999) 892,500 893 3,263,081 3,263,974 Issuance of options for consulting services and software development costs (August and September 1999) 368,230 368,230 Issuance of shares for legal and consulting services (September 1999) 20,000 20 79,980 80,000 Cancellation of treasury shares (September 1999) (113,465) (113) (64,630) 64,743 Exercise of warrants (November 1999) 95,000 95 94,905 95,000 Issuance of shares for content supply agreement (December 1999) 93,750 93 374,907 375,000 Net loss for the year ended December 31, 1999 (3,339,500) (3,339,500) --------------- -------- ----------- ---------- --------- ----------- Balance, December 31, 1999 17,738,531 17,738 13,634,725 (12,674,652) - 977,811 Exercise of stock options (March 2000) 215,000 215 135,285 135,500 Sale of shares in private offering memorandum, net (March 2000) 976,597 976 3,242,981 3,243,957 Issuance of stock options for consulting and advertising services 120,417 120,417 (March 2000) Net loss for the three months ended March 31, 2000 (2,008,495) (2,008,495) --------------- -------- ----------- ---------- --------- ----------- Balance, March 31, 2000 18,930,128 $18,929 $17,133,408 $(14,683,147) $ - $ 2,469,190 =============== ======== =========== ============= ========== ===========
The accompanying notes are an integral part of this statement. F-4 Worlds.com, Inc. STATEMENTS OF CASH FLOWS Three months ended March 31, (unaudited) 1999 2000 ------------ -------- Cash flows from operating activities Net loss $ (628,238) $(2,008,495) Adjustments to reconcile net loss to net cash used in operating activities Depreciation and amortization 50,000 337,100 Consulting and advertising expense related to the issuance of stock options 120,417 Changes in operating assets and liabilities Private placement proceeds receivable (1,255,373) Accounts receivable 40,509 Inventories 21,464 (37,635) Prepaid expenses and other current assets 27,353 9,729 Accounts payable and accrued expenses 56,078 318,893 Deferred revenue 19,936 ------------ ------------ Net cash used in operating activities (473,343) (2,454,919) ------------ ---------- Cash flows from investing activities Acquisition of property and equipment (38,555) Additions to software development costs (214,000) ----------- Net cash used in investing activities (214,000) (38,555) ------------ ------------ Cash flows from financing activities Proceeds from sale of common stock in private offering memorandum 3,243,957 Proceeds from exercise of options 135,500 ------------ ----------- Net cash provided by financing activities 3,379,457 ----------- ---------- Net increase (decrease) in cash and cash equivalents (687,343) 885,983 Cash and cash equivalents, beginning of period 1,581,764 1,821,180 ----------- ---------- Cash and cash equivalents, end of period $ 894,421 $ 2,707,163 =========== =========== Supplemental disclosures of cash flow information: Cash paid during the year for Interest $ - $ - Income taxes - -
Noncash investing and financing activities: Issuance of an option to purchase 73,245 shares of common stock at $3.87 per share to the placement agent in connection with the private placement in March 2000. Issuance of stock options for consulting and advertising services of $120,417 in the period ended March 31, 2000. The accompanying notes are an integral part of these statements. F-5 Worlds.com, Inc. NOTES TO FINANCIAL STATEMENTS March 31, 2000 and 1999 NOTE 1 - SUMMARY OF ACCOUNTING POLICIES Nature of Business The Company designs, develops and markets three-dimensional ("3D") music-oriented Internet sites on the World Wide Web. These web sites utilize 3D technologies. The Company also sells music and sports-related merchandise through its website. Basis of Presentation The accompanying financial statements are unaudited; however, in the opinion of management, all adjustments necessary for a fair statement of financial position and results for the stated periods have been included. These adjustments are of a normal recurring nature. Selected information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. Results for interim periods are not necessarily indicative of the results to be expected for an entire fiscal year. These condensed financial statements should be read in conjunction with the audited financial statements and accompanying notes for the Company for the year ended December 31, 1999. In prior years, the Company was classified as a development stage enterprise. Software Development Costs In accordance with the provisions of Statement of Financial Accounting Standards No.86, "Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed," software development costs incurred by the Company subsequent to establishing technological feasibility of the resulting product or enhancement and until the product is available for general release to customers are capitalized and carried at the lower of unamortized cost or net realizable value. Net realizable value is determined based on estimates of future revenues to be derived from the sale of the software product reduced by the costs of completion and disposing of the product. $214,000 was capitalized and included in property, equipment and software development during the period ended March 31, 1999. No costs were capitalized in the first quarter of 2000. Amortization of the costs capitalized commenced in the first quarter of 1999, based on current and anticipated future revenues for each product or enhancement with an annual minimum equal to straight-line amortization over the remaining estimated economic life of the product or enhancement. All software development costs are being amortized over a period of three years. Amortization expense charged to operations for the periods ended March 31, 1999 and 2000 was $14,000 and $113,000, respectively. F-6 Worlds.com, Inc. NOTES TO FINANCIAL STATEMENTS (continued) March 31, 2000 and 1999 NOTE 1 (continued) Loss Per Share Basic and diluted loss per share is calculated by dividing the net loss by the weighted average number of shares of common stock outstanding during each period. The common stock equivalents, which would arise from the exercise of stock options and warrants, are excluded from calculation of diluted loss per share since their effect is antidilutive. Therefore, the amounts reported for basic and diluted loss per share are the same. Stock-Based Compensation In the first quarter of 2000, the Company granted options to purchase an aggregate of 1,028,500 shares of common stock to directors, officers and employees of, and certain consultants to the Company at exercise prices ranging from $3.00 to $9.00. In connection with options issued to nonemployees, the Company recorded consulting and advertising expense of approximately $120,000 for the fair market value of the options using the Black-Scholes calculation. NOTE 2 - GOING CONCERN As discussed in Note 3, the Company completed a private placement during the first quarter of 2000, raising net proceeds of $3,243,957. In April of 2000, the Company raised an additional $500,000 through another private placement of 142,045 shares of common stock. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. Since its inception, the Company has had minimal revenues from operations. There can be no assurance that the Company will be able to obtain the substantial additional capital resources necessary to pursue its business plan or that any assumptions relating to its business plan will prove to be accurate. The Company is pursuing sources of additional financing and there can be no assurance that any such financing will be available to the Company on commercially reasonable terms, or at all. Any inability to obtain additional financing will have a material adverse effect on the Company, including possibly requiring the Company to significantly curtail or cease operations. These factors raise doubt about the ability of the Company to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. NOTE 3 - PRIVATE PLACEMENT On March 31, 2000, the Company sold 976,597 shares of common stock through a private placement. In connection with the Private Placement, the placement agent received an option to purchase 73,245 shares of the Company's common stock at $3.87 per share for five years. Cumulative net proceeds, after commissions and expenses of the offering, aggregated $3,243,957. F-7 Report of Independent Certified Public Accountants Worlds.com Inc. Boston, Massachusetts We have audited the accompanying balance sheets of Worlds.com Inc. (the "Company") (a development stage enterprise) as of December 31, 1998 and 1999, and the related statements of operations, stockholders' equity (deficit) and cash flows for the period from April 8, 1997 (inception) to December 31, 1997 and for the years ended December 31, 1998 and 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Worlds.com Inc. at December 31, 1998 and 1999, and the results of it operations and its cash flows for the period from April 8, 1997 (inception) to December 31, 1997 and for the years ended December 31, 1998 and 1999, in conformity with generally accepted accounting principles. As discussed in Note 1, the accompanying financial statements have been prepared assuming Worlds.com Inc. will continue as a going concern. The Company is in the development stage and has incurred losses since its inception, has a working capital deficiency, has had minimal revenues from operations and will require substantial additional funds for development and marketing of its products. These matters raise substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. BDO Seidman, LLP New York, New York March 10, 2000 F-8 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-9 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-10 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) ----------------------------------------------------------------------- -------------- -------------- -------------- ------------- 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-11 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-12 Worlds.com Inc. (a development stage enterprise) Summary of Accounting Policies - -------------------------------------------------------------------------------- Definitions The Company is the resulting entity of two contemporaneous mergers (the "Mergers") of Worlds Inc., a Delaware corporation ("Predecessor"), with and into Worlds Acquisition Corp., a Delaware corporation ("WAC"), and WAC with and into Academic Computer Systems, Inc., a New Jersey corporation ("Academic"), which changed its name to Worlds.com Inc. While Academic was the legal entity that survived the Mergers, WAC was the accounting acquiror in both Mergers. The Company's fiscal year-end is December 31. The term the "Company," as used herein, refers to the consolidated entity resulting from the two contemporaneous Mergers, as well the pre-merger Predecessor, WAC and Academic; however, Predecessor, WAC and Academic are hereinafter sometimes referred to separately as the context requires. Nature of Business WAC was incorporated on April 8, 1997 to design, develop and market three-dimensional ("3D") music oriented Internet sites on the World Wide Web. These web sites utilize 3D technologies developed by Predecessor. The Company also sells music and sports related merchandise through its website. Revenue Recognition Revenue from technology development and licensing contracts is recognized upon the attainment of contractual milestones (approximating the percentage-of-completion method). Deferred revenue represents cash received in advance to be offset against royalties to be earned. Basis of Presentation The financial statements include the results of operations of Predecessor and Academic from December 3, 1997, the date of the Mergers (the "Merger Date"). The financial statements have been prepared in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 7, "Accounting and Reporting by Development Stage Enterprises," which requires development stage enterprises to employ the same accounting principles as operating companies. F-13 Worlds.com Inc. (a development stage enterprise) Summary of Accounting Policies - -------------------------------------------------------------------------------- Fair Value of Financial The carrying amounts of financial instruments, Instruments including cash and short-term debt, approximated fair value as of December 31, 1999 because of the relatively short maturity of the instruments. The carrying value of long-term debt, including the current portion, approximates fair value as of December 31, 1999, based upon quoted market prices for similar debt issues. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Cash and Cash Cash and cash equivalents are comprised of highly Equivalents liquid money market instruments, which have original maturities of three months or less at the time of purchase. Property and Equipment Property and equipment and intangible assets are stated and Intangible Assets at cost. Depreciation and amortization are calculated using the straight-line method over the estimated useful lives of the assets, which range from two to five years. Inventory Inventories consist of merchandise held for resale and are valued at the lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method. F-14 Worlds.com Inc. (a development stage enterprise) Summary of Accounting Policies - -------------------------------------------------------------------------------- Software Development In accordance with the provisions of SFAS No. 86, Costs "Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed", software development costs incurred by the Company subsequent to establishing technological feasibility of the resulting product or enhancement and until the product is available for general release to customers are capitalized and carried at the lower of unamortized cost or net realizable value. Net realizable value is determined based on estimates of future revenues to be derived from the sale of the software product reduced by the costs of completion and disposing of the product. During the fourth quarter of 1998 technological feasibility of the company's software was established. In this regard $160,000 and $1,193,190 (aggregating $1,353,190), were capitalized and included in property, equipment and software development as of December 31, 1998 and 1999, respectively. Amortization of the costs capitalized commenced in the first quarter of 1999, based on current and anticipated future revenues for each product or enhancement with an annual minimum equal to straight-line amortization over the remaining estimated economic life of the product or enhancement. All software development costs are being amortized over a period of three years. Amortization expense charged to operations for the year ended December 31, 1999 was $151,890. Research and Research and development costs are expensed as Development Costs incurred. Income Taxes The Company uses the liability method of accounting for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes." Deferred income tax assets and liabilities are recognized based on the temporary differences between the financial statement and income tax bases of assets, liabilities and carryforwards using enacted tax rates. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. F-15 Worlds.com Inc. (a development stage enterprise) Summary of Accounting Policies - -------------------------------------------------------------------------------- Loss Per Share The Company has adopted SFAS No. 128, "Earnings per Share," which provides for the calculation of "basic" and "diluted" earnings/loss per share. Basic earnings/loss per share includes no dilution and is computed by dividing income/loss available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings/loss per share reflect, in periods in which they have a dilutive effect, the effect of common shares issuable upon exercise of stock options and warrants. The common stock equivalents which would arise from the exercise of stock options and warrants are excluded from calculation of diluted loss per share since their effect is anti-dilutive. Therefore, the amounts reported for basic and diluted loss per share are the same. Stock-Based In October 1995, the FASB issued SFAS No. 123, Compensation "Accounting for Stock-Based Compensation" ("SFAS No. 123"). SFAS No. 123 encourages entities to adopt the fair value method in place of the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"), for all arrangements under which employees receive shares of stock or other equity instruments of the employer or the employer incurs liabilities to employees in amounts based on the price of its stock. The Company has not adopted the fair value method encouraged by SFAS No. 123 and will continue to account for such transactions in accordance with APB No. 25. Comprehensive Income Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income", which establishes standards for reporting and display of comprehensive income, its components and accumulated balances. Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Adoption of the standard has had no effect on financial statement disclosures since there were no items of comprehensive income during the periods presented. F-16 Worlds.com Inc. (a development stage enterprise) Summary of Accounting Policies - -------------------------------------------------------------------------------- Recent Accounting In June 1998, the Financial Accounting Standards Board Pronouncements issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities," which requires entities to recognize all derivative financial instruments as either assets or liabilities in the balance sheet and measure these instruments at fair value. SFAS No. 133, as amended by SFAS No. 137, is effective for all fiscal years beginning after June 15, 2000. The Company does not presently enter into any transactions involving derivative financial instruments and, accordingly, does not anticipate that the new standard will have any effect on its financial statements. F-17 Worlds.com Inc. (a development stage enterprise) Notes to Financial Statements - -------------------------------------------------------------------------------- 1. Going Concern As discussed in Notes 2 and 3, the Company completed a private placement during the fourth quarter of 1997 raising gross proceeds of $4,415,000, consummated a merger agreement during December 1997 with a development stage enterprise, Predecessor, completed a public offering in June 1998 raising gross proceeds of $1,832,000, and completed a private placement during the third quarter of 1999, raising gross proceeds of $3,540,000. Predecessor had not generated significant revenues from operations and had an accumulated deficit from inception to the Merger Date of $21,236,139 and a capital deficit of $4,135,538. The acquisition of Predecessor by the Company was accounted for as a purchase. Accordingly, $6,135,538, the portion of the purchase allocable to in-process research and development projects that had not reached technological feasibility and had no probable alternative future uses, was expensed by the Company at the date of merger. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company is in the development stage, has incurred significant losses since its inception, and has had minimal revenues from operations since the series of merger transactions. There can be no assurance that the Company will be able to obtain the substantial additional capital resources necessary to pursue its business plan or that any assumptions relating to its business plan will prove to be accurate. The Company is pursuing sources of additional financing and there can be no assurance that any such financing will be available to the Company on commercially reasonable terms, or at all. Any inability to obtain additional financing will have a material adverse effect on the Company, including possibly requiring the Company to significantly curtail or cease operations. These factors raise substantial doubt about the ability of the Company to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. F-18 Worlds.com Inc. (a development stage enterprise) Notes to Financial Statements - -------------------------------------------------------------------------------- 2. The Mergers On December 3, 1997, Predecessor was merged with and into WAC in a series of related transactions which included a simultaneous capital transaction between the Company and Academic (the "Mergers") and a private offering of WAC's securities (the "Private Placement"). In both the merger with Predecessor and the capital transaction with Academic, WAC was the acquiror for accounting purposes. The acquisition of Predecessor was accounted for as a purchase whereby all of the common and preferred stock of Predecessor were exchanged for 1,999,996 shares of WAC. The shares issued to Predecessor common and preferred shareholders were valued at $1.00 per share which represented the share value in the private placement that occurred during this time period (see Note 3); a purchase price of approximately $2,000,000. The exchange ratio was determined after extensive negotiation between management of Predecessor and WAC. Predecessor was a development stage company, had not generated significant revenues from operations and had an accumulated deficit from inception to December 3, 1997 of $21,236,139 and a capital deficit of $4,135,538. The assets acquired of Predecessor (cash, prepaid expenses, property and equipment) were recorded at fair market value which approximated book value at December 3, 1997, and, as discussed in Note 1 above, since technological feasibility of the various Predecessor technologies acquired had not been established, the excess purchase price over Predecessor's capital deficit of $6,135,538 was expensed as acquired research and development. Academic was an inactive company with no operations. The value assigned to the 910,000 shares in the capital transaction with Academic on December 3, 1997 represented Academic's net tangible assets (primarily cash) of $558,026. During June 1998, 113,465 shares of common stock were converted at $0.57 per share ($64,743) as a result of certain stockholders dissenting with respect to the Academic/WAC capital transaction of December 3, 1997. Such reacquired shares have been classified as treasury and were cancelled during the third quarter of 1999. F-19 Worlds.com Inc. (a development stage enterprise) Notes to Financial Statements - -------------------------------------------------------------------------------- 3. Private Placement The Private Placement discussed in Note 2 called for and Public WAC to offer for sale a maximum of 50 units (57-1/2 Offering with the over-allotment), each consisting of 120,000 shares of WAC's common stock (the "Units") at a price of $120,000 per Unit. In connection with the Private Placement, the placement agent was to receive one warrant to purchase one share of WAC's common stock at $1 per share for every $40 of gross proceeds from the sale of the Units. On November 21, 1997, WAC sold 31.67 Units with gross proceeds of $3,800,000 (3,800,000 shares) (the "Initial Private Placement Closing") and the placement agent was issued 425,000 shares of common stock. On December 31, 1997, the Company sold 4.88 Units with gross proceeds of $585,000 (585,000 shares). On January 2, 1998 a further 30,000 shares were issued with gross proceeds of $30,000. Cumulative net proceeds, after commissions and expenses of the offering, aggregated $3,721,176. WAC agreed to include the shares of common stock underlying the Units sold in the Private Placement (the "Private Placement Shares") in a registration statement to be filed with the Securities and Exchange Commission (the "SEC"). Such registration statement was declared effective on May 1, 1998. During June 1998, WAC sold 1,832,000 shares in a public offering of its stock and received gross proceeds of $1,832,000. Net proceeds, after commissions of this offering, aggregated $1,715,800. During the second and third quarters of 1999, the Company sold 892,500 shares in a private offering and received gross proceeds of $3,540,000. In connection with the private offering, the Company issued warrants to purchase 452,500 shares of common stock at $5.00 per share to the investors in the offering. Broker-dealers assisting the Company in the sale of its securities were issued warrants to purchase 48,000 shares of common stock of the Company at $5.00 per share. Net proceeds, after commissions and expenses of this offering, aggregated $3,263,974. F-20 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-21 Worlds.com Inc. (a development stage enterprise) Notes to Financial Statements - -------------------------------------------------------------------------------- 6. Intangible Asset During June 1999, the Company entered into a content supply agreement for 2D and 3D internet sites offered by an Internet service provider (the "Provider"). The agreement provides for advertising revenue sharing and an e-commerce link to the Company's website which markets music and sports related merchandise.Under the terms of the agreement, the Company paid $125,000 and issued 93,750 shares of common stock upon signing. The brokerage agent of such agreement was issued 50,000 shares of common stock during July 1999 ($200,000). Further, 93,750 shares were issued upon launch of the sites during November 1999 and $125,000, which was accrued at December 31, 1999, was paid during February 2000. The total consideration of $1,200,000 is recorded as an intangible asset and is being amortized on a straight-line basis (commencing in the fourth quarter of 1999) over the initial term of the agreement, which expires June 2001. Accumulated amortization at December 31, 1999 was $66,666. F-22 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-23 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-24 Worlds.com Inc. (a development stage enterprise) Notes to Financial Statements - -------------------------------------------------------------------------------- (c) On March 23, 1999, the Company entered into a three-year financial advisory and consulting agreement (that became effective during April 1999) with a consulting firm controlled by the Company's Chairman that provides for an annual fee of $120,000, escalating to $300,000 annually if the Company raises $5 million in cash and the market value of the Company's issued and outstanding common stock is no less than $100 million. In addition, the Company granted warrants to such firm to purchase 1,000,000 shares of common stock at $.50 per share. Such warrants were valued at $465,000 and charged to selling, general and administrative expenses in the quarter ended June 30, 1999. The warrants are exercisable through April 13, 2006 and contain anti-dilution provisions and both "demand" and "piggy-back" registration rights. Further, in connection with the above consulting agreement, three founding stockholders of WAC contributed 1,500,000 shares to the capital of the Company. Such shares had been classified as treasury stock and were cancelled during the third quarter of 1999. (d) On December 15, 1999, the Company entered into an additional content supply agreement to provide two customized websites with the Company's 3D technology. Under the terms of the agreement the Company received $500,000 upon signing, which is included in deferred revenue at December 31, 1999. The Company will be entitled to an additional payment of $250,000 upon delivery of the first website. On December 31, 1999, the Company entered into an additional content supply agreement to provide a customized website with the Company's 3D technology. Under the terms of the agreement the Company received $20,000 upon execution of the agreement during January 2000. The above agreements provide for the Company to receive royalty revenue from advertising placements and subscriptions with respect to customized websites. F-25 Worlds.com Inc. (a development stage enterprise) Notes to Financial Statements - -------------------------------------------------------------------------------- 9. Stockholders' Equity (Deficit) Stock Option Plan During September 1997, the Board of Directors and stockholders of the Company adopted a stock option plan (the "Option Plan") as an incentive for, and to encourage share ownership by, the Company's officers, directors and other key employees and/or consultants and potential management of possible future acquired companies. The Option Plan provides that options to purchase a maximum of 3,000,000 shares of common stock (subject to adjustment in certain circumstances) may be granted under the Option Plan. The Option Plan also allows for the granting of stock appreciation rights ("SAR's") in tandem with, or independent of, stock options. Any SAR's granted will not be counted against the 3,000,000 limit. The Company applies APB Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and related Interpretations in accounting for the Option Plan. Under APB 25, no compensation cost was recognized because the exercise price of Worlds' employee stock options equaled the market price of the underlying stock on the date of grant. FASB Statement No. 123, "Accounting for Stock-Based Compensation", requires the Company to provide pro forma information regarding net loss as if compensation cost for the Company's stock option plans had been determined in accordance with the fair value based method prescribed in FASB Statement No. 123. The Company estimates the fair value of each stock option at the grant date by using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1998 and 1999, no dividend yield; expected volatility of 46.1% in 1998 and 45.8% in 1999; risk-free interest rate of 4.3% in 1998 and 5.8% in 1999; and expected life of 3.8 years. F-26 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-27 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-28 Worlds.com Inc. (a development stage enterprise) Notes to Financial Statements - -------------------------------------------------------------------------------- Non-Plan Stock Options and Warrants The Company has issued options and warrants to various employees, directors and other third parties that were not part of the Company's Option Plan. The following non-plan options and warrants were issued during 1999: a) Warrants to purchase 300,000 shares of common stock of the Company at $2.46 per share were issued to a consultant in connection with services rendered for the development of the Company's proprietary software (see Note 1). The warrants were valued at $355,004 and were capitalized as software development costs. b) Options to purchase an aggregate of 750,000 shares of common stock of the Company at various prices between $2.91 and $10.00 per share were issued to two employees and a director of the Company. c) Warrants to purchase an aggregate of 500,500 shares of common stock of the Company at $5.00 per share were issued in connection with a private offering (see Note 3). d) Warrants to purchase 1,000,000 shares of common stock at $.50 per share were issued in connection with a financial advisory and consulting agreement (see Note 8(c)). F-29 Worlds.com Inc. (a development stage enterprise) Notes to Financial Statements - -------------------------------------------------------------------------------- 10. Income Taxes The use of the Predecessor's net operating loss ("NOL") is subject to annual limits due to the ownership change for the Mergers. In general, an ownership change occurs if, during any three-year test period, the aggregate of all increases in percentage ownership by stockholders is more than 50%. Upon completion of the Mergers discussed in Note 2, such an ownership change occurred. At December 31, 1999, after accounting for the estimated limitation of the Predecessor's NOL carryforward (approximately $100,000 per year over 15 years), the Company has a NOL aggregating approximately $9,300,000 to be used to offset future Federal income taxes. A deferred income tax asset for the Company's NOL has been completely offset by a valuation allowance due to the uncertainty of its realization. 11. Extraordinary During 1997, the Company negotiated settlement of Item certain trade payables assumed in the Merger with Predecessor. Such payables which amounted to $193,501 were reduced to $67,725 resulting in a gain on debt forgiveness of $125,776. During 1998, additional trade payables amounting to $172,547 were forgiven resulting in a total gain on debt forgiveness since inception of $298,323. 12. Gain Resulting During December 1998, management determined that certain from Reversal predecessor liabilities assumed at the date of the Merger of Certain with Predecessor were no longer owed. During the fourth Predecessor quarter of 1998, accounts payable ($220,000), accrued Liabilities expenses ($154,000) and advanced customer billings ($436,140), which aggregated $810,140, were reversed and accounted for as other income in the accompanying statement of operations for the year ended December 31, 1998. F-30 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-31 Worlds.com Inc. (a development stage enterprise) Notes to Financial Statements - -------------------------------------------------------------------------------- For additional disclosure regarding stock options, warrants and convertible debt, see Notes 3, 7, 8 and 9, respectively. Options to purchase 50,000 shares of common stock at $5 per share were outstanding during 1997 and 1998, and options to purchase 1,125,000 shares of common stock, at various prices, were outstanding during 1999. These shares were not included in the computation of diluted loss per share because the option exercise prices were greater than the fair value of common shares and, therefore, the effect would be anti-dilutive. 14. Supplemental 1) Interest paid was approximately $1,600, $1,000 and $575 Cash Flow for the period ended December 31, 1997 and the years Information ended December 31, 1998 and 1999, respectively. 2) Noncash investing and financing activities during the period ended December 31, 1997 were as follows: (a) As discussed in Note 2, WAC exchanged all of the outstanding common and preferred stock of the Predecessor in exchange for 1,999,996 shares of WAC. Also, Academic exchanged all of their outstanding common and preferred stock for 910,000 shares of WAC and WAC was merged into Academic. (b) The Company recognized a gain of $221,000 from forgiveness of debt to shareholders of Predecessor that was recorded as a capital contribution (see Note 7). (c) The Company converted accounts payable of $250,000 into a note payable (see Note 7). F-32 Worlds.com Inc. (a development stage enterprise) Notes to Financial Statements - -------------------------------------------------------------------------------- 3) Noncash investing and financing activities during the year ended December 31, 1999 were as follows: (a) During 1999, the Company issued 237,500 shares (valued at $950,000) with respect to a content supply agreement and incurred $125,000 in accounts payable related to such agreement that was paid in February 2000 (see Note 6). (b) During 1999, the Company issued 300,000 warrants to purchase common stock in the Company as consideration for services rendered in connection with the development of the Company's proprietary software. The warrants were valued at $355,004. F-33 =================== =================== You should only rely on the information contained in this document or other information that we refer you to. We have not authorized anyone to provide you with any other information that is different. You should note that even though you WORLDS.COM INC. received a copy of this prospectus, there may have been changes in our affairs since the date of this prospectus. This prospectus does not constitute an offer to sell securities 5,356,125 shares of Common Stock in any jurisdiction in which such offer or solicitation is not authorized. TABLE OF CONTENTS PAGE Where You Can Find More Information.................3 ---- Prospectus Summary..................................4 Summary Historical Financial........................5 PROSPECTUS Risk Factors........................................6 Special Note Regarding Forward- ---- Looking Statements...............................15 Management's Discussion and Analysis of Financial Condition and Results of Operations....................................16 Business...........................................23 Management.........................................32 Security Ownership of Certain Beneficial Owners and Management............................34 Executive Compensation.............................35 Certain Relationships and Related Transactions.....................................37 Disclosure of Commission Position on Indemnification for Securities Act Liabilities......................................38 Description of Securities..........................38 Selling Shareholders...............................41 Plan of Distribution...............................45 Legal Matters......................................46 Experts............................................46 Index to Financial Statements.....................F-1 June 29, 2000 =================== ===================
PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 24. Indemnification of Directors and Officers. Section 14A:3-5 of the New Jersey Business Corporation Act, as amended, authorizes the Registrant to indemnify any director or officer under certain prescribed circumstances and subject to certain limitations against certain costs and expenses, including attorneys' fees actually and reasonably incurred in connection with any action, suit or proceeding, whether civil, criminal, administrative or investigative, to which such person is a party by reason of being a director or officer of the Registrant if it is determined that such person acted in accordance with the applicable standard of conduct set forth in such statutory provisions. Article VIII of the Registrant's Certificate of Incorporation and Article VI of the Registrant's By-Laws extend such indemnities to the fullest extent permitted by the New Jersey Business Corporation Act. The Registrant may also purchase and maintain insurance for the benefit of any director or officer which may cover claims for which the Registrant could not indemnify such persons. Item 25. Other Expenses of Issuance and Distribution The following statement sets forth the estimated expenses in connection with the offering described in the Registration Statement, all of which will be borne by the Registrant. Securities and Exchange Commission......................... $ 4,252.60 Accountants' Fees.......................................... $ 25,000.00 Legal Fees................................................. $ 50,000.00 Printing and engraving..................................... $ 10,000.00 Miscellaneous.............................................. $ 40,747.00 ------------ TOTAL...................................................... $ 139,999.60 Item 26. Recent Sales of Unregistered Securities Except as may be otherwise indicated, we relied upon Section 4(2) of the Securities Act as the basis for exemption from registration for all of the following transaction because the transactions did not involve public offerings. In December 1997, we consummated the Mergers, as well as a private placement of our common stock raising gross proceeds of $4,385,000, by selling 4,385,000 shares. We netted proceeds of approximately $3,695,000 from this private placement. In January 1998, we received an additional $30,000, of which we netted approximately $26,500, and issued an additional 30,000 shares in this private placement. In June 1998, we closed on a secondary offering of $1,832,000 gross proceeds, of which we netted approximately $1,715,800 by selling 1,832,000 shares of our common stock at $1.00 per share. In June and August 1999, we consummated a private placement, selling an aggregate of 59 units. Each unit cost $60,000 and consisted of 15,000 shares of common stock and warrants to purchase 7,500 shares of common stock. We raised gross proceeds of $3,540,000 in this private placement, netting proceeds of approximately $3,264,000. We also issued 1 1/3 units to the placement agent and warrants to purchase 48,000 shares to broker-dealers in exchange for services rendered in connection with the private placement. In June and December 1999 we issued an aggregate of 187,500 shares of common stock to an Internet Service Provider and 50,000 shares of common stock to a brokerage agent in exchange for services rendered in connection with an agreement with the Internet Service Provider. Excluding the options granted in the first quarter of 2000, which are listed below, we have also issued the following options to employees, consultants and a director under our 1997 Incentive and Non-Qualified Stock Plan, as amended ("Plan"):
Employee Name Date of Grant No. of Shares Exercise Price - $ - ------------- ------------- ------------- ------------------ M. Sivak 9/3/99 12,500 4.00 9/15/97 37,500 0.50 5/7/98 10,000 1.00 J. Renfro 9/3/99 12,500 4.00 9/15/97 22,500 0.50 5/7/98 10,000 1.00 C. Ellis 9/3/99 17,500 4.00 2/12/99 15,000 1.00 J. O'Neil 9/3/99 12,000 4.00 M. Pimco 8/3/98 30,000 1.00 9/28/98 9,000 1.00 9/3/99 9,000 4.00 T. Straub 9/3/99 10,000 4.00 9/28/98 9,000 1.00 S. Palacek 9/3/99 6,000 4.00 8/3/98 9,000 1.00 M. Goheen 8/10/99 60,000 2.46 5/7/98 10,000 1.00 9/3/99 10,000 4.00 D. Leahy 2/8/98 10,000 1.00 C. Laffan 9/15/97 20,000 0.50 Community Monitors (as a 9/99-4/00 15,500 $4.00 group) F. Kane 8/10/99 45,000 2.46 D. Engel 5/7/98 100,000 1.00 P. Kym 9/28/98 6,000 1.00 C. Colemen 9/3/99 5,000 4.00
Consultant Name Date of Grant No. of Shares Exercise Price - $ - --------------- ------------- ------------- ------------------ J. Leader 5/7/98 15,000 1.00 9/3/99 10,000 4.00 L. Hasiuk 5/7/98 65,000 1.00 B. Adler 5/7/98 10,000 1.00 2/12/99 10,000 1.00 8/10/99 45,000 2.46 9/3/99 10,000 4.00 G. Mason 8/10/99 15,000 2.46 9/3/99 10,000 4.00 J. Fifield 5/7/98 150,000 1.00 R. Bizien 9/28/98 20,000 1.00 K. Chin 9/28/98 12,000 1.00 J. Konaxis 9/28/98 35,000 1.00
Director Name Date of Grant No. of Shares Exercise Price - $ - ------------- ------------- ------------- ------------------ K. Locker 9/15/97 60,000 0.50
Between May 1998 and November 1999, we also issued the following non-Plan options and warrants to employees, directors, and consultants:
Name Date of Grant No. of Shares Exercise Price - $ - ---- ------------- ------------- ------------------ S. Colwell 8/10/99 300,000 2.46 K. Locker 5/7/98 40,000 1.00 D. Sito 9/3/99 150,000 4.00 9/3/99 50,000 7.50 9/3/99 50,000 10.00 T. Saleh 11/8/99 250,000 2.91 11/8/99 100,000 5.00 11/8/99 100,000 7.00 W. Harvey 11/8/99 50,000 2.91 SGC Advisory 4/13/99 1,000,000 0.50
In the first quarter of 2000, we granted options to purchase an aggregate of 1,030,100 shares of our common stock to directors, officers and employees of, and certain consultants to, Worlds.com, at exercise prices ranging from $3.00 to $9.00. as follows:
Name Number Exercise Price of shares Steven Chrust 187,500 $5.68 50,000 6.00 50,000 9.00 Thom Kidrin 125,000 5.68 25,000 6.00 25,000 9.00 Debra Sito 31,250 5.68 Noel Kimmel 31,250 5.68 Hal Trencher 100,000 4.00 25,000 6.00 25,000 9.00 Ignition Inc. 15,000 4.00 3,000 4.00 Credo Interactive 75,000 2.50 Marty Scott 100,000 4.00 25,000 6.00 25,000 9.00 Chris Ryan 65,000 4.00 25,000 6.00 10,000 9.00 Todd Greene 1,500 4.00 Christina Oltmer 2,000 4.00 Brendan Whelan 2,000 4.00 RDA Designs 5,000 4.00
II-1 On March 31, 2000, we consummated an agreement to sell an aggregate of 976,598 shares of common stock pursuant to Regulation S. The shares of common stock were sold by Hoodless Brennan & Partners, plc to ten non-U.S. principals at $3.52 per share, less a discount of 5%. The total offering price was $3,437,622 with net proceeds to us of $3,243,957, which includes approximately $21,000 in fees invoices after March 31, 2000. In connection with the offering, we issued a five-year Purchase Option to purchase an aggregate of 73,245 shares of common stock at $3.87 per share to Hoodless Brennan. Purchaser Shares Price Proceeds Robert Newman 262,290 $3.52 $923,260.00 Archdream Ltd. 252,804 3.52 889,870.00 Atalanta Finance Ltd. 71,023 3.52 250,000.00 Netvest.com Plc 74,751 3.52 263,122.00 Bracken Partners 22,450 3.52 79,025.00 Barry Gold 11,264 3.52 39,650.00 Peter Old 45068 3.52 158,640.00 VoyagerIT.com 203,121 3.52 714,985.00 Marmara Resources SA 22,577 3.52 79,470.00 Pierson Resources 11,250 3.52 39,600.00 ---------- ------------- Total 976,598 $3,437,622.00 On April 7, 2000, we entered into agreements with four investors to sell an aggregate of 142,045 shares of common stock pursuant to Section 4(2) of the Securities Act at $3.52 per share. As compensation for these subscriptions we paid another agent, International Capital Growth, Ltd., a commission of 7%. From the $500,000 total offering price, aggregate net proceeds to us from these sales were $465,000. Purchaser Shares Price Proceeds Cehoff Opportunity Fund 56,818 $3.52 $200,000 Primo Capital Growth Fund 28,409 3.52 100,000 Rosebud Internet Fund 28,409 3.52 100,000 Ecom Growth Fund 28,409 3.52 100,000 ---------- ------------ Total 142,045 $500,000 In May 2000, we issued 32,000 shares of common to one of our employees in connection with an inventory purchase agreement. II-2 Item 27. Exhibits and Financial Statements Schedules.
Incorporated Exhibit By Reference No. in Number Description from Document Document Page - ------ ----------- ------------- -------- ---- 3.1 Certificate of Incorporation A 3.1 3.1.1 Certificate of Amendment of the Certificate of B 3.1.1 Incorporation 3.1.2 Certificate of Merger A 3.1.1 3.2 By-Laws A 3.2 3.2.1 By-Laws - Restated as Amended - - Filed Herewith 4.1 Specimen common stock Certificate A 4.1 4.2 1997 Incentive and Non-Qualified Stock Option C 4.1 Plan, as amended 4.3 Form of Employee Incentive/Non-Incentive C 4.2 Stock Option Agreement under the 1997 Incentive and Non-Qualified Stock Option Plan 4.4 Form of Consultant Non-Incentive Stock Option C 4.3 Agreement under the 1997 Incentive and Non- Qualified Stock Option Plan 4.5 Form of Director Non-Incentive Stock Option C 4.4 Agreement under the 1997 Incentive and Non- Qualified Stock Option Plan 4.6 Form of Community Leader Stock Option C 4.5 Agreement under the 1997 Incentive and Non- Qualified Stock Option Plan 4.10 Schedule of Option Grants under Benefit Plans C 4.9 5.1 Opinion of Graubard Mollen & Miller E 5.1 10.1 Merger Agreement between Worlds Acquisition D 99 Corp. and Academic Computer Systems, Inc. 10.2 Consulting Agreement between the Registrant B 10.2 and SGC Advisory, Inc. 23.1 Consent of BDO Seidman, LLP - - Filed Herewith
- ---------------------------- A Registrant's Registration Statement No. 2-31876. B Registrant's Annual Report on Form 10-KSB filed on March 30, 2000. C Registrant's Registration Statement on Form S-8 (File No. 333-89937). D Registrant's Current Report on Form 8-K filed on December 18, 1997. E Registrant's Post-Effective Amendment No.1 to Registrants' Registration Statement on Form SB-2 (File No. 333-10838) Item 28. Undertakings. ------------ The undersigned Registrant hereby undertakes: (a) (1) To file, during any period in which it offers or sells securities, a post-effective amendment to this registration statement to: (i) Include any prospectus required by section 10(a)(3) of the Securities Act; (ii) Reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information in the registration statement; and notwithstanding the II-3 foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high and of the estimated maximum offering range may be reflected in the form of prospectus filed with Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement. (iii) Include any additional or changed material information on the plan of distribution. (2) For determining liability under the Securities Act, treat each post-effective amendment as a new registration statement of the securities offered and the offering of the securities at that time to be the initial bona fide offering. (3) File a post-effective amendment to remove from registration any of the securities that remain unsold at the end of the offering. (e) "Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the "Act") may be permitted to directors, officers and controlling persons of the small business issuer pursuant to the foregoing provisions, or otherwise, the small business issuer has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore unenforceable." In the event that a claim for indemnification against such liabilities (other than the payment by the small business issuer of expenses incurred or paid by a director, officer or controlling person of the small business issuer in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the small business issuer will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. II-4 SIGNATURES In accordance with the requirements of the Securities Act, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements of filing on Form SB-2 and has authorized this registration statement or amendment to be signed on its behalf by the undersigned, in the City of New York on the 28th day of June, 2000. WORLDS.COM INC. By: /s/ Thomas Kidrin ------------------------------- Thomas Kidrin, President In accordance with the requirements of the Securities Act, this registration statement or amendment was signed by the following persons in the capacities and on the dates stated:
Signatures Title Date - ---------- ----- ---- /s/ Thomas Kidrin President and Chief Executive June 28, 2000 - ----------------------------- Officer Thomas Kidrin /s/ Steven G. Churst Chairman June 28, 2000 - ----------------------------- Steven G. Chrust /s/ Kenneth A. Locker Director June 28, 2000 - ----------------------------- Kenneth A. Locker /s/ William Harvey Director June 28, 2000 - ----------------------------- William Harvey /s/ Christopher J. Ryan Principal Financial and June 28, 2000 - ----------------------------- Accounting Officer Christopher J. Ryan
II-5 EX-99.3.2.1 2 0002.txt MEETINGS OF STOCKHOLDERS BY-LAWS OF WORLDS.COM INC. (RESTATED AS AMENDED AS OF JANUARY 1, 2000) ARTICLE I MEETINGS OF STOCKHOLDERS SECTION 1. Annual Meeting. A meeting of stockholders shall be held annually for the election of directors and the transaction of such other business as is related to the purpose or purposes set forth in the notice of meeting on such date as may be fixed by the Board of Directors, or if no date is so fixed on the second Tuesday in April in each and every year, unless such day shall fall on a legal holiday, in which case such meeting shall be held on the next succeeding business day, at such time and at such place as may be fixed by the Board of Directors. SECTION 2. Special Meetings. Special meetings of the stockholders for any purpose may be called by the Board of Directors, the Chairman of the Board, the President or the Secretary, and shall be called by the Chairman of the Board, the President or the Secretary at the written request of the holders of record of a majority of the outstanding shares of the Corporation entitled to vote at such meeting. Special meetings shall be held at such time as may be fixed in the call and stated in the notices of meeting or waiver thereof. At any special meeting only such business may be transacted as is related to the purpose or purposes for which the meeting is convened. SECTION 3. Place of Meetings. Meetings of stockholders shall be held at such place, within or without the State of New Jersey or the United States of America, as may be fixed in the call and stated in the notice of meeting or waiver thereof. SECTION 4. Notice of Meetings: Adjourned Meetings. Notice of each meeting of stockholders shall be given in writing and shall state the place, date and hour of the meeting. The purpose or purposes for which the meeting is called shall be stated in the notices of each special meeting and of each annual meeting at which any business other than the election of directors is to be transacted. A copy of the notice of any meeting shall be given, personally or by mail, not less then ten (10) nor more than sixty (60) days before the date of the meeting, to each stockholder entitled to vote at such meeting. If mailed, such notice shall be deemed given when deposited in the United States mail, with postage thereon prepaid, directed to the stockholder at his address as it appears on the record of stockholders. When a meeting is adjourned for less than thirty (30) days in any one adjournment, it shall not be necessary to give any notice of the adjourned meeting if the time and place to which the meeting is adjourned are announced at the meeting at which the adjournment is taken, and at the adjourned meeting any business may be transacted that might have been transacted on the original date of the meeting. When a meeting is adjourned for thirty (30) days or more, notice of the adjourned meeting shall be given as in the case of an original meeting. SECTION 5. Waiver of Notice. The transactions of any meeting of stockholders, however called and with whatever notice, if any, are as valid as though had at a meeting duly held after regular call and notice, if: (a) all the stockholders entitled to vote are present in person or by proxy and no objection to holding the meeting is made by anyone so present, and if, either before or after the meeting, each of the persons entitled to vote, not present in person or by proxy, signed a written waiver of notice, or a consent to the holding of the meeting, or an approval of the action taken as shown by the minutes thereof. Whenever notice is required to be given to any stockholder, a written waiver thereof signed by such stockholder, whether before or after the time thereon stated, shall be deemed equivalent to such notice. Attendance of a person at a meeting of stockholders shall constitute a waiver of notice of such meeting, except when such stockholder attends for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of any meeting of stockholders need be specified in any written waiver of notice thereof. SECTION 6. Qualification of Voters. Except as may be otherwise provided in the Certificate of Incorporation, every stockholder of record shall be entitled to one vote on each matter submitted to a vote at a meeting of stockholders for every share standing in his name on the record of stockholders. SECTION 7. Quorum. At any meeting of the stockholders the presence, in person or by proxy, of the holders of a majority of the shares entitled to vote thereat shall constitute a quorum for the transaction of any business. When a quorum is once present to organize a meeting, it is not broken by the subsequent withdrawal of any stockholders. The stockholders present may adjourn the meeting despite the absence of a quorum. 2 SECTION 8. Proxies. Every stockholder entitled to vote at a meeting of stockholders or to express consent or dissent without a meeting may authorize another person or persons to act for him by proxy. Every proxy must be executed by the stockholder or his attorney-in-fact. No proxy shall be valid after the expiration of three (3) years from the date thereof unless otherwise provided in the proxy. Every proxy shall be revocable at the pleasure of the stockholder executing it, except as otherwise provided therein and as permitted by law. Except as otherwise provided in the proxy, any proxy holder may appoint in writing a substitute to act in his place. SECTION 9. Voting. Except as otherwise required by law, directors shall be elected by a plurality of the votes cast at a meeting of stockholders by the holders of shares entitled to vote in the election. Whenever any corporate action, other than the election of directors, is to be taken by vote of the stockholders at a meeting, it shall, except as otherwise required by law or the Certificate of Incorporation, be authorized by a majority of the votes cast thereat, in person or by proxy. SECTION 10. Action Without A Meeting. Whenever stockholders are required or permitted to take any action at a meeting or by vote, such action may be taken without a meeting, without prior notice and without a vote, by consent in writing setting forth the action so taken, signed by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. SECTION 11. Record Date. The Board of Directors is authorized to fix a day not more than sixty (60) days nor less than ten (10) days prior to the day of holding any meeting of stockholders as the day as of which stockholders entitled to notice of and to vote at such meeting shall be determined; and only stockholders of record on such day shall be entitled to notice or to vote at such meeting. SECTION 12. Inspectors of Election. The Chairman of any meeting of the stockholders may appoint one or more Inspectors of Election. Any Inspector so appointed to act at any meeting of the stockholders, before entering upon the discharge of his or her duties, shall be sworn faithfully to execute the duties of an Inspector at such meeting with strict impartiality, and according to the best of his or her ability. 3 ARTICLE II BOARD OF DIRECTORS SECTION 1. Power of Board and Qualification of Directors. The business and affairs of the Corporation shall be managed by the Board of Directors. SECTION 2. Number of Directors. The number of directors constituting the entire Board of Directors shall be such number not less than one (1) nor more than nine (9) as may be fixed from time to time by resolution adopted by the stockholders or by the Board. SECTION 3. Election and Term of Directors. At each annual meeting of stockholders, directors shall be elected to serve until the next annual meeting. SECTION 4. Resignations. Any director of the Corporation may resign at any time by giving written notice to the Board of Directors, the Chairman of the Board, the President or the Secretary of the Corporation. Such resignation shall take effect at the time specified therein; and unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. SECTION 5. Removal of Directors. Any or all of the directors may be removed with or without cause by vote of the stockholders. SECTION 6. Newly Created Directorships and Vacancies. Newly created directorships resulting from an increase in the number of directors and vacancies occurring in the Board of Directors for any reason except the removal of directors by stockholders without cause may be filled by vote of a majority of the directors then in office, although less than a quorum exists, or may be filled by the stockholders. Vacancies occurring as a result of the removal of directors by stockholders, without cause, shall be filled by the stockholders. A director elected to fill a vacancy or a newly created directorship shall be elected to hold office until the next annual meeting of stockholders. SECTION 7. Executive and Other Committee of Directors. The Board of Directors, by resolution adopted by a majority of the entire Board, may designate from among its members an executive committee and other committees, each consisting of one or more directors, and each of which, to the extent provided in the resolution, shall have all the authority of the Board to the fullextent authorized by law and including the power and authority to declare a dividend or to authorize the issuance of stock. 4 The Board of Directors may designate one or more directors as alternate members of any such committee, who may replace any absent member or members at any meeting of such committee. SECTION 8. Compensation of Directors. The Board of Directors shall have authority to fix the compensation of directors for services in any capacity, or to allow a fixed sum plus expenses, if any, for attendance at meetings of the Board or of committees designated thereby. SECTION 9. Interest of Director in a Transaction. (a) No contract or transaction between the Corporation and one or more of its directors or officers, or between the Corporation and any other corporation, partnership, association or other organization in which one or more of its directors or officers are directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the Board or committee thereof which authorized the contract or transaction, or solely because his or their votes are counted for such purpose, if: (1) The material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the Board of Directors or the committee, and the Board or committee, in good faith, authorizes the contract or transaction by the affirmative vote of a majority of the disinterested directors, even though the disinterested directors be less than as quorum; or (2) The material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved, in good faith, by vote of the stockholders; or (3) The contract or transaction is fair as to the Corporation as of the time it is authorized, approved or ratified, by the Board of Directors, a committee thereof, or the stockholders. (b) Common or interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee which authorized the contract or transaction. ARTICLE III MEETINGS OF THE BOARD SECTION 1. Regular Meetings. Regular meetings of the Board of Directors may be held without notice at such time and places, within or without the State of New Jersey, or the United States of America, as may from time to time be fixed by the Board. 5 SECTION 2. Special Meetings; Notice; Waiver. Special meetings of the Board of Directors may be held at any time, place, within or without the State of New Jersey or the United States of America, upon the call of the Chairman of the Board, the President or the Secretary, by oral, telegraphic or written notice, duly given to or sent or mailed to each director not less than two (2) days before such meeting. Special meetings shall be called by the Chairman of the Board, the President or the Secretary on the written request of any two directors. Notice of a special meeting need not be given to any director who submits a signed waiver or notice whether before or after the meeting, or who attends the meeting without protesting, prior thereto or at its commencement, the lack of notice to him. A notice, or waiver of notice, need not specify the purpose of any special meeting of the Board of Directors. SECTION 3. Quorum: Action by the Board; Adjournment. At all meetings of the Board of Directors, a majority of the whole Board shall constitute a quorum for the transaction of business, except that when the number of directors constituting the whole Board shall be an even number, one-half of that number shall constitute a quorum. The vote of a majority of the directors present at the time of the vote, if a quorum is present at such time, shall be the act of the Board, except as may be otherwise specifically provided by law or by the Certificate of Incorporation or by these By-Laws. A majority of the directors present, whether or not a quorum is present, may adjourn any meeting to another time and place. SECTION 4. Action Without a Meeting. Any action required or permitted to be taken at any meeting of the Board, or any committee thereof, may be taken without a meeting if all members of the Board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes or proceedings of the Board or committee, whether done before or after the action so taken. SECTION 5. Action Taken by Conference Telephone. Members of the Board of Directors or any committee thereof may participate in a meeting by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other. 6 ARTICLE IV OFFICERS SECTION 1. Officers. The Board of Directors shall elect a President, one or more Vice Presidents, a Secretary and a Treasurer of the Corporation and from time to time may elect or appoint such other officers as it may determine. Any two or more offices may be held by the same person. Securities of other corporations held by the corporation may be voted by any officer designated by the Board and, in the absence of any such designation, by the President, any Vice President, the Secretary, or the Treasurer. The Board may require any officer to give security for the faithful performance of his duties. SECTION 2. President. The President shall be the chief executive and chief operating officer of the Corporation with all the rights and powers incident to that position. SECTION 3. Vice President. The Vice Presidents shall perform such duties as may be prescribed or assigned to them by the Board of Directors, the Chairman of the Board or President. In the absence of the President the first-elected Vice President shall perform the duties of the President. In the event of the refusal or incapacity of the President to function as such, the first-elected Vice President shall perform the duties of the President until such time as the Board of Directors elects a new President. In the event of the absence, refusal or incapacity of the first-elected Vice President, the other Vice Presidents, in order of their rank, shall so perform the duties of the President; and the order of rank of such other Vice Presidents shall be determined by the designated rank of their offices or, in the absence of such designation, by seniority in the office of Vice President; provided that said order or rank may be established otherwise by action of the Board of Directors. SECTION 4. Treasurer. The Treasurer shall perform all the duties customary to that office, and shall have the care and custody of the funds and securities of the Corporation. He shall at all reasonable times exhibit his books and accounts to any director upon application, and shall give such bond or bonds for the faithful performance of his duties with such surety or sureties as the Board of Directors from time to time may determine. SECTION 5. Secretary. The Secretary shall act as secretary of and shall keep the minutes of the Board of Directors and of the stockholders, have the custody of the seal of the Corporation and perform all of the other duties usual to that office. 7 SECTION 6. Assistant Treasurer and Assistant Secretary. Any Assistant Treasurer or Assistant Secretary shall perform such duties as may be prescribed or assigned to him by the Board of Directors, the Chairman of the Board, or the president. An Assistant Treasurer shall give such bond or bonds for the faithful performance of his duties with such surety or sureties as the Board of Directors from time to time may determine. SECTION 7. Term of Office: Removal. Each officer shall hold office for such term as may be prescribed by the Board. Any officer may be removed at any time by the Board with or without cause. The removal of an officer without cause shall be without prejudice to his contract rights, if any. The election or appointment of an officer shall not, of itself, create contract rights. SECTION 8. Compensation. The compensation of all officers of the Corporation shall be fixed by the Board of Directors. ARTICLE V SHARE CERTIFICATES SECTION 1. Form of Share Certificates. The shares of the Corporation shall be represented by certificates, in such form as the Board of Directors may from time to time prescribe, signed by the Chairman of the Board, the President, or a Vice President, and by the Secretary, an Assistant Secretary, the Treasurer or an Assistant Treasurer, and shall be sealed with the seal of the Corporation or a facsimile thereof. The signatures of the officers upon a certificate may be facsimiles if the certificate is countersigned by a transfer agent or registered by a registrar other than the Corporation or its employees. In case any such officer who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer at the date of issue. SECTION 2. Lost Certificates. In case of the loss, theft, mutilation or destruction of a stock certificate, a duplicate certificate will be issued by the Corporation upon notification thereof and receipt of such proper indemnity or assurances as the Board of Directors may require. SECTION 3. Transfer of Shares. Transfers of shares of stock shall be made upon the books of the Corporation by the registered holder in person or by duly authorized attorney, upon surrender of the certificate or certificates for such shares properly endorsed. 8 SECTION 4. Registered Stockholders. Except as otherwise provided by law, the Corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends or other distributions and to vote as such owner, and to hold such person liable for calls and assessments, and shall not be bound to recognize any equitable or legal claim to or interest in such shares on the part of any other person. ARTICLE VI INDEMNIFICATION SECTION 1. Actions by or in the Right of the Corporation. Any person made a party to an action by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he, his testator or intestate, is or was a Director or officer of the Corporation shall be indemnified by the Corporation against the reasonable expenses, including attorneys fees, actually and necessarily incurred by him in connection with the defense of such action or in connection with an appeal therein, to the fullest extent permitted by the New Jersey Business Corporation Act or any successor thereto. SECTION 2. Action or Proceeding Other Than by or in The Right of the Corporation. Any person made or threatened to be made a party to an action or proceeding other than one by or in the right of the Corporation to procure a judgment in its favor, whether civil or criminal, including an action by or in the right of any other corporation of any type or kind, domestic or foreign, which any Director or officer of the Corporation served in any capacity at the request of the Corporation, by reason of the fact that he, his testator or intestate, was a Director or officer of the Corporation, or served such other corporation in any capacity, shall be indemnified by the Corporation against judgments, fines, amounts paid in settlement and reasonable expenses, including attorneys fees actually and necessarily incurred as a result of such action or proceeding, or any appeal therein, if such Director or officer acted in good faith for a purpose which he reasonably believed to be in the best interests of the Corporation and, in criminal actions or proceedings, in which he had no reasonable cause to believe that his conduct was unlawful. The termination of any such civil or criminal action or proceeding by judgment, settlement, conviction or upon a plea of nolo contendere, or its equivalent, shall not in itself create a presumption that any such Director or officer did not act in good faith for a purpose which he reasonably believed to be in the best interests of the Corporation or that he had reasonable cause to believe that his conduct was unlawful. SECTION 3. Opinion of Counsel. In taking any action or making any deterntination pursuant to this Article, the Board of 9 Directors and each Director, officer or employee, whether or not interested in any such action or determination, may rely upon an opinion of counsel selected by the Board. SECTION 4. Qther Indemnification; Limitation. The Corporation's obligations under this Article shall not be exclusive or in limitation of but shall be in addition to any other rights to which any such person may be entitled under any other provision of these By-Laws, or by contract, or as a matter of law, or otherwise. All of the provisions of this Article VI of the By-Laws shall be valid only to the extent permitted by the Certificate of Incorporation and the laws of the State of New Jersey. ARTICLE VII MISCELLANEOUS PROVISIONS SECTION 1. Corporate Seal. The corporate seal shall have inscribed thereon the name of the Corporation and shall be in such form as the Board of Directors may from time to time determine. SECTION 2. Fiscal Year. The fiscal year of the Corporation shall be the twelve month period prescribed by the Board of Directors. SECTION 3. Checks and Notes. All checks and demands for money and notes or other instrument evidencing indebtedness or obligations of the Corporation shall be signed by such officer or officers or other person or persons as shall be authorized from time to time by the Board of Directors. SECTION 4. Nasdaq Rule 4310(c)(25)(H)(i)d. Until August 31, 2002, the Corporation shall abide by Nasdaq Rule 4310(c)(25)(H)(i)d, which generally requires stockholders approval for nonpublic sales of stock representing greater than twenty (20%) percent of the voting power of shares then outstanding at a price less than the greater of book value or market value. This provision may be amended or repealed only in accordance with Article I Sections 9 or 10 of these By-Laws. ARTICLE VIII AMENDMENTS SECTION 1. Power to Amend. By-Laws of the Corporation may be adopted, amended or repealed by the Board of Directors, subject to amendment or repeal by the stockholders entitled to vote thereon. 10 EX-23.1 3 0003.txt CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors Worlds.com Inc. We hereby consent to the use in the Prospectus constituting a part of this Registration Statement of our report dated March 10, 2000, relating to the financial statements of Worlds.com Inc. which is contained in that Prospectus, as of December 31, 1998 and 1999 and the related statements of operations, stockholders' equity (deficit) and cash flows for the period April 8, 1997 (inception) to December 31, 1997 and the years ended December 31, 1998 and 1999. Our report contains an explanatory paragraph regarding the Company's ability to continue as a going concern. We also consent to the reference to us under the caption "Experts" in the Prospectus. BDO Seidman, LLP New York, New York June 29, 2000 -----END PRIVACY-ENHANCED MESSAGE-----