-----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, UBs9DlUcXg+eR9mI41KSjhzoFzxXktmwcFhXM85gm3BGAYFnYQ/d+j9FRk4NzHww xqca+GcsimKId4fACOLQqw== 0000946790-98-000015.txt : 19980817 0000946790-98-000015.hdr.sgml : 19980817 ACCESSION NUMBER: 0000946790-98-000015 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: WORLDS INC CENTRAL INDEX KEY: 0000001961 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 221848316 STATE OF INCORPORATION: NJ FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-24115 FILM NUMBER: 98691130 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: ACADEMIC COMPUTER SYSTEMS INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: COMPUTER INDUSTRIES LTD DATE OF NAME CHANGE: 19690318 10QSB 1 QUARTERLY REPORT ON FORM 10-QSB SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 1998 [ ] Transition report under Section 13 or 15(d) of the Exchange Act Commission file number 2-31876 WORLDS INC. (Exact name of small business issuer as specified in its charter) New Jersey (State or other jurisdiction of incorporation or organization) 13-3768554 (IRS Employer Identification No.) 15 Union Wharf, Boston, Massachusetts 02109 (Address of principal executive offices)(Zip Code) (617) 725-8900 (Issuer's telephone number) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] The number of shares of Common Stock outstanding was 17,868,531 shares as of June 30, 1998 Transitional Small Business Disclosure Format: Yes [ ] No [X] PART I FINANCIAL INFORMATION Item 1. Financial Statements. Worlds Inc. (a development stage enterprise) Financial Statements Period from April 8, 1997 (Inception) to June 30, 1998 Worlds Inc. (a development stage enterprise) Financial Statements Period from April 8, 1997 (Inception) to June 30, 1998 Worlds Inc. (a development stage enterprise) Contents - -------------------------------------------------------------------------------- Worlds Inc. (the "Company") Financial statements (unaudited): Balance sheets F-3 Statements of operations F-4 Statement of stockholders' deficit F-5 Statements of cash flows F-6 Summary of accounting policies F-7 - F-10 Notes to financial statements F-11 - F-15 Worlds Inc. ("Predecessor") [Predecessor company - information prior to date of merger with the Company herein disclosed]: Financial statements (unaudited): Statements of operations F-18 Statements of cash flows F-19 Summary of accounting policies F-21 - F-24 Notes to financial statements F-25 - F-26 Worlds Inc. (a development stage enterprise) Balance Sheets - -------------------------------------------------------------------------------- December 31, June 30, 1997 1998 - ---------------------------------------------------- ----------- ----------- (Unaudited) Assets Current: Cash and cash equivalents $ 3,541,829 $ 3,419,518 Trade receivables, less allowances for doubtful accounts of $140,318 and $140,318 538 -- Prepaid expenses and other current assets 74,175 34,287 - ---------------------------------------------------- ----------- ----------- Total current assets 3,616,542 3,453,805 Property and equipment, net of accumulated depreciation and amortization 209,452 115,869 - ---------------------------------------------------- ----------- ----------- $ 3,825,994 $ 3,569,674 - ---------------------------------------------------- ----------- ----------- Liabilities and Stockholders' Deficit Current: Accounts payable $ 568,707 $ 303,074 Accrued expenses 592,250 634,834 Advanced customer billings and deferred revenue 436,140 436,140 Current maturities of notes payable 269,333 314,560 - ---------------------------------------------------- ----------- ----------- Total current liabilities 1,866,430 1,688,608 Long-term portion, notes payable 1,968,333 1,906,666 - ---------------------------------------------------- ----------- ----------- Total liabilities 3,834,763 3,595,274 - ---------------------------------------------------- ----------- ----------- Stockholders' deficit (Notes 2 and 3): Common stock, $.001 par value - shares authorized 30,000,000; issued 16,119,996 and 17,981,996 16,120 17,982 Additional paid-in capital 6,661,582 8,402,020 Deficit accumulated during the development stage (6,686,471) (8,380,859) - ---------------------------------------------------- ----------- ----------- (8,769) 39,143 Treasury stock, at cost, 113,465 shares -- (64,743) - ---------------------------------------------------- ----------- ----------- Total stockholders' deficit (8,769) (25,600) - ---------------------------------------------------- ----------- ----------- $ 3,825,994 $ 3,569,674 - ---------------------------------------------------- ----------- ----------- See accompanying summary of accounting policies and notes to financial statements. F-3 Worlds Inc. (a development stage enterprise) Statements of Operations (Unaudited) - --------------------------------------------------------------------------------
Cumulative, period from Period from Three months Six months April 8, 1997 April 8, 1997 ended ended (inception) to June 30, June 30, to June 30, June 30, 1997 1998(a) 1998(a) 1998(a) - ------------------------------------------- ----------- ------------ ------------ ----------- Net revenues $ -- $ 12,130 $ 16,132 $ 17,552 Costs and expenses: Cost of revenues -- (22,500) (25,101) (25,101) Selling, general and administrative (151,176) (759,185) (1,307,525) (1,982,555) Research and development -- (302,516) (534,428) (534,428) Acquired research and development (Note 1) -- -- -- (6,135,538) - ------------------------------------------- ----------- ------------ ------------ ----------- Operating loss (151,176) (1,072,071) (1,850,922) (8,660,070) Other income (expenses): Interest income -- 35,054 76,992 90,585 Interest expense -- (35,656) (72,112) (88,804) - ------------------------------------------- ----------- ------------ ------------ ----------- Loss before extraordinary item (151,176) (1,072,673) (1,846,042) (8,658,289) Extraordinary item - gain on debt settlement -- -- 151,654 277,430 - ------------------------------------------- ----------- ------------ ------------ ----------- Net loss $ (151,176) $ (1,072,673) $ (1,694,388) $(8,380,859) - ------------------------------------------- ----------- ------------ ------------ ----------- Loss per share (basic and diluted): Loss before extraordinary item $ (.02) $ (.06) (.11) Extraordinary item -- -- .01 ----------- ------------ ------------ Net loss per share (basic and diluted) $ (.02) $ (.06) $ (.10) ----------- ------------ ------------ Weighted average common shares outstanding: Basic and diluted 8,400,000 16,716,546 16,434,339 ----------- ------------ ------------ -------- (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-4 Worlds Inc. (a development stage enterprise) Statement of Stockholders' Deficit - -------------------------------------------------------------------------------- Period from April 8, 1997 (inception) to June 30, 1998
Deficit accumulated Common stock Additional during the Total Shares Amount paid-in development Treasury stockholders' capital stage stock deficit - -------------------------- ---------- ------ --------- ---------- -------- ---------- Issuance of common stock to founding stockholders 8,400,000 $ 8,400 $ 195,600 $ -- $ -- $ 204,000 Sale of shares in private offering memorandum and shares issued to placement agent, net (Note 3) 4,810,000 4,810 3,689,866 -- -- 3,694,676 Issuance of shares to Academic Computer Systems, Inc. (Note 2) 910,000 910 557,116 -- -- 558,026 Issuance of shares pursuant to merger with Predecessor 1,999,996 2,000 1,998,000 -- -- 2,000,000 (Note 2) Capital contribution resulting from forgiveness of debt to -- -- 221,000 -- -- 221,000 shareholders of Predecessor Net loss for the period April 8 to -- -- -- (6,686,471) -- (6,686,471) December 31, 1997 - -------------------------------------------------------------------------------------------------------- Balance, December 31, 1997 16,119,996 16,120 6,661,582 (6,686,471) -- (8,769) Sale of shares in private offering memorandum (January 1998) 30,000 30 26,470 -- -- 26,500 (unaudited) Sale of shares in public offering of common stock, net (June 1998) 1,832,000 1,832 1,713,968 -- -- 1,715,800 (unaudited) Conversion of 113,465 shares to certain stockholders (June 1998) (Note 2) -- -- -- -- (64,743) (64,743) (unaudited) Net loss for the six months ended June 30, 1998 (unaudited) -- -- -- (1,694,388) -- (1,694,388) - -------------------------------------------------------------------------------------------------------- Balance, June 30, 1998 (unaudited) 17,981,996 $17,982 $8,402,020 $(8,380,859) $(64,743) $ (25,600)
See accompanying summary of accounting policies and notes to financial statements. F-5 Worlds Inc. (a development stage enterprise) Statements of Cash Flows (Unaudited) - --------------------------------------------------------------------------------
Cumulative, period from April 8, 1997 Six months ended (inception) to June 30, 1998 June 30, 1998 - -------------------------------------------------- ----------- ----------- Cash flows from operating activities: Net loss $(1,694,388) $(8,380,859) - -------------------------------------------------- ----------- ----------- Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 93,583 109,906 Gain on debt settlement (151,654) (277,430) Acquired research and development -- 6,135,538 Changes in operating assets and liabilities, net of effects from merger with Predecessor and Academic: Trade receivables 538 -- Prepaid expenses and other assets 39,888 133,604 Accounts payable and accrued expenses (71,395) 142,966 - -------------------------------------------------- ----------- ----------- Total adjustments (89,040) 6,244,584 - -------------------------------------------------- ----------- ----------- - -------------------------------------------------- ----------- ----------- Net cash used in operating activities (1,783,428) (2,136,275) - -------------------------------------------------- ----------- ----------- - -------------------------------------------------- ----------- ----------- Cash flows from financing activities: Proceeds from sale of common stock to founding stockholders -- 204,000 Proceeds from sale of common stock in private offering memorandum 26,500 3,721,176 Proceeds from sale of common stock in a public offering 1,715,800 1,715,800 Payment of conversion price of shares to certain stockholders (64,743) (64,743) Payment on note payable (16,440) (20,440) - -------------------------------------------------- ----------- ----------- Net cash provided by financing activities 1,661,117 5,555,793 - -------------------------------------------------- ----------- ----------- Net increase (decrease) in cash and cash equivalents (122,311) 3,419,518 Cash and cash equivalents, beginning of period 3,541,829 -- - -------------------------------------------------- ----------- ----------- Cash and cash equivalents, end of period $ 3,419,518 $ 3,419,518 - -------------------------------------------------- ----------- -----------
See accompanying summary of accounting policies and notes to financial statements. F-6 Worlds Inc. (a development stage enterprise) Summary of Accounting Policies - -------------------------------------------------------------------------------- Definitions The Company is the resulting entity of two contemporaneous mergers (the "Mergers") of Worlds Inc., a Delaware corporation ("Predecessor"), with and into Worlds Acquisition Corp., a Delaware corporation ("WAC"), and WAC with and into Academic Computer Systems, Inc., a New Jersey corporation ("Academic"), which changed its name to Worlds Inc. (see Note 2). While Academic was the legal entity that survived the mergers, WAC was the accounting acquiror in both mergers. The Company's fiscal year-end is December 31. The term the "Company," as used herein, refers to the consolidated entity resulting from the two contemporaneous mergers, as well the pre-merger Predecessor, WAC and Academic; however, Predecessor, WAC and Academic are hereinafter sometimes referred to separately as the context requires. Nature of Business WAC was incorporated on April 8, 1997 to design, develop and market three-dimensional ("3D") music oriented Internet sites on the World Wide Web. These web sites are anticipated to utilize 3D technologies developed by Predecessor. Basis of Presentation The accompanying financial statements are unaudited; however, in the opinion of management, all adjustments necessary for a fair statement of financial position and results for the stated periods have been included. These adjustments are of a normal recurring nature. Selected information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. Results for interim periods are not necessarily indicative of the results to be expected for an entire fiscal year. It is suggested that these condensed financial statements be read in conjunction with the audited financial statements and accompanying notes for the Company for the year ended December 31, 1997 and for the Predecessor for the period ended December 3, 1997. F-7 The financial statements include the results of Predecessor and Academic from December 4, 1997, the date of the Mergers (the "Merger Date"). The financial statements have been prepared in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 7, "Accounting, and Reporting by Development Stage Enterprises," which requires development stage enterprises to employ the same accounting principles as operating companies. Fair Value of The carrying amounts of financial Financial Instruments instruments, including cash and short-term debt, approximated fair value as of June 30, 1998 because of the relatively short maturity of the instruments. The carrying value of long-term debt, including the current portion, approximates fair value as of June 30,1998, based upon estimates for similar debt issues. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates Cash and Cash Equivalents Cash and cash equivalents are comprised of highly liquid money market instruments, which have original maturities of three months or less at the time of purchase. Property and Equipment Property and equipment are stated at cost. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets, which range from two to five years. F-8 Revenue Recognition Revenue from technology development and licensing contracts is recognized upon the attainment of contractual milestones (approximating the percentage-of-completion method). Cash received in advance of revenues earned is recorded as deferred revenue. Software Development Costs Software development costs are charged to expense when incurred until the technological feasibility of the product has been established. After technological feasibility has been established, any additional costs would be capitalizable in accordance with the Financial Accounting Standards Board's ("FASB") SFAS No. 86 ("SFAS No. 86"). No such costs have been capitalized to date. Research and Development Costs The Company uses the liability method of accounting for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes." Deferred income tax assets and liabilities are recognized based on the temporary differences between the financial statement and income tax bases of assets, liabilities and carryforwards using enacted tax rates. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. F-9 Loss Per Share In 1997, the FASB's SFAS No. 128, "Earnings per Share," replaced the calculation of primary and fully diluted earnings (loss) per share with basic and diluted earnings (loss) per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. The loss per share amounts have been presented to conform to SFAS No. 128 requirements. The common stock equivalents which would arise from the exercise of stock options and warrants are excluded from calculation of diluted loss per share since their effect is anti-dilutive. Therefore, the amounts reported for basic and diluted loss per share are the same. Stock-Based Compensation In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). SFAS No. 123 encourages entities to adopt the fair value method in place of the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"), for all arrangements under which employees receive shares of stock or other equity instruments of the employer or the employer incurs liabilities to employees in amounts based on the price of its stock. The Company has not adopted the fair value method encouraged by SFAS No. 123 and will continue to account for such transactions in accordance with APB No. 25. Comprehensive Income Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income", which establishes standards for reporting and display of comprehensive income, its components and accumulated balances. Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Adoption of the standard has had no effect on financial statement disclosures since there were no items of comprehensive income during the periods presented. F-10 Worlds Inc. (a development stage enterprise) Notes to Financial Statements (information pertaining to the periods ended June 30, 1997 and 1998 is unaudited) - -------------------------------------------------------------------------------- 1. Going Concern As discussed in Note 3, the Company completed a private placement raising gross proceeds of $4,415,000, consummated a merger agreement with a development stage enterprise, Predecessor, and completed a public offering in June 1998 raising gross proceeds of $1,832,000. Predecessor had not generated significant revenues from operations and had an accumulated deficit from inception to the Merger Date of $21,236,139 and a capital deficit of $4,135,538. The acquisition of Predecessor by the Company was accounted for as a purchase. Accordingly, $6,135,538, the portion of the purchase allocable to in-process research and development projects that had not reached technological feasibility and had no probable alternative future uses, was expensed by the Company at the date of merger. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company is in the development stage and has had minimal revenues from operations since the series of merger transactions. The Company anticipates that it currently has only a portion of the funds necessary to complete product development and commercialization. There can be no assurance that the Company will be able to obtain the substantial additional capital resources necessary to pursue its business plan or that any assumptions relating to its business plan will prove to be accurate. The Company is pursuing sources of additional financing and there can be no assurance that any such financing will be available to the Company on commercially reasonable terms, or at all. Any inability to obtain additional financing will have a material adverse effect on the Company, including possibly requiring the Company to significantly curtail or cease operations. These factors raise substantial doubt about the ability of the Company to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. F-11 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. F-12 Academic was an inactive company with no operations. The value assigned to the 910,000 shares in the capital transaction with Academic on December 3, 1997 represented Academic's net tangible assets (primarily cash) of $558,026. During June 1998, 113,465 shares of common stock were converted at $0.57 per share ($64,743) as a result of certain stockholders dissenting with respect to the Academic/WAC capital transaction of December 3, 1997. Such reacquired shares have been classified as treasury stock in the accompanying balance sheets. Academic voluntarily reported under the Securities Exchange Act of 1934 (the "Exchange Act"). The Company intends to continue reporting under the Exchange Act. While no trading market existed for the securities of Academic, or currently exists for the securities of the Company, the Company intends to cause its common stock to be traded on the Bulletin Board. 3. Private Placement and The Private Placement called for WAC to Public Offering offer for sale a maximum of 50 units (57-1/2 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. F-13 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 by the SEC on May 1, 1998. During June 1998, WAC sold 1,832,000 shares in a public offering of its stock and received gross proceeds of $1,832,000. Net proceeds, after commissions of this offering, aggregated $1,715,800. 4. Agreement and Plan of Merger On June 25, 1998, the Company entered into an agreement and plan of merger and reorganization (the "Agreement") with Unity First Acquisition Corp., a Delaware corporation ("Unity"), whereby Unity would acquire all of the outstanding shares of the Company in exchange for shares of its own common stock. The acquisition, if consummated, calls for each share of the Company's stock being converted into .357 shares of Unity's common stock. At that point, the Company would "reverse-merge" into Unity which would then change its name to "Worlds Inc." The Agreement is, among other conditions, subject to approval by both Unity and the Company's stockholders. The Company's current management will continue as management following the transaction. F-14 Unity is a "blank check" company with no operations, formed in May 1996 for the sole and exclusive purpose of acquiring an operating business. Certain of Unity's management and stockholders are stockholders of the Company. In the aggregate, directly and indirectly, they own approximately 1.1 million shares of the Company's common stock. Unity's unaudited financial statements as of April 30, 1998 showed that Unity had approximately $6,360,000 in net worth, almost all of which is in the form of cash or cash equivalents. On June 25, 1998, Unity had outstanding 1,875,000 shares of common stock; 1,350,000 Class A warrants exercisable at $5.50 per share; and 1,350,000 Class B warrants exercisable at $7.50 per share. Unity also has 125,000 underwriter's warrants outstanding, exercisable at a price of $6.60 per warrant to purchase up to a like number of shares of common stock, and Class A and Class B warrants. Unity's common stock is quoted on the Bulletin Board under the symbol "UFAC". The Agreement contemplates that following the consummation of the transaction, the officers, directors and principal stockholders of the Company and Unity will lock up their shares for twelve months. F-15 Worlds Inc. - Predecessor (a development stage enterprise) Financial Statements Six Months Ended June 30, 1997 and Period from April 26, 1994 (Inception) to December 3, 1997 Worlds Inc. - Predecessor (a development stage enterprise) Financial Statements Six Months Ended June 30, 1997 and Period from April 26, 1994 (Inception) to December 3, 1997 Worlds Inc. - Predecessor (a development stage enterprise) Contents - -------------------------------------------------------------------------------- Worlds Inc. ("Predecessor") is considered a predecessor company and the information disclosed herein is as of and prior to the date of merger with Worlds Inc. (formerly Worlds Acquisition Corp.) ("WAC") on December 3, 1997. Financial statements (unaudited): Statements of operations F-19 Statements of cash flows F-20 Summary of accounting policies F-21 - F-24 Notes to financial statements F-25 - F-26 Worlds Inc. - Predecessor (a development stage enterprise) Statements of Operations - --------------------------------------------------------------------------------
Three months Six months ended ended June 30, ended June 30, Cumulative, period 1997 1997 from inception to (unaudited) (unaudited) December 3, 1997(a) - ---------------------------------------------------- --------- ----------- ------------ Net revenues $ 24,342 $ 64,327 $ 6,026,691 - ---------------------------------------------------- --------- ----------- ------------ Costs and expenses: Cost of revenues 9,026 27,629 11,279,348 Selling, general and administrative 556,395 1,800,488 10,602,749 Research and development 76,595 388,159 5,388,340 Lawsuit settlements -- -- 509,200 - ---------------------------------------------------- --------- ----------- ------------ Total costs and expenses 642,016 2,216,276 27,779,637 - ---------------------------------------------------- --------- ----------- ------------ Operating loss (617,674) (2,151,949) (21,752,946) Other income (expenses): Interest income 431 10,344 237,629 Interest expense (34,511) (71,339) (171,082) Gain (loss) on disposal of property and equipment (2,085) 4,070 (79,125) Income from sale of technology -- 260,100 260,100 - ---------------------------------------------------- --------- ----------- ------------ Loss before income taxes and extraordinary item (653,839) (1,948,774) (21,505,424) Income taxes (2,500) (5,000) (120,000) - ---------------------------------------------------- --------- ----------- ------------ Loss before extraordinary item (656,339) (1,953,774) (21,625,424) Extraordinary item - gain on debt settlement -- -- 389,285 - ---------------------------------------------------- --------- ----------- ------------ Net loss $(656,339) $(1,953,774) $(21,236,139) - ---------------------------------------------------- --------- ----------- ------------ - -------- (a) Date of merger with Worlds Inc. (formerly Worlds Acquisition Corp.)
See accompanying summary of accounting policies and notes to financial statements. F-19 Worlds Inc. - Predecessor (a development stage enterprise) Statements of Cash Flows - --------------------------------------------------------------------------------
Six months ended Cumulative, period June 30, 1997 from inception to (unaudited) December 3, 1997(a) - --------------------------------------------------------------------- ----------- ------------ Cash flows from operating activities: Net loss $(1,953,774) $(21,236,139) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 120,357 721,097 (Gain) loss on disposal of property and equipment (4,070) 79,125 Gain on debt settlement -- (389,284) Compensation related to stock options 6,801 761,453 Compensation related to common stock issuance -- 58,525 Licensed technology expense -- 750,000 Changes in operating assets and liabilities: Trade receivables 489,050 -- Prepaid expenses and other assets 111,250 (167,891) Accounts payable and accrued liabilities (118,503) 1,856,619 Advanced customer billings and deferred revenue -- 436,140 - --------------------------------------------------------------------- ----------- ------------ Net cash used in operating activities (1,348,889) (17,130,355) - --------------------------------------------------------------------- ----------- ------------ Cash flows used in investing activities: Acquisition of property and equipment (2,063) (999,302) - --------------------------------------------------------------------- ----------- ------------ Cash flows from financing activities: Proceeds from issuance of common stock -- 116,857 Proceeds from issuance of preferred stock, net of issuance costs -- 16,163,766 Advance from Worlds Inc. (formerly Worlds Acquisition Corp. 100,000 561,397 Payments on capital lease -- (116,018) Payments on note payable (40,000) (190,000) Proceeds from note payable 650,000 1,650,000 - --------------------------------------------------------------------- ----------- ------------ Net cash provided by financing activities 710,000 18,186,002 - --------------------------------------------------------------------- ----------- ------------ Net increase (decrease) in cash and cash equivalents (640,952) 56,345 Cash and cash equivalents, beginning of period 894,692 -- - --------------------------------------------------------------------- ----------- ------------ Cash and cash equivalents, end of period $ 253,740 $ 56,345 - --------------------------------------------------------------------- ----------- ------------ Supplemental disclosures of cash flow information: Interest paid $ -- $ 23,916 Income taxes paid 2,128 5,620 - --------------------------------------------------------------------- ----------- ------------ Disclosure of Noncash Financing and Investing Activities: In the six months ended June 30, 1997, as part of the restructuring of operations, the Predecessor disposed of property and equipment with a net book value of $252,180, which included $138,439 of equipment under capital leases. The related capital lease obligations, totaling $123,013, were assumed by the lessor and a party which acquired certain assets used in the Predecessor's prior Seattle operations. The agreement with this party also resulted in a reduction of trade payables totaling $87,226. - -------- (a) Date of merger with Worlds Inc. (formerly Worlds Acquisition Corp.)
See accompanying summary of accounting policies and notes to financial statements. F-20 Worlds Inc. - Predecessor (a development stage enterprise) Summary of Accounting Policies - -------------------------------------------------------------------------------- Nature of Business Worlds Inc. (the "Predecessor") was incorporated under the laws of Delaware on April 26, 1994. The Predecessor was formed to develop and commercialize 3D multi-user tools and technologies for the Internet market. The Predecessor is in the development stage and, as such, has not generated significant revenues from operations. Basis of Presentation The accompanying financial statements are unaudited; however, in the opinion of management, all adjustments necessary for a fair statement of financial position and results for the stated periods have been included. These adjustments are of a normal recurring nature. Selected information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. Results for interim periods are not necessarily indicative of the results to be expected for an entire fiscal year. It is suggested that these condensed financial statements be read in conjunction with the audited financial statements and accompanying notes for the Predecessor for the period ended December 3, 1997. The accompanying financial statements have been prepared assuming that the Predecessor will continue as a going concern. The Predecessor is in the development stage (see Note 1) and has suffered recurring losses from operations since its inception that raises substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. As more fully described in Note 2, on December 3, 1997, the Predecessor consummated a merger agreement with Worlds Inc. (formerly Worlds Acquisition Corp.) ("WAC"), a company which had completed a private placement offering of securities. F-21 The financial statements have been prepared in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 7, "Accounting and Reporting by Development Stage Enterprises," which requires development stage enterprises to employ the same accounting principles as operating companies. Restructuring of Operations Due to recurring losses, insufficient revenue, a working capital deficit and a net stockholders' deficit, the Predecessor's management made significant reductions in operations in February 1997 that are reflected in the Predecessor's financial statements for the period ended December 3, 1997. In March 1997, the Predecessor engaged an outside management firm to assist with the downsizing of operations which has included a major reduction in employees and a consolidation of all operations to one location in San Francisco. 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. Revenue Recognition Revenue from technology development and licensing contracts is recognized upon the attainment of contractual milestones (approximating the percentage-of-completion method). Cash received in advance of revenues earned is recorded as deferred revenue. F-22 Software Development Costs Software development costs are charged to expense when incurred until the technological feasibility of the product has been established. After technological feasibility has been established, any additional costs would be capitalizable in accordance with SFAS No. 86. No such costs have been capitalized to date. Research and Development Costs Research and development costs are expensed as incurred. Income Taxes The Predecessor uses the liability method of accounting for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes.". Deferred income tax assets and liabilities are recognized based on the temporary differences between the financial statement and income tax bases of assets, liabilities and carryforwards using enacted tax rates. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. Concentration of Credit Risk The Predecessor derives revenues from corporate customers in a variety of industries. For the periods ended June 30, 1997 and December 3, 1997, no individual customer accounted for more than 10% of revenues. F-23 New Accounting Standards Effective January 1, 1996, the Predecessor adopted the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation". Under this standard, companies are encouraged, but not required, to adopt the fair value method of accounting for employee stock-based transactions. Under the fair value method, compensation cost is measured at the grant date based on the fair value of the award and is recognized over the service period, which is usually the vesting period. Companies are permitted to continue to account for employee stock-based transactions under Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees," but are required to disclose pro forma net income and earnings per share as if the fair value method has been adopted. The Predecessor has elected to continue to account for stock-based compensation under APB No. 25. F-24 Worlds Inc. - Predecessor (a development stage enterprise) Notes to Financial Statements - -------------------------------------------------------------------------------- 1. Going Concern The accompanying financial statements have been prepared on a going-concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the financial statements, the Predecessor, as of December 3, 1997, had incurred recurring losses since inception totaling $21,236,139. As discussed in Note 2, on December 3, 1997, the Predecessor consummated a merger agreement with WAC, a company which had completed a private placement offering of securities whereby $4,415,000 of gross proceeds was raised. The Predecessor anticipates, however, that it currently has only a portion of the funds necessary to permit it to complete product development and commercialization. There can be no assurance that the Predecessor will be able to obtain the substantial additional capital resources necessary to permit the Predecessor to pursue its business plan or that any assumptions relating to its business plan will prove to be accurate. WAC is pursuing sources of additional financing and there can be no assurance that any such financing will be available to WAC on commercially reasonable terms, or at all. Any inability to obtain additional financing will have a material adverse effect on the Predecessor and WAC, including possibly requiring the Predecessor or WAC to significantly curtail or cease operations. These factors raise substantial doubt about the ability of the Predecessor to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. F-25 2. Merger On December 3, 1997, the Predecessor was merged with and into Worlds Inc. (formerly Worlds Acquisition Corp.) ("WAC") in a series of related transactions which included the simultaneous merger with and into Academic Computer Systems, Inc., a New Jersey corporation ("Academic") (the "Mergers") and a private offering of WAC's securities (the "Private Placement"). All of the common and preferred stock of the Predecessor were exchanged for 1,999,996 shares of WAC. WAC was incorporated in Delaware on April 8, 1997 to engage in designing, developing and marketing three-dimensional ("3D") music oriented Internet sites on the World Wide Web. These web sites are anticipated to utilize 3D technologies developed by the Predecessor. Academic was an inactive company with no operations. Academic voluntarily reported under the Securities Exchange Act of 1934 "Exchange Act"). The combined entity that resulted from the Mergers (the "Combined Entity") intends to continue reporting under the Exchange Act. While no trading market existed for the securities of Academic, or currently exists for the securities of the Combined Entity, the Combined Entity intends to cause its common stock to be traded on the Bulletin Board. F-26 Item 2. Management's Discussion And Analysis Of Financial Conditions And Results Of Operations. Statements contained herein 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, the Company's ability to complete development and then market its products and competitive factors and other risk factors detailed in the Companys filings with the Securities and Exchange Commission. The following material and the financial statements included herein should be read in conjunction with the Company's audited financial statements. The Company was originally formed on May 20, 1968. Since 1975 the Company has been inactive with no operations and its only income has come from interest and dividends. Following a series of mergers in December 1997 (the "Mergers"), the Company is engaged in the business and operations formerly conducted by Worlds Inc., a Delaware corporation ("Predecessor"). Accordingly, a discussion and analysis of the Company's financial condition and results of its operations would be of limited import to any reader as it would only cover activities (or lack thereof) which have no meaning in the context of the Company's current operations. Thus, included herein is a discussion and analysis of the financial condition and results of the operations of Predecessor's pre-Mergers operations. Background 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, Predecessor's operations were limited and consisted primarily of start-up activities, including recruiting personnel, raising capital, and research and development. In the third quarter of 1996, 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. In October of 1996, Predecessor introduced its first commercial toolset for developing 3D multi-user applications. In the first quarter of 1997, after an unsuccessful effort to raise capital, Predecessor became insolvent and released most of its personnel, and management sought to sell Predecessor and/or its technology. Predecessor has not generated significant revenues, and the Company will not generate significant revenues, if ever, until after it successfully completes development and market testing of Worlds Platinum and its 3D Internet music sites, and attracts and retains a significant number of subscribers and/or advertisers. The Company anticipates that it will continue to incur significant losses until, at the earliest, the Company generates sufficient revenues to offset the substantial up-front expenditures and operating costs associated with developing and commercializing its proposed products. There can be no assurance that the Company will be able to attract and retain a sufficient number of subscribers and/or advertisers to generate significant revenues or achieve profitable operations or that its products and services will prove to be commercially viable. Predecessor (and now the Company), classified its expenses into three broad groups: (i) research and development; (ii) cost of revenues; and (iii) selling, general and administration. Revenues consisted primarily of production service activities and sales of technology licenses. 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, the Company will capitalize software development costs at such time as the technological feasibility of the product has been established. 1 Plan of Operation During the next twelve months of operation the Company intends to (i) refine and commercialize the technology of Predecessor by producing interactive, 3D, music related websites and distribute access to these web sites on enhanced compact discs ("CD+") of various recording artists via traditional retail record outlets, working in conjunction with major record labels, (ii) provide the Company's proprietary 3D toolsets to aid programmers in the creation of unique 3D user experiences on the Internet, and (iii) offer the Company's 3D technology for non-music applications such as corporate intranets. The Company is presently completing work on Worlds Platinum, the latest version of the Company's 3D internet software, to adapt it for distribution and use on CD+ media. The Company is also in discussions with several major record labels and companies for them to distribute Worlds Platinum, along with music related web site access and graphics files co-authored by the Company and the particular record label or company. While the Company foresees no particular obstacle to completing work on Worlds Platinum, the development of software is inherently fraught with unforeseen delays resulting from bugs, lack of coordination among development staff, integration with other software and hardware, and general design flaws, among other problems. In addition, the Company's strategy of distributing its products on CD+ is wholly dependent upon obtaining distribution agreements with record labels or companies. To date, the Company has no such agreements and does not expect to have any until it can demonstrate that it has successfully adapted Worlds Platinum for distribution on CD+ media as planned. The Company currently has sufficient cash resources to meet the requirements of its business plan over the next twelve months. The Company currently has 8 full-time employees and is working with eight independent software contractors who were former employees of Predecessor. The Company does not anticipate hiring more than 2-3 additional employees or purchasing additional plant or equipment until product sales increase significantly and/or additional financing is obtained. By agreement dated as of June 25, 1998, the Company agreed, subject to shareholder approval and other conditions, to merge into Unity First Acquisition Corp. ("Unity"), a publicly traded blank check company with approximately $6,000,000 in liquid assets, by exchanging each Company share of Common Stock for .357 shares of Unity resulting in the Company's shareholders retaining ownership of in excess of 75% of the merged entity (the "Unity Merger"). 2 Results of Operations of the Company (Note to Results of Operations. The Mergers with Predecessor occurred on December 3, 1997) Six Months Ended June 30, 1998 Compared with Six Months Ended June 30, 1997 Statements of Operations Worlds Inc. Worlds Inc. - Predecessor 6/30/98 6/30/97 ---------- ---------- Net Revenues 16,132 64,327 Costs & Expenses: Cost of revenues (25,101) (27,629) Selling, general & administrative (1,307,525) (1,800,488) Research & development (534,428) (388,159) ---------- ---------- Operating Loss (1,850,922) (2,151,949) ---------- ---------- Other income (expense): Interest income 76,992 10,344 Interest expense (72,112) (71,339) Gain on disposal of equipment 4,070 Income from sale of technology 26,100 ---------- ---------- Loss before taxes & extraordinary item (1,846,042) (1,948,774) Income taxes (5,000) ---------- ---------- Loss before extraordinary item (1,846,042) (1,953,774) Extraordinary item - gain on debt settlement 151,654 ---------- ---------- Net Loss (1,694,388) (1,953,774) ---------- ---------- In the first six months of 1998 the company continued the implementation of the new business plan. Significant expenditure was incurred towards completion of the Platinum technology and also with legal and professional fees as the company proceeds with its fund raising activities. In the first quarter of 1997 Predecessor was insolvent and had failed to raise any additional capital. In January and February 1997 the majority of Predecessor's personnel were released and most of its management team resigned. Normal operations of Predecessor ceased and significant wind down costs were incurred. The Seattle network operations center and Active Worlds, an earlier generation of Predecessor's technology, were both sold, resulting in net proceeds of $260,100 3 Revenues are nominal and are derived from the company's WorldsChat product and one custom production project. Revenue was $16,132 and had associated direct costs of $25,101 for the six months ended June 30, 1998 compared to $64,327 in revenue and $27,629 of direct costs for the same period in 1997. Selling, general and administrative expenses were $1,307,525 for the six months ended June 30, 1998. This represented a decrease of $492,963 from $1,800,488 compared to the six months ended June 30, 1997. This decrease was directly attributable to the higher costs associated with the Predecessor ceasing normal operations in the first quarter of 1997. Research and development costs increased by $146,269 to $534,428 for the six months ended June 30, 1998 from $388,159 for the six months ended June 30, 1997. This increase is directly attributable to the company ceasing development technology at the end of the first quarter of 1997. Other income included $76,992 of interest income in the six months to June 30,1998 earned from the proceeds of the recent share offerings. Other income in the six months to June 30, 1997 included interest income of $10,344, the sale of the Activeworlds technology in the net amount of $260,100 and a property disposal gain of $4,070. Other expenses included interest expense of $72,112 directly attributable to the Predecessor's notes payable in the six months to June 30, 1998. Interest expenses in the six months to June 30, 1997 were $71,339. As a result of the foregoing, plus a gain on debt settlement of $151,654 during the first quarter of 1998, Worlds Inc incurred a net loss of $1,694,388 for the six months to June 30,1998, compared to a loss $1,953,774 for the six months to June 30,1997 a decrease of 13%. Three Months Ended June 30, 1998 Compared with 3 months Ended June 30, 1997 Statements of Operations Worlds Inc. Worlds Inc. - Predecessor 6/30/98 6/30/97 ---------- -------- Net Revenues 12,130 24,342 Costs & Expenses: Cost of revenues (22,500) (9,026) Selling, general & administrative (759,185) (556,395) Research & development (302,516) (76,595) ---------- -------- Operating Loss (1,072,071) (617,674) ---------- -------- Other income (expense): Interest income 35,054 431 Interest expense (35,656) (34,511) Loss on disposal of equipment (2,085) ---------- -------- Loss before taxes (1,072,673) (653,839) Income taxes -- (2,500) ---------- -------- Net Loss (1,072,673) (656,339) ---------- -------- 4 In the second quarter of 1998 the company continued the implementation of the new business plan. Significant expenditure was incurred towards completion of the Platinum technology. Revenues are nominal and are derived from the company's WorldsChat product and one custom production project. Revenue was $12,130 and had associated direct costs of $22,500 for the three months ended June 30, 1998 compared to $24,342 in revenue and $9,026 of direct costs for the same period in 1997. Selling, general and administrative expenses were $759,185 for the three months ended June 30, 1998. This represented a increase of $202,790 from $556,395 compared to the three months ended June 30, 1997. This increase was directly attributable to the Predecessor ceasing normal operations in the first quarter of 1997. Research and development costs increased by $225,921 to $302,516 for the three months ended June 30, 1998 from $76,595 for the three months ended June 30, 1998. This increase was directly attributable to the Predecessor ceasing normal operations in the first quarter of 1997 Other income included $35,054 of interest income in the three months to June 30,1998 earned from the proceeds of the recent share offerings. Other income in the three months to June 30, 1997 included interest income of $431. Interest expenses in the three months to June 30, 1998 were $35,656 directly attributable to the Predecessor's notes payable. Other expenses included interest expense of $34,511 and a property disposal loss of $2,085 in the three months to June 30, 1997. As a result of the foregoing Worlds Inc incurred a net loss of $1,072,673 for the three months to June 30,1998, compared to a loss $656,339 for the three months to June 30,1997 a increase of 63%. Liquidity and Capital Resources of the Company Net cash used by the Company's operating activities from January 1,1998 through June 30, 1998 was $1,783,428. At June 30, 1998 the Company had working capital of $1,765,197 The Company completed a public round of financing on June 16, 1998 raising $1,832,000 of which it netted $1,715,800 and paid $64,743 to dissenting shareholders of the Mergers resulting in 113,465 shares being added to treasury. The Company's capital requirements relating to the development and commercialization of Worlds Platinum have been and will continue to be significant. The Company is dependent on the proceeds of Unity resulting from the Unity Merger and other future financings in order to develop and commercialize its proposed products. 5 The Company anticipates, based on currently proposed business plans and assumptions relating to its operations (including the timetable of, and costs associated with, product development and commercialization), that the proceeds of its recent offering, will provide only a portion of the funds necessary to permit the Company to complete product development and commercialization. Satisfactory completion of product development and commercialization will require capital resources substantially greater than the proceeds of its recent offering or otherwise currently available to the Company. While the Company hopes to raise an additional $6 million from the Unity Merger, the Company has no current arrangements with respect to, or 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 operations. Based upon its current projections, the Company believes it currently has sufficient funds to operate for the next twelve months and at least two years following the Unity Merger. PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. (a) A financial data schedule is filed herewith as an exhibit. (b) No reports on Form 8-K were filed during the quarter for which this report is being filed. 6 SIGNATURES In accordance with the requirements of the Exchange Act, the Registrant caused this Report to be signed on its behalf by the undersigned thereto duly authorized. Date: August 12, 1998 WORLDS INC. By: ________________________ Thomas Kidrin, President, CEO and Treasurer 7 EX-27 2 ARTICLE 5 FDS FOR 2ND QUARTER 10-QSB
5 THE SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF WORLDS, INC. FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 3,419,518 0 140,318 (140,318) 0 3,453,805 650,557 (534,688) 3,569,674 1,688,608 0 0 0 17,982 (43,582) 3,569,674 16,132 16,132 25,101 25,101 1,841,953 0 72,112 (1,846,042) 0 (1,846,042) 0 151,654 0 (1,694,388) (.10) (.10)
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