-----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, NWXeA572BhkIzwHQfA+o10v2z8SwBTJZ7eUbffTxrNOkwMLAitnJ+501l/Bi02Gc xNxXkHQfmGjtJAl66ZzoeQ== 0000946790-99-000037.txt : 19990817 0000946790-99-000037.hdr.sgml : 19990817 ACCESSION NUMBER: 0000946790-99-000037 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990816 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: 99692675 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 10QSB 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, 1999 [ ] 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) 22-184316 (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 16,637,881 shares as of August 13, 1999 Transitional Small Business Disclosure Format: Yes [ ] No [X] PART I FINANCIAL INFORMATION Item 1. Financial Statements. Item 2. 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 under Item 1. 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 as stated in other of our public filings with the Securities and Exchange Commission. We were formed on May 20, 1968. From 1975 until December 1997 we were inactive with no operations and our only income was from interest, gain on the sale of securities and dividends. In December 1997 a series of mergers occurred involving us, Worlds Acquisition Corp. and our predecessor, Worlds Inc. Following the mergers, we have been engaged in the business and operations formerly conducted by our predecessor and have changed our name to adopt that of our predecessor, Worlds Inc. Accordingly, a discussion and analysis of our financial condition and results of our operations without discussing our predecessor would be of limited importance to any reader. Thus, included herein is a discussion of our 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, custom production work, 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. These sales were nominal. 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 did not generate significant revenues. While we have completed development and market testing of Worlds Gamma and 3D Internet music sites, we may not generate significant revenues until after we successfully attract and retain a significant number of VIP subscribers, customers and/or advertisers. We anticipate continuing 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 proposed products. There can be no assurance that we will be able to attract and retain a sufficient number of VIP subscribers, customers and/or advertisers to generate significant revenues or achieve profitable operations or that our products and services will prove to be commercially viable. We classify our expenses into three broad groups: (1) research and development; (2) cost of revenues; and (3) selling, general and administration. Software development costs, consisting primarily of salaries and related expenses, incurred prior to establishing technological feasibility are expensed in accordance with Financial Accounting Standards Board (FASB) Statement No. 86. In accordance with FASB 86, we will capitalize software development costs at such time as the technological feasibility of the product has been established. We began capitalizing our software in the 4th quarter of 1998 with the commercial release of three products, Animal House, BowieWorld and Worlds Ultimate 3D Chat. For the first quarter of 1999 approximately $214,000 of such expenditures were capitalized. For the second quarter of 1999 approximately $225,000 of such expenditures were capitalized. Plan of Operation During the fourth quarter of 1998, we successfully completed the development of our Gamma development tool kit and commercially released three products utilizing our 3D Internet technology. During the first and second quarters of 1999 we continued holding discussions with several major record labels and companies for them to distribute Worlds Gamma, along with music related web site access. Our strategy of distributing our products on CD+ is wholly dependent upon obtaining distribution agreements with record labels, artists or record companies. We have also begun to distribute our services via internet service providers, broadband service providers via cable modems and a mini-downloadable version. To date, we have entered into several agreements. We have also been actively pursuing strategic alliances with a number of companies that can provide exposure and distribution of our products and technology. These meetings started paying dividends during the first half of 1999 as we engaged in serious negotiations that led to the following agreements. In June 1999 we launched HansonWorld, the first 3D chat environment utilizing our 3D technology on a special CD which was distributed to the fan club of Hanson. We entered into two agreements with Freeserve Plc., United Kingdom's largest Internet Service Provider and a leading UK Internet Portal. The first agreement provides for us to be the official 3D Internet broadband chat content provider on Freeserve which will include our 3D Internet Technology and 3D broadband content on millions of new Freeserve ISP access CDs. The second agreement provides for us to be the official and exclusive 2D, or HTML, Internet chat content provider on the Freeserve ISP service. We entered into agreements with third party content providers to be integrated into the Road Runner broadband offering, Hang@worlds.com. We added the following artists to our e-commerce website, WorldsStore.com. Wu Wear store.com, Five store.com, B*Witched store.com, Sheryl Crow store.com, Eminem store.com, Bruce Springsteen store.com, Ricky Martin store.com, Deftones store.com, Metallica store.com, Tim McGraw store.com, The Cranberries store.com and Britney Spears store.com. During this quarter we also continued to upgrade our e-commerce web site, WorldsStore.com, purchased inventory for sale through our web site, enhanced features to our core technology by improving the audio and video streaming features, continued to improve our voice-to-voice Internet telephony and increased our customer service program. Our present cash resources are insufficient to meet all of our requirements over the next twelve months unless additional funds are raised through our current private offering and through other financings. We currently have nine full-time employees and are working with seven independent software contractors who were former employees of our predecessor. We do not anticipate hiring additional employees or purchasing additional plant or equipment other than that needed on a day-to-day basis until product sales increase significantly and/or significant additional financing is obtained. We are currently in the midst of a private offering. We are offering up to 66 units at a price of $60,000 per unit. Each unit consists of 15,000 shares of our common stock and 7,500 warrants to purchase shares of our common stock at a price of our common stock at a price of $5.00 per share. As of June 30, 1999 and through August 13, 1999, $2,460,000 has been released from escrow. The escrow agent for the offering is currently holding an additional $419,930, but is unable to predict how much, if any, of such funds will eventually be released for our use. The offering is currently schedule to terminate on August 21, 1999. Results of Our Operations Six Months Ended June 30, 1999 Compared with Six Months Ended June 30, 1998 The following data extracted from the attached financial statements compares the results of our operations for the six months ended June 30, 1999 to the six months ended June 30, 1998. Six months ended 6/30/99 6/30/98 Net Revenue $ 92,925 $16,132 Costs & Expenses: Cost of revenues (70,355) (25,101) Selling, general & administrative (1,425,495) (1,307,525) Research & development - (534,428) Operating Loss (1,402,925) (1,850,922) Other Income (Expense): Interest income 17,966 76,992 Interest expense (68,922) (72,112) Loss before taxes & extraordinary item (1,453,881) (1,846,042) Extraordinary item - gain on debt settlement - 151,654 Net Loss (1,453,881) (1,694,388) In the first half of 1999, we continued to upgrade our core technology and began production on various new projects. We continue to have discussions with potential new clients and/or partners, no assurance can be given that any negotiations will lead to the consummation of any additional agreements. In the first quarter of 1998 we continued the implementation of our new business plan. Significant expenditure was incurred towards completion of the Gamma technology and also with legal and professional fees. Revenues are nominal and are derived from our Worlds Ultimate 3D Chat product and from sales on our e-commerce web site where we currently operate artist or artist related Internet stores such as DavidBowieStore.com, NinetyEightDegreesStore.com and EltonJohnStore.com, among others. Revenue was $92,925 and had associated direct costs of $70,355 for the six months ended June 30, 1999, compared to $16,132 in revenue and $25,101 of direct costs for the same period in 1998. Selling, general and administrative expenses were $1,425,495 for the six months ended June 30, 1999. This represented an increase of $117,970 from $1,307,525 compared to the six months ended June 30, 1998. This increase was directly attributable to the higher costs associated with maintaining our new e-commerce site, retaining expert software developers to improve and upgrade our existing products and costs involved in beginning work on some of the new projects discussed above. We incurred no research and development costs during the six months ended June 30, 1999 as compared to $534,428 for the six months ended June 30, 1998. This decrease is directly attributable to the fact that since our technology is now technologically feasible, i.e., it works, all expenses previously charged to research and development are capitalized. For the six months ended June 30, 1999 $439,000 of such expenditures were capitalized. Other income included $17,966 of interest income in the six months to June 30, 1999 earned from the remainder of the proceeds of our share offerings as compared to $76,992 in the six months ended June 30, 1998. Other expenses included interest expense of $68,922 directly attributable to the Predecessor's notes payable in the six months to June 30, 1999. Interest expense in the six months to June 30, 1998 was $72,112. As a result of the foregoing we incurred a net loss of $1,453,881 for the six months ending June 30, 1999, compared to a loss of $1,694,388 for the six months ending June 30, 1998, a decrease of $240,507. The loss in the 1998 quarter was after an extraordinary gain of $151,654. See Statement of Operations on Page F-4. Three Months Ended June 30, 1999 Compared with Three Months Ended June 30, 1998 Three months ended 6/30/99 6/30/98 Net Revenue $57,748 $12,130 Costs & Expenses: Cost of revenues (48,891) (22,500) Selling, general & administrative (809,680) (759,185) Research & development - (302,516) Operating Loss (800,825) (1,072,071) Other Income (Expense): Interest income 5,180 35,054 Interest expense (30,000) (35,656) Loss before taxes (825,643) (1,072,673) Net Loss (825,643) (1,072,623) Revenues are nominal and are derived from our Worlds Ultimate 3D Chat product and from sales on our e-commerce web site where we currently operate artist or artist related Internet stores such as DavidBowieStore.com, NinetyEightDegreesStore.com and EltonJohnStore.com, among others. Revenue was $57,748 and had associated direct costs of $48,891 for the three months ended June 30, 1999, compared to $12,130 in revenue and $22,500 of direct costs for the same period in 1998. Selling, general and administrative expenses were $809,680 for the three months ended June 30, 1999. This represented an increase of $50,495 from $759,185 compared to the three months ended June 30, 1998. This increase was directly attributable to the higher costs associated with maintaining our new e-commerce site, retaining expert software developers to improve and upgrade our existing products and costs involved in beginning work on some of the new projects discussed above. We incurred no research and development costs during the three months ended June 30, 1999 as compared to $302,516 for the three months ended June 30, 1998. This decrease is directly attributable to the fact that since our technology is now technologically feasible, i.e., it works, all expenses previously charged to research and development are capitalized. For the second quarter of 1999, $225,000 of such expenditures were capitalized. Other income included $5,180 of interest income in the three months to June 30, 1999 earned from the remainder of the proceeds of our share offerings as compared to $35,054 in the three months ended June 30, 1998. Other expenses included interest expense of $30,000 directly attributable to the Predecessor's notes payable in the three months to June 30, 1999. Interest expense in the three months to June 30, 1998 was $35,656. As a result of the foregoing we incurred a net loss of $825,643 for the three months ending June 30, 1999, compared to a loss of $1,072,673 for the three months ending June 30, 1998, a decrease of $247,030. See Statement of Operations on Page F-4. Liquidity and Capital Resources of the Company Net cash provided from January 1, 1999 through June 30, 1999 was $955,853. At June 30, 1999, we had working capital of $1,179,631 and cash and cash equivalents in the amount of $2,537,617. 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 $3,000,000. We also acquired approximately an additional $560,000 from one of the other parties to the mergers. 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. On May 12, 1999 we commenced a new private offering. While the offering is continuing, as of August 13, 1999 we received $2,460,000 and escrow agent for the offering is holding an additional $419,930 pending completion of some related paperwork. Our capital requirements relating to the commercialization of Worlds Gamma and development of web site access and content for the music industry have been and will continue to be significant. We are dependent on the proceeds of future financings in order to continue in business and develop and further commercialize our proposed products. We anticipate, based on currently proposed business plans and assumptions relating to our operations, including the timetable of, and costs associated with, product development and commercialization, that we have only a portion of the funds necessary to complete product development and commercialization. Satisfactory completion of product development and commercialization will require capital resources substantially greater than those currently available to us. In addition, as a result of the mergers by operation of law, we assumed predecessor's then liabilities of approximately $4.6 million, the majority of which has since been paid or renegotiated. At June 30, 1999, our total liabilities were approximately $3,360,000 million, including the long term portion of notes payable of $1,853,000. There can be no assurance that we will be able to obtain the substantial additional capital necessary to permit us to attract and retain a sufficient number of subscribers or that any assumptions relating to our business plan will prove to be accurate. While we hope to raise additional financing, we have no current arrangements with respect to, or sources of, additional financing and there can be no assurance that any such financing, particularly the significant amounts of financing that would be required, will be available to us on commercially reasonable terms, or at all. Any inability to obtain additional financing will have a material adverse effect, including possibly requiring us to significantly curtail or cease operations. Effect of Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." ("SFAS No. 133"), which requires companies to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. The Company does not presently enter into any transactions involving derivative financial instruments and, accordingly, does not anticipate the new standard will have any effect on its financial statements. Year 2000 Disclosure We are Year 2000 compliant and we do not anticipate any internal problems. In the event any internal problems should arise, we have many expert computer technicians on our payroll and we believe that we will be able to satisfactorily address any such problems. However, we are dependent on the integrity of the Internet being maintained to derive income from the sale of merchandise on our own e-commerce site and through links to the products we create. We have employed a redundancy system as a safeguard to protect the viability of our site by having our site hosted by two of the larger Internet Service Providers. Thus, in the event one of our hosts should fail, we could continue uninterrupted on the other Internet Service Provider. We have been advised that our hosts are addressing the Year 2000 issue and hope to be compliant. We use Wells Fargo to process our e-mail transactions. Wells Fargo processes a significant portion of all Internet e-commerce transactions and if it fails due to Year 2000 problems we will be negatively impacted, but not likely more than many other e-commerce vendors. In summary, we are totally dependent upon 3rd parties for hosting and processing our e-commerce activities and while we cannot control the actions of these 3rd parties, we believe that given our redundant safeguards, the availability of other hosts and processors to switch to in the event our current hosts and/or processor crashes and the fact that we only see nominal revenue from our e-commerce at this time, we do not believe that our profitability or operations will be materially affected by the Year 2000 problem. PART II OTHER INFORMATION Item 5. Other Information. On May 12, 1999, we began an exempt private offering under Rule 506 as promulgated under The Securities Act of 1933, as amended. We are seeking to raise $2-4 million through the sale of a unit offering. The offering was offered solely to "accredited investors" and pursuant to a Private Placement Memorandum and Subscription Agreement. The offering terminated on July 31, 1999. We received $2,460,000 and the escrow agent is holding an additional $419,930 pending clarification of some of the submitted paperwork. We can venture no opinion at this time as to how much additional funds will be released to us. On August 8, 1999 we adopted the name Worlds.com as the new name under which we will conduct business. The previous disclosure in this Item 5 is a "forward looking statement" which may never eventuate. 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. 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, 1999 WORLDS INC. By: /s/ Thomas Kidrin, President, CEO and Treasurer Worlds Inc. (a development stage enterprise) Financial Statements Periods Ended June 30, 1998 and 1999 Worlds Inc. (a development stage enterprise) Financial Statements Periods Ended June 30, 1998 and 1999 F-1 Worlds Inc. (a development stage enterprise) Contents Unaudited financial statements: Balance sheets F-3 Statements of operations F-4 Statement of stockholders' equity (deficit) F-5 Statements of cash flows F-6 Summary of accounting policies F-7 - F-11 Notes to financial statements F-12 - F-15 F-2 Worlds Inc. (a development stage enterprise) Balance Sheets December 31, 1998 June 30, 1999 ------------------------------------------------------------------ --------------------------- ---------------------- Assets (unaudited) Current: Cash and cash equivalents $ 1,581,764 $ 2,537,617 Accounts receivable - 19,918 Prepaid expenses and other current assets 53,486 42,512 Inventory 58,516 87,052 ------------------------------------------------------------------ --------------------------- ---------------------- Total current assets 1,693,766 2,687,099 Property, equipment and software development costs, net of accumulated depreciation and amortization 214,246 562,132 Other assets (Note 5) - 503,095 ------------------------------------------------------------------ --------------------------- ---------------------- $ 1,908,012 $ 3,752,326 ------------------------------------------------------------------ --------------------------- ---------------------- Liabilities and Stockholders' Equity (Deficit) Current: Accounts payable $ 319,906 $ 468,488 Accrued expenses 446,333 769,832 Current maturities of notes payable 246,648 269,148 ------------------------------------------------------------------ --------------------------- ---------------------- Total current liabilities 1,012,887 1,507,468 Long-term portion, notes payable 1,875,018 1,852,518 ------------------------------------------------------------------ --------------------------- ---------------------- Total liabilities 2,887,905 3,359,986 ------------------------------------------------------------------ --------------------------- ---------------------- Contingencies (Note 4) Stockholders' equity (deficit) (Notes 2 and 3): Common stock, $.001 par value - shares authorized 30,000,000; outstanding 18,031,996 and 18,815,746 18,032 18,816 Additional paid-in capital 8,401,970 11,227,300 Deficit accumulated during the development stage (9,335,152) (10,789,033) ------------------------------------------------------------------ --------------------------- ---------------------- (915,150) 457,083 Treasury stock, at cost, 113,465 and 1,613,465 shares (64,743) (64,743) ------------------------------------------------------------------ --------------------------- ---------------------- Total stockholders' equity (deficit) (979,893) 392,340 ------------------------------------------------------------------ --------------------------- ---------------------- $ 1,908,012 $ 3,752,326 ------------------------------------------------------------------ --------------------------- ----------------------
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 April 8, 1997 (inception) to Three months ended June 30, Six months ended June 30, June 30, 1998 1999 1998 1999 1999 (a) Net revenues $ 12,130 $ 57,748 $ 16,132 $ 92,925 $ 123,455 Costs and expenses: Cost of revenues (22,500) (48,891) (25,101) (70,355) (99,634) Selling, general and administrative (759,185) (809,680) (1,307,525) (1,425,495) (4,751,228) Research and development (302,516) - (534,428) - (992,932) Acquired research and development - - - - (6,135,538) Operating loss (1,072,071) (800,823) (1,850,922) (1,402,925) (11,855,877) Other income (expenses): Gain resulting from reversal of certain predecessor liabilities - - - - 810,140 Interest income 35,054 5,180 76,992 17,966 155,565 Interest expense (35,656) (30,000) (72,112) (68,922) (197,184) Loss before extraordinary item (1,072,673) (825,643) (1,846,042) (1,453,881) (11,087,356) Extraordinary item - gain on debt settlement - - 151,654 - 298,323 Net loss $(1,072,673) $(825,643) $(1,694,388) $(1,453,881) $(10,789,033) Loss per share (basic and diluted): Loss before extraordinary item $ (.06) $ (.05) $ (.11) $ (.08) Extraordinary item - - .01 - Net loss per share (basic and diluted) $ (.06) $ (.05) $ (.10) $ (.08) Weighted average common shares outstanding: Basic and diluted 16,716,546 16,723,298 16,434,339 17,304,288 -------------- (a) Includes the results of Predecessor and Academic (from December 4, 1997) 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) Statements of Stockholders' Equity (Deficit) Period from April 8, 1997 (inception) to June 30, 1999 ------------------------------------- ----------------------- -------------- ---------------- ---------- -------------- Deficit accumulated Total Additional during the stockholders' paid-in development Treasury equity Common stock capital stage stock (deficit) ----------------------- Shares Amount ------------------------------------- ------------ ---------- -------------- ---------------- ---------- -------------- Balance, January 1, 1998 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 Sale of shares in public offering of common stock, net (June 1998) 1,832,000 1,832 1,713,968 - - 1,715,800 Conversion of 113,465 shares to certain stockholders (June 1998) - - - - (64,743) (64,743) 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) - (2,648,681) ------------------------------------- ------------ ---------- -------------- ---------------- ---------- -------------- Balance, December 31, 1998 18,031,996 18,032 8,401,970 (9,335,152) (64,743) (979,893) Contribution of 1,500,000 shares by founders to treasury (April 1999) - - - - - - Exercise of stock options (April 1999) 75,000 75 74,925 - - 75,000 Issuance of shares for content supply agreement (June 1999) 93,750 94 374,906 - - 375,000 Sale of shares in private offering memorandum (June 1999) 615,000 615 2,375,499 - - 2,376,114 Net loss for the six months ended June 30, 1999 (unaudited) - - - (1,453,881) - (1,453,881) ------------------------------------- ------------ ---------- -------------- ---------------- ---------- -------------- Balance, June 30, 1999 (unaudited) 18,815,746 $18,816 $11,227,300 $(10,789,033) $(64,743) $ 392,340 ------------------------------------- ------------ ---------- -------------- ---------------- ---------- --------------
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 June 30, (inception) to ------------------ ------------------- 1998 1999 June 30, 1999 ----------------------------------------------------------- ------------------ ------------------- ------------------ Cash flows from operating activities: Net loss $ (1,694,388) $(1,453,881) $(10,789,033) ----------------------------------------------------------- ------------------ ------------------- ------------------ Adjustments to reconcile net loss to net cash used in operating activities: Loss on disposal of fixed assets - - 54,041 Depreciation and amortization 93,583 105,114 251,189 Gain resulting from reversal of certain predecessor liabilities - - (810,140) Gain on debt settlement (151,654) - (298,323) Acquired research and development - - 6,135,538 Changes in operating assets and liabilities, net of effects from merger with Predecessor and Academic: Trade receivable 538 (19,918) (19,918) Inventory - (28,536) (87,052) Prepaid expenses and other assets 39,888 (117,121) (2,716) Accounts payable and accrued expenses (71,395) 472,081 838,271 ----------------------------------------------------------- ------------------ ------------------- ------------------ Total adjustments (89,040) 411,620 6,060,890 ----------------------------------------------------------- ------------------ ------------------- ------------------ Net cash used in operating activities (1,783,428) (1,042,261) (4,728,143) ----------------------------------------------------------- ------------------ ------------------- ------------------ Cash flows from investing activities: Acquisition of property and equipment - (14,000) (42,587) Additions to software development costs - (439,000) (599,000) ----------------------------------------------------------- ------------------ ------------------- ------------------ Net cash used in investing activities - (453,000) (641,587) ----------------------------------------------------------- ------------------ ------------------- ------------------ 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 2,376,114 6,097,290 Proceeds from exercise of options - 75,000 75,000 Proceeds from sale of common stock in public offering 1,715,800 - 1,715,800 Payment of conversion price of shares to certain stockholders (64,743) - (64,743) Payments on note payable (16,440) - (120,000) ----------------------------------------------------------- ------------------ ------------------- ------------------ Net cash provided by financing activities 1,661,117 2,451,114 7,907,347 ----------------------------------------------------------- ------------------ ------------------- ------------------ Net increase (decrease) in cash and cash equivalents (122,311) 955,853 2,537,617 Cash and cash equivalents, beginning of period 3,541,829 1,581,764 - ----------------------------------------------------------- ------------------ ------------------- ------------------ Cash and cash equivalents, end of period $ 3,419,518 $ 2,537,617 $ 2,537,617 ----------------------------------------------------------- ------------------ ------------------- ------------------
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") 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, 1998 and for the Predecessor for the period ended December 3, 1997. F-7 Worlds Inc. (a development stage enterprise) Summary of Accounting Policies 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 Financial Instruments The carrying amounts of financial instruments, including cash and short-term debt, approximated fair value as of March 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 June 30 1999, 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 Worlds Inc. (a development stage enterprise) Summary of Accounting Policies 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. Inventory Inventory consists of merchandise held for resale and is valued at the lower of cost or market on a first-in, first-out (FIFO) basis. Software Development Costs In accordance with the provisions of SFAS 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. During the fourth quarter of 1998, technological feasibility of the Company's software was established. In this regard, $160,000 was capitalized and included in property, equipment and software development as of December 31, 1998. During the six months ended June 30, 1999, a further $439,000 was capitalized in this regard. 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. Research and Development Costs Research and development costs are expensed as incurred. F-9 Worlds Inc. (a development stage enterprise) Summary of Accounting Policies 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. Loss Per Share In 1997, the Financial Accounting Standards Board's ("FASB") 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 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", 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. F-10 Worlds Inc. (a development stage enterprise) Summary of Accounting Policies Comprehensive Income Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income", which establishes standards for reporting and display of comprehensive income, its components and accumulated balances. Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Adoption of the standard has had no effect on financial statement disclosures since there were no items of comprehensive income during the periods presented. F-11 Worlds Inc. - Predecessor (a development stage enterprise) Notes to Financial Statements 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-12 Worlds Inc.-Predecessor (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 stock in the accompanying balance sheets. While no trading market existed for the securities of Academic, the Company's common stock is traded on the Bulletin Board. F-13 Worlds Inc.-Predecessor (a development stage enterprise) Notes to Financial Statements 3. Private Placement and Public Offering The Private Placement called for WAC to 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. 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 June 1999, the Company sold 615,000 shares in a private offering memorandum and received gross proceeds of $2,460,000. Net proceeds, after commissions and expenses of this offering, aggregated $2,376,114. F-14 Worlds Inc.-Predecessor (a development stage enterprise) Notes to Financial Statements 4. Contingencies During April 1999, the Company entered into a three-year financial advisory and consulting agreement 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. 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 agreed to contribute 1,500,000 shares to the capital of the Company (included in treasury stock). 5. Content Supply Agreement During June 1999, the Company entered into a content supply agreement for a 3D internet site offered by an Internet service provider (the "Provider"). Under the terms of the agreement, the Company paid $125,000 and issued 93,750 shares of common stock upon signing (included in other assets aggregating $500,000). A further $125,000 and 93,750 shares is required to be delivered to the Provider upon launch of the site which is expected to occur during the quarter ended September 30, 1999. F-15 EX-27 2 FDS --
5 THE SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENT OF WORLDS INC. FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY TO SUCH FINANCIAL STATEMENTS. 0000001961 WORLDS INC. 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 2,537,617 0 19,918 0 87,052 2,687,099 1,050,600 488,468 3,752,386 1,507,468 0 0 0 18,816 373,524 3,752,886 92,925 92,925 70,355 70,355 1,425,495 0 68,922 (1,453,881) 0 (1,453,881) 0 0 0 (1,453,881) (.08) (.08)
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