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As filed with the Securities and Exchange Commission on September 29, 1999
Registration No. 0-26355
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10/A
Amendment Number 1
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR 12(g) OF THE
SECURITIES EXCHANGE ACT OF 1934
eUNIVERSE, INC.
(Exact Name of Registrant as Specified in Its Charter)
NEVADA 06-1556248
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
101 NORTH PLAINS INDUSTRIAL ROAD
WALLINGFORD, CONNECTICUT 06492
(Address of Principal Executive Offices) (Zip Code)
203-265-6412
(Registrant's Telephone Number, Including Area Code)
Securities to be registered pursuant to Section 12(b) of the Act:
None
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
(Title of Class)
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TABLE OF CONTENTS
Item 1 Business................................................................1
General Development of Business...............................................1
Description of the Business...................................................2
Web Sites of eUniverse........................................................4
Domain Names, Patents and Trademarks..........................................8
Operations and Technology.....................................................9
Year 2000 Readiness Disclosure...............................................10
Sales and Marketing..........................................................11
Competition..................................................................13
Employees....................................................................14
Facilities...................................................................15
The Company's Strategy and Plans.............................................15
Recent Acquisitions..........................................................18
Item 2 Financial Information..................................................19
Selected Financial Information...............................................19
Management's Discussion and Analysis of Financial Condition and Results
of Operations...............................................................20
Results of Operations - Year Ended March 31, 1999 vs. 1998...................23
Liquidity and Capital Resources..............................................26
Item 3 Properties............................................................26
Item 4 Security Ownership of Certain Beneficial Owners and Management........27
Item 5 Directors and Executive Officers......................................28
Item 6 Executive Compensation................................................30
Item 7 Certain Relationships and Related Transactions........................33
Item 8 Legal Proceedings.....................................................33
Item 9 Market Price of and Dividends on the Registrant's Common Equity and
Related Stockholder Matters...........................................33
Item 10 Recent Sales of Unregistered Securities...............................35
Item 11 Description of Securities.............................................37
Item 12 Indemnification of Directors and Officers.............................38
Item 13 Financial Statements..................................................40
Item 14 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure..................................................40
Item 15 Financial Statements and Exhibits.....................................40
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ITEM 1 BUSINESS
The registrant, eUniverse, Inc., is a Nevada corporation engaged in
developing, acquiring and operating a network of web sites which provide
entertainment-oriented products and services. The registrant is engaged in the
retail sale of audio CDs, videotapes, digital video disks ("DVDs") and related
services. Additionally, the Company offers interactive games, including
traditional board and card games and computer and arcade games, gaming and other
forms of web-based entertainment programming via the World Wide Web. As used
herein, the term "Company" refers to eUniverse, Inc. and all of its
subsidiaries, unless the context requires otherwise.
GENERAL DEVELOPMENT OF BUSINESS.
Entertainment Universe, Inc. ("EUI") was founded in February 1999 by Brad D.
Greenspan for the purpose of developing and acquiring entertainment-related
Internet businesses. Motorcycle Centers of America, Inc. ("MCA"), was a Nevada
corporation with no significant operations or revenue since 1995, whose shares
were publicly traded on the OTC Bulletin Board. In March 1999, EUI and MCA
entered into a letter of intent to undertake a stock exchange (the
"Reorganization") pursuant to which the holders of EUI common stock would
exchange their EUI shares for shares of MCA common stock on a one-to-one basis.
On April 14, 1999, the Reorganization was completed. As a result of the
Reorganization, EUI shareholders owned 92% of MCAs shares of common stock and
EUI became a wholly owned subsidiary of MCA.
Also on April 14, 1999 but immediately prior to the closing of the
Reorganization, EUI sold 1,795,024 shares of Series A Convertible Preferred
Stock in a private offering under Regulation D of the Securities Act of 1933
(the "Securities Act") (See "Item 10, Recent Sales of Unregistered Securities"),
raising $6,462,086, before offering costs were deducted. In connection with the
Reorganization, the holders of the EUI Series A Convertible Preferred Stock
exchanged their shares, on a one-to-one basis, for shares of MCA convertible
preferred stock which have equivalent rights and preferences.
EUI used $1,915,000 of the Preferred Stock offering proceeds (plus
2,425,000 shares of common stock) to acquire CD Universe, Inc. ("CD Universe").
CD Universe is a Connecticut corporation engaged in the business of selling
audio CDs and videotapes over the Internet. Concurrently with the closing of the
Reorganization, EUI distributed its asset, the capital stock of CD Universe,
Inc., to its sole shareholder, MCA. MCA, the parent entity following the
Reorganization, changed its name to eUniverse, Inc.
As neither MCA nor EUI had any significant operations prior to the
acquisition of CD Universe, CD Universe is considered to be the predecessor
entity and its historical financial statements have been included in this
registration statement.
The following chart summarizes our current corporate organizational structure:
----------------------------
eUniverse, Inc.
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<S> <C> <C> <C> <C>
Entertainment CD Universe, Case's Ladder Gamer's Alliance, The Big Network,
Universe, Inc. Inc. Inc. Inc. Inc.
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</TABLE>
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DESCRIPTION OF THE BUSINESS.
The Company's current emphasis is on acquiring businesses in the field of
entertainment, primarily games (including board, card, computer, arcade and
console video games), music and movies, with the following key characteristics:
(1) strategic content, management or technology, (2) product offerings
compatible with the Generation X and Y demographics of the Company's sites, and
(3) the ability to leverage the Company's strategic advantages such as order
fulfillment, hardware capacity and general overhead. The Company's strategy is
based on the acquisition and/or development of web-based businesses in several
sectors of the entertainment industry, and utilizing their synergies to generate
cross traffic and increased revenues. This strategy includes the integration of
a worldwide distribution of web-based entertainment programming. The Company is
presently exploring expansion into Internet-based entertainment in a form that
is similar to television and radio programming. Its long-term strategic plans
are intended to take advantage of a world-wide distribution network comprised of
the installed base of personal computers and televisions, making use of existing
and emerging technologies to deliver this targeted programming.
At the present time, the Company is primarily engaged in the retail sale of
music and video products and accessories, including audio CDs, videotapes and
DVDs via the Internet and the maintenance and operation of interactive games
sites. The Company does not offer and does not intend to
offer online gambling or other activities associated with gambling.
The Company has been in the music and video sales business since April
1997, and the interactive games business since early 1998. The Company has never
made a profit in any fiscal quarter.
The Company's CD Universe online store (www.cduniverse.com) currently offers
customers a selection of over 240,000 audio CD titles as well as proprietary
content and features. The Company's CD Universe web site currently has over
290,000 registered users, attracts almost 1,000,000 unique visitors and
processes over 20,000 orders each month. With acclaimed customer service, CD
Universe's online music store has gained recognition in publications such as The
New York Times, USA Today, Billboard and PC World. A recent consumer survey
released by BizRate, an independent commerce ranking service, rated CD Universe
as the number one CD store on the Internet. Furthermore, Briefing.com, a leading
provider of live market commentary on the Internet, voted CD Universe as the
best music retailer on the Internet. The Company has capitalized on its
experience in online retailing to enter other e-commerce areas, such as online
games, by acquiring community-based web sites with significant traffic, selling
advertising space on their web pages, and enhancing the retail capabilities of
these sites in order to diversify its product offerings.
The Company sells interactive games through one of the Company's web sites,
GamesUniverse.com, an online retailer of single- and multiplayer games, with
links to eUniverse subsidiaries as follows: (1) Case's Ladder, which offers
online ranking and tournament offerings for people who play games on the
Internet; (2) Gamer's Alliance, which owns a network of online gaming editorial
Web sites; and (3) The Big Network, which provides multiplayer classic games
(e.g., chess, checkers, backgammon, spades). The Big Network, Inc. also provides
a suite of multiplayer Java-based parlor games and a unique library of
proprietary community-building software technologies, named LivePlace. LivePlace
combines group browsing, chat, instant messaging and a host of other advanced
features to introduce social interaction to browsing the Web and shopping
experience. Additions to eUniverse's games will include other classic board
and card games (e.g., Battleship, Hearts) and other online strategy,
role-playing or action games.
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Additionally, the Company plans to build an affiliate network of third-party
entertainment and retail Web sites which would license the LivePlace
ommunity-building software that the Company has acquired. The Company
believes that its plans to superimpose LivePlace on these affiliate
sites will generate additional traffic and e-commerce sales for the Company's
network.
In May 1999, the Company acquired all of the assets of Green Willow
International Corp., including MegaDVD.com, a web site devoted to the retail
sale of DVDs. The Company purchased all of the outstanding stock of Case's
Ladder, Inc. ("Case's Ladder") as of May 31, 1999, and of Gamer's Alliance, Inc.
("Gamer's Alliance") by July 1, 1999. Both Case's Ladder and Gamer's Alliance
own and operate online computer game-related sites. (See "Web Sites of
eUniverse" at p.4). As of August 31, 1999, the Company acquired the Big
Network, Inc., a company that (1) offers classic card and board games through
its web site (www.bignetwork.com), and (2) is developing LivePlace. The
Company's acquisition of Cases Ladder, Gamer's Alliance, Big Network and
the assets of Green Willow International Corp., represents an early step towards
its goal of using strategic acquisitions as well as internal growth to develop a
diverse but synergistic portfolio of Internet-based entertainment offerings for
a world-wide customer base. (See "Recent Acquisitions" at p.18)
Given that the current business of the Company commenced in February 1999, the
Company has only a limited operating history upon which an evaluation of the
Company and its prospects can be based. The Company has never made a profit. The
Company's prospects for financial success must be considered in light of the
risks, expenses and difficulties frequently encountered by companies in new,
unproven and rapidly evolving markets. To address these risks, the Company must,
among other things, expand its customer base, respond effectively to competitive
developments, continue to attract, retain and motivate qualified employees and
continue to upgrade its technologies. There can be no assurance that the Company
will be successful in addressing such risks. If the Company is not successful in
developing and expanding its music, video and interactive entertainment
business, including sales of advertising on its web sites and development of
related business opportunities, its ability to achieve profitability may not be
realized.
Prior to becoming part of the Company, CD Universe only generated revenue from
merchandise sales. In contemplation of the Company's plans to use its site
traffic to generate advertising revenues, the Company implemented a program to
accept paid third-party advertising. This program began generating revenues in
the quarter ending June 30, 1999. Although the Company has begun to sell
advertising on its web sites, it has not realized material advertising revenues
to date. In order for the Company to generate significant advertising revenues,
advertisers and advertising agencies must be willing to direct a portion of
their budgets to the Internet and, specifically, to the Company's web sites.
There can be no assurance that advertisers and advertising agencies will accept
the Internet as a medium for advertising. If Internet advertising is not widely
accepted by advertisers and advertising agencies, or if the Company is not
successful in generating significant advertising revenues from such sources, the
Company's business, results of operations and financial condition could be
materially adversely affected by the reduced revenue.
Historically, the Company primarily has generated revenue from merchandise
sales. The Company has implemented a program to generate advertising revenue
through paid third-party advertising on eUniverse's Web sites. The Company also
intends to diversify its retail offerings to include a greater selection of
products, such as online downloads of content, clothing, sports items and
accessories.
Due to the fact that material may be downloaded from web sites and may be
subsequently distributed to others, there is a potential that claims will be
made against the Company pursuant to such legal theories as defamation,
negligence, copyright or trademark infringement or other theories based on the
nature and content of such material. Such
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claims have been brought, and sometimes successfully pressed, against on-line
services in the past. In addition, the Company could be exposed to liability
with respect to the material that may be accessible through its products and web
sites. Although the Company carries general liability insurance, such insurance
may not cover potential claims of this type, or the level of coverage may not be
adequate to fully protect the Company against all liability that may be imposed.
Any costs or imposition of liability that is not covered by insurance or in
excess of insurance coverage could have a material adverse effect on the
Company's business, results of operations and financial condition. Also, the
legal effectiveness of the Company's terms and conditions of use is uncertain.
The Company is currently not aware of any claims that can be expected to have a
material adverse impact on its financial condition or its ability to conduct
business as described herein.
The Company plans to enhance its position as a premier online music
destination by providing digital music distribution and proprietary content on
its CD Universe site. Using the Internet as a distribution medium in conjunction
with audio compression and delivery technologies, the Company plans to enable a
growing number of artists to distribute and to promote their music broadly and
to enable customers to conveniently access an expanding music catalog. In recent
years, with the proliferation of multimedia PCs, consumers have increasingly
used their computers to play music. The recent introduction of compression
formats such as MP3 has led to the widespread use of the Internet for the
transmission of music. The Company believes that its established customer base
of over two million registered members gives it a significant competitive
advantage over other companies entering the online distribution market. This
customer base allows the Company to attract artists who are interested in
broadly distributing and promoting their music. The Company currently creates
its own proprietary content for the CD Universe site, including the Big Bang
newsletter, a personalized newsletter for customers, and CD University, a
content-driven area that provides information about specific music genres.
WEB SITES OF EUNIVERSE.
MUSIC
CD UNIVERSE
The CD Universe online store is designed to be informative, and to allow
customers to discover, learn about and purchase CDs, videos and other music and
video-related products. The store is designed to be intuitive and easy to use
and to enable customers to complete the ordering process with a minimum amount
of effort. Customers enter the CD Universe store through its Web site,
cduniverse.com, and in addition to ordering music and video products, can
conduct searches, browse among top sellers and other featured titles, read
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reviews, listen to music samples, register for a personalized newsletter,
participate in promotions and check order status.
The CD Universe web site provides a search engine that enables customers to
navigate the store to find CDs or other products of interest. Customers can
search for CDs based on artist, album title, song title, record label or musical
genre. Upon clicking on an album title, the site visitor is provided with
information about the artist and the specific album, a list of tracks on the
album, sound samples and a list of reviews.
The Company believes that effective use of content encourages purchases by
customers who may be browsing the site without a specific title in mind. The CD
Universe web site provides sound samples, information about specific artists,
albums and types of music, ratings, articles on music topics and other
information. To help customers browse and discover CDs, the web site has eight
music spaces organized by genre. These include rock, jazz, R & B, classical,
country, Christian, world music and miscellaneous. The main page of each space
features links to more specific genre pages which have a list of new releases as
well as alphabetical listings of the artists and albums available within that
genre. In addition to these regular online store content features, CD Universe's
Web site offers several other features to encourage customers to learn about and
discover CDs that might be of interest to the customer. The web site's CD
University feature provides links to genre-specific areas where customers are
provided with information about specific musical offerings and biographies of
featured musicians in that genre. CD University currently offers links for
classical, jazz and blues and is in the process of adding more musical genres to
this area. In addition, the CD Universe web site has a feature called RockOnTV,
provided by RockOnTV.com, where customers can read a listing of music and
musician-related programs available on TV during that week. Once a CD has been
selected, customers are prompted to click on the price to add products to their
virtual shopping carts. Customers can add and remove products from their
shopping carts as they browse, prior to finalizing their purchase. The shopping
cart page displays each item that has been placed in the cart, including title,
price and availability. To execute orders, customers can choose from a secure or
standard purchasing mode depending on the capabilities of the customer's Web
browser. After choosing a purchasing mode, the customer is prompted to enter his
or her name and password or to create an account on CD Universe's Web site that
can be used to make repeat purchases.
The Company accepts credit cards, personal checks or money orders as payment
for customer orders. The CD Universe web site enables customers to store their
credit card information in a personal account, thereby avoiding the need to
re-enter this information when making future purchases. Customers are offered
several shipping options, including overnight delivery. The Company confirms
each order by e-mail communication to the customer promptly after the order is
placed, and subsequently confirms shipment of the order by e-mail. In addition,
the CD Universe web site includes a feature which enables customers to check on
the status of their order. Use of the Internet by consumers is at an early stage
of development, and market acceptance of the Internet as a medium for commerce
is still by no means certain. The Company's future success will depend on its
ability to significantly increase revenues, which will require the development
and widespread acceptance of the Internet as a medium for commerce, particularly
as a channel of retail distribution. The Internet may not prove to be a viable
commercial marketplace because of inadequate development of the necessary
infrastructure, such as reliable network backbones, or complementary services,
such as high-speed modems and security procedures for financial transactions.
The viability of the Internet may prove uncertain due to delays in the
development and adoption of new standards and protocols to handle increased
levels of Internet activity or due to increased government regulation. If use of
the Internet for the purposes envisioned by the Company does not continue to
grow, or if the necessary Internet infrastructure is not further developed and
maintained, the Company's business, results of operations and financial
condition could be materially adversely affected.
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FILMED ENTERTAINIMENT
VIDEO UNIVERSE
The Company's Video Universe online store (www.videouniverse.com) offers
customers a selection of over 40,000 movie titles in videocassette, DVD and
laser disc formats. The Video Universe Web site was expanded to include DVD
titles with the acquisition of MegaDVD.com (www.megadvd.com). MegaDVD.com, a
pioneer in the online retailing of DVDs and accessories, was founded in June
1997. MegaDVD.com has been featured in publications such as Billboard magazine,
the Hollywood Reporter and Stereo Review. MegaDVD.com has a loyal customer base
of 3,000 registered users. The acquisition of MegaDVD.com provided the Company
with additional management resources and expertise necessary to effectively
promote its online video store. The domain name MegaDVD.com takes customers to
the Company's Video Universe online store.
Paul Kagan Associates, Inc., a company specializing in media and
communications financial and business research, has estimated that annual
retail sales of videos and DVDs in the United States will increase from
$9.1 billion in 1998 to $12.8 billion in 2002. Domestic retail sales of DVD
titles are expected to grow from $286 million in 1998 to $4.1 billion in 2003.
The addition of MegaDVD.com expands the Company's customer base for video
products, strengthened the Company's management and renewed emphasis on its
online video offerings.
The Video Universe online store operates in conjunction with the CD Universe
store and allows customers the ability to purchase products from either site
using a common shopping cart.
INTERACTIVE ENTERTAINMENT
GAMES UNIVERSE
Through its Games Universe online store (www.gamesuniverse.com) the
Company offers customers a selection of single- and multi-player games and
provides links to the Company's other web sites, featuring the web site of the
Company's subsidiaries that provide other online games. The Company does not
offer and does not intend to offer online gambling or other activities
associated with gambling.
CASE'S LADDER
Case's Ladder is an online gaming portal which provides competitive rankings
for online gamers and allows gamers to compete against one another in a variety
of tournaments and leagues. Approximately 1.1 million users are registered with
Case's Ladder interactive entertainment communities on the Internet. Case's
Ladder primarily derives revenues from membership fees and advertising.
According to a survey amongst Case's Ladder's registered users, approximately
75% of registered users on the Case's Ladder Web site are between the ages of 18
and 50, with the majority of those visitors having an annual income over
$50,000. In addition, 46% of Case's Ladder's users have purchased products or
services over the Internet. The Company continues to use Case's Ladder's
audience to expand eUniverse's customer base and to diversify its retail
offerings into new business areas such as computer games.
GAMER'S ALLIANCE
Launched in 1996, Gamer's Alliance is a network of interactive entertainment
community sites on the Internet with over 1.2 million unique monthly visitors,
according to Double Click's July 1999 Report, and 20 impressions per month.
Gamer's Alliance has aggregated a collection of leading sites covering several
platforms, game genres and topics. The Gamer's Alliance Network spans over fifty
(50) sites, including GA-Source, GA-Sports, GA- Strategy, GA-RPG and
Dreamcast.net, owned and operated by the Company. GA-Source is an interactive
game site on the Web that incorporates daily gaming news, interviews, game
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previews and product reviews. GA-Sports is a Web-community site focused on PC
sports games. Other Gamer's Alliance properties include:
- -Dreamcast.net, a site dedicated to the Sega Dreamcast console platform;
- -GA-Strategy, a site dedicated to PC strategy games. -GA-RPG, a hub site focused
on daily RPG gaming news.
The acquisition of Gamer's Alliance provides the Company with a valuable source
of proprietary content that can be offered to Case's Ladder's 1.1 million
registered users.
The Gamer's Alliance content development team consists of gaming enthusiasts
from around the world. This content development approach is highly effective in
attracting a viewership of avid gamers. Furthermore, the Gamer's Alliance
network of sites seeks to encourage customer loyalty by allowing visitors to
become actively involved in content creation through forums and chat services.
BIG NETWORK
The Big Network site provides a full suite of classic board and card games,
including spades, checkers, chess, backgammon, reversi and morph, allowing
thousands of simultaneous players to meet, chat and play parlor games in a
friendly setting. The site's gaming system is based on a sophisticated Java
client-server architecture designed to support very large numbers of users. The
Big Network currently hosts over 210,000 registered members and generates almost
three million advertising impressions per month.
The Big Network operates an entertainment and community site at
http://www.bignetwork.com. The site offers multiplayer classic games (e.g.,
chess, checkers, spades) as well as other forms of entertainment and information
to its members and users. The Big Network has also developed LivePlace, a Java
applet that provides users with an overview of activity around them on the site,
and allows them to follow public conversation and send private messages to other
users. LivePlace also uses proprietary technology to map users to their web
location and to control the browser window to allow for co-navigation of the
web. A map view allows users to see where other users are, across the eUniverse
site and its associated network. Users can move instantly to any other
location within the network.
The Company's Big Network site includes Play4Prizes, a game show channel
where players can win cash and prizes. No purchase is necessary to play
the games or to win prizes. Play4Prizes' games are sponsored by
advertisers and used as a promotional vehicle for the advertisers' products and
services. Play4Prizes caters to a predominantly female audience. In addition,
the Big Network publishes the Daily Post, a collection of eight daily e-mail
newsletters providing news, facts and trivia on a variety of topics such as
cinema, sports, star gazing, cooking recipes, jokes and holidays. The Big
Network reaches over 85,000 people daily through its Daily Post e-mail
newsletters.
The Company plans to continue to leverage the audience of its newly acquired
interactive entertainment sites by pursuing e-commerce and merchandising
opportunities in the interactive entertainment arena. These opportunities
include online publishing of game titles, online retailing of interactive
entertainment products and the exclusive online distribution of titles developed
by smaller game developers.
COMMUNITY-BUILDING TECHNOLOGIES
With the acquisition of the Big Network, Inc., we acquired LiveSuite, a
modular suite of multi-user, Web-based community-building software with common
technology architecture. This software is currently undergoing final development
prior to its release. The core module of LiveSuite, LivePlace, takes the form of
a client-side pop-up Java applet that allows users to chat, send instant
messages, set up friends lists and co-browse a site. LiveSuite modules work
together using a shared technology core to provide virtual presence, instant
messaging, co-browsing, online sales assistance and game-playing
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through a common user interface. LivePlace is designed to map onto existing Web
sites quickly and easily. Its components can be deployed individually or as an
integrated solution that combines entertainment, community and commerce through
a common user interface.
The Company plans to build an affiliate network of third-party entertainment
and retail Web sites that would license the Company's LivePlace
community-building software. The Company believes the implementation of
LivePlace on these affiliate sites will create a virtual
presence for the Company on these sites, allowing the Company to generate
additional traffic and e-commerce sales for the Company's network.
The Company believes that its strategic assets include customer loyalty,
proprietary content and user-friendly technology, and that such assets will
enable it to grow Web site traffic, retain customers, expand revenue
opportunities and execute strategic acquisitions. The Company also plans to
develop strategic relationships with traditional media partners that will enable
it to build awareness of its sites and e-commerce services and increase traffic
to its sites.
DOMAIN NAMES, PATENTS AND TRADEMARKS
The Domain names of the Company's Web sites constitute important intellectual
property for the Company. Domain names registered to the Company include the
following:
euniverse.com gasource.net nhl2K.com
cduniverse.com ga-source.com sanitybycain.com
videouniverse.com ga-source.net voodoo3.net
gamesuniverse.com ga-strategy.com wrestling-games.com
gagames.com highheatbaseball.com experience3d.com
megadvd.com messiahpress.com frontofficefootball.com
casesladder.com metalgear.net frontofficefootball.net
aoe2.net myth2.com frontofficefootball.org
cavenews.com ionrpg.com 3dracing.net
dknation.com ga-sports.com rallychamp.com
ga-rpg.com coursedepot.com afflicted.net
gasource.com grandprix2.com ctimes.net
Big network.com highheatbaseball.com indy3d.net
Play4prizes.com maddencentral.com ta-k.com
Liveplace.com simracingnews.net prey.net
Livestore.com the-fastlane.com war3.com
Livesuite.com nflfever.com eqrealms.com
goldenbearsden.net Live-store.com acrealms.com
nfscheats.com Shop-Live.com mygamelobby.com
nfs4.com Shop-Live.net Big-network.com
wcw-meyhem.com online-alchemy.com
gp500.net Gamelets.com
At the present time, the Company does not own any patents. The Company has
filed service mark applications for "eUniverse", "Games Universe", "CD
Universe", "Video Universe" and "Gamer's Alliance" with the US Patent and
Trademark Office. The Company is in the process of filing trademark
registrations for "LiveSuite" and "LivePlace", and a service mark registration
for "Play4Prizes" with the US Patent and Trademark Office. The Company believes
that it presently has, or is capable of acquiring, ownership and/or control of
the intellectual property rights, which are necessary to conduct its operations
and to carry out its strategic plans.
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OPERATIONS AND TECHNOLOGY.
eUniverse maintains a technology center, with in-house technical staff, at
each of its main business units: CD Universe, Case's Ladder, Gamer's Alliance
and Big Network.
CD UNIVERSE
CD Universe has developed proprietary technologies and systems that provide for
reliable and scalable online retailing in a secure and easy-to-use format. Using
a combination of proprietary solutions and commercially available, licensed
technologies, the Company has deployed systems for online content dissemination,
online transaction processing, customer service, market analysis and electronic
data interchange.
CD Universe uses Microsoft SQL Server 7.0 as its database management technology.
Web pages are served by Microsoft's Internet Information Server and use
Microsoft's Active Server Page technology. The web pages themselves are
designed, programmed, tested, implemented, and maintained by on-staff designers
and programmers. The system is flexible enough to allow new product lines to be
integrated. Computer games were added in August 1999. A "server farm" of
redundant web servers was brought on-line in August 1999 to provide extremely
high site availability to our customers. The site is monitored 24 hours a day
and seven days a week by an outside company that provides alerts to on-call
technicians in the event that the site is not operating correctly.
CD Universe's on-site data center is connected via a point to point T1 line
to its ISP, Internet Media Corporation. This service is provided under a
two-year contract.
CD Universe uses Secure Socket Layers (SSL) for secure electronic transactions
over the Internet and uses proprietary Electronic Data Interchange interfaces
and private networks to ensure the security of customer order information
and credit card transactions shared with its vendors and credit card processor.
FULFILLMENT
CD Universe has developed proprietary software to manage its onsite fulfillment
operation. This software allows CD Universe to order product from multiple
vendors, receive product into its warehouse, pick and pack individual customer
orders, and electronically manifest the product for shipping. This system allows
the Company to aggregate product from multiple vendors into a single shipment to
its customers. Partially filled shipments can be held for a customer-selectable
number of days to reduce the number of shipments needed to fill a single order,
thus saving the customer shipping charges.
CUSTOMER SERVICE
CD Universe has developed proprietary software for use by its in-house customer
service department to access real time order information.
CASE'S LADDER
Case's Ladder utilizes multiple servers running the RedHat Linux operating
system, MySQL database backend, the Apache Web server, Perl programming
language, and various other open-source packages. Proprietary software developed
in-house allows staff to easily manage the over one hundred and fifty gaming
leagues we operate, handling over 1.2 million members and 3,500 online
tournaments each month. In addition, a proprietary technical support system
allows staff members to have real-time access to queries with full logging of
requests ensuring top of the line customer service. Servers are co-located with
Exodus Communications, Inc. under a yearly contract. Utilizing a 3Mb connection
with up to 10Mb burst capabilities; Case's Ladder is tied into a private
nationwide ATM backbone that feeds into every major Internet backbone in the
United States. High performance hosting, custom applications, and the proven
software packages listed above have given Case's Ladder the ability to have its
services available to the public with reliability above 99%.
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GAMER'S ALLIANCE
Gamer's Alliance utilizes Linux operating system distribution Red Hat 6.0 to
power the majority of its PC web servers. NT Server 4.0 is used for web
applications requiring a Windows based operating system. A new backup system has
been implemented to protect mission critical data from hardware and software
failure, and other unpredictable circumstances. Bandwidth is rented from
Valuenet Inc. Gamer's Alliance has internally developed several web based
applications that increase the efficiency of administrating severs and updating
web sites. Among these programs is a database driven content system for Linux
and NT which allow web site content to be stored into databases, such as mySQL
and Microsoft Access, and then be dynamically recalled based upon specific user
preferences. This allows users to customize certain Gamer's Alliance web sites
to only display news, previews, reviews, interviews, etc that meet certain
criteria such as type of content or date added. These user preferences are
then stored as cookies for later viewing sessions.
BIG NETWORK
BigNetwork.com is built on several servers running the Sun Solaris operating
system and an Oracle database. The servers are co-located at Exodus in Santa
Clara, CA. Exodus provides unlimited bandwidth and redundant power and network
backbone connectivity as well as advanced fire suppression and other emergency
provisions. Connectivity cost is approximately $4,500 per month. Key hardware is
a Sun Enterprise Server 450, a Sparc 20, and several Intel Pentium II class
machines, also running Solaris.
The Big Network multiplayer gaming system and the Big Network LivePlace instant
messaging system are built on a highly scalable proprietary Java client-server
system. The system is capable of supporting thousands of simultaneous users
using relatively small amounts of server-side CPU and bandwidth per user.
Because the server is written in Java, it is portable and can run on any machine
capable of supporting a Java VM including Solaris on Sun or Intel hardware and
Windows NT.
Despite the Company's implementation of network security measures, its
infrastructure is potentially vulnerable to computer break-ins and similar
disruptive problems caused by individuals with a variety of objectives. Consumer
concern over Internet security has been, and could continue to be, an impediment
to the expansion of commercial activities that require consumers to transmit
their credit card information and other personal information over the Internet.
In addition, computer viruses, break-ins or other security problems could lead
to misappropriation of proprietary information and interruptions, delays or
cessation in service to the Company's customers. Until more comprehensive and
reliable security technologies are developed and implemented, the security and
privacy concerns of existing and potential customers may inhibit the growth of
the Internet as a merchandising medium.
YEAR 2000 READINESS DISCLOSURE
The Year 2000 issue (Y2K) is the result of computer programs written using two
digits rather than four to define the applicable year. Any of the Company's
computer and telecommunications programs that have date sensitive software may
recognize a date using "00" as the year 1900 instead of 2000. This could result
in system failure or miscalculations causing disruptions in operations,
including the ability to process transactions, send invoices, or engage in
similar normal business activities.
The Company has determined that its equipment is Y2K compliant. All mission
critical third party software applications at all divisions and subsidiaries
have been independently tested (operating systems, web servers, database
systems, programming languages) and are currently Year 2000 compliant or
require free patches to correct. All internally developed software at all
divisions is believed to be Year 2000 compliant.
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eUniverse is currently conducting an analysis to determine the extent to
which others have Year 2000 issues. These include CD Universe's major suppliers'
systems, including the systems of credit card processors, telecommunications
providers, product distributors and companies with whom CD Universe has
marketing agreements. CD Universe's primary distributor for music products,
Valley Media, has indicated that it has begun its remediation efforts and
expects to be in compliance before the year 2000. CD Universe is currently
unable to predict the extent to which the Year 2000 issue will affect Valley's
suppliers, to the extent to which Valley would be vulnerable to its suppliers'
failure to resolve any Year 2000 issues on a timely basis. The failure of a
major supplier subject to the Year 2000 issue to convert its systems on a timely
basis or a conversion that is incompatible with CD Universe's systems could have
a material adverse effect on CD Universe. In addition, most of the purchases
from CD Universe's online store are made with credit cards, and our operations
may be materially adversely affected to the extent customers are unable to use
their credit cards due to Year 2000 issues that are not rectified by their
credit card providers.
CD Universe and eUniverse intend to actively work with and encourage their
suppliers to minimize the risks of business disruptions resulting from Year 2000
issues and develop contingency plans where necessary. Such plans may include
using alternative suppliers and establishing contingent supply arrangements.
YEAR 2000 RISKS
There can be no assurance Year 2000 issues will not cause a material adverse
effect on the operating results or financial condition of the Company. The
Company believes, however, that its most reasonably likely worst-case scenario
would relate to problems with the systems of third parties rather than with the
Company's internal systems, including disruption of product delivery from
wholesalers, inability to charge purchases to credit cards, temporary power
outages, delayed transportation of products by third parties, and lost or
delayed customer purchases due to non-compliant personal computers. The Company
is limited in its efforts to address the Y2K issue as it relates to third
parties and is relying solely on the assurances of these third parties as to
their Year 2000 preparedness. See "RISK FACTORS -- RISKS ASSOCIATED WITH THE
YEAR 2000 ISSUE."
CONTINGENCY PLAN
The Company intends to use existing non-Year 2000 specific contingency plans
to address any situations that it believes would arise if the Company or third
parties fail to be Year 2000 compliant. There is a risk that that existing
contingency plans would be inadequate to deal with serious and sustained Year
2000 adverse affects.
YEAR 2000 COSTS
The Company has not expended or committed any significant amount of money
resources on Year 2000 compliance. The Company does not expect to expend any
significant amount of money or resources on Year 2000 compliance in the future.
SALES AND MARKETING.
At the present time, the Company receives and processes over 20,000 orders in a
typical month, with an average order size of about $35 exclusive of shipping
charges.
To date, the Company has been able to increase site traffic and sales with
little outbound marketing efforts. The Company makes use of strategic
partnerships and proprietary content to attract and retain traffic on its
network of web sites. The Company's CD Universe, for example, has built a
network of over 8,000 partner web sites through its "Partner Program".
These partner web sites increase the Company's market presence by allowing
"partner" web sites ("eUniverse Partners") to offer the Company's music products
to their audience in exchange for a commission on dates. The eUniverse Partner
site provides a hyperlink
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to the CD Universe web site that leads the consumer to more information about a
specific artist or title. This hyperlink automatically connects the customer to
the CD Universe online store where the eUniverse Partner's customer may place an
order to purchase a CD. In this manner, the eUniverse Partner can offer enhanced
services and product recommendations, while avoiding ordering and fulfillment
costs. eUniverse Partners receive a commission of 7% to 15% on sales of the
Company's products that originate from the eUniverse Partner's web site.
The Company recently announced a strategic partnership with LinkShare
Corporation ("LinkShare") to dramatically expand the scope of its Partner
Program. As part of the partnership, LinkShare will introduce the Company's
online retailing sites to its vast network of over 65,000 partner sites.
LinkShare operates an expansive network on the Internet servicing clients such
as Dell Computers, Cyberian Outpost, Borders, 1-800-FLOWERS, Virtual Vineyards,
Omaha Steaks and others. The Company also plans to develop strategic
partnerships with traditional media partners that will enable it to build
greater awareness of its sites and expand traffic and e-commerce activity on its
network.
In August, 1999, eUniverse signed an agreement with Mpath Interactive, Inc.,
providing for the sale and provision of advertisements by Mpath for all of the
Company sites. The Agreement calls for MPath to make guaranteed payments to the
Company. This figure will increase if the Company generates increased traffic.
The initial term of the advertising agreement is two years, although the Company
can cancel it at any time after nine months from its signing.
The Company has done very little outbound marketing in FY'00 (through June
30, 1999). During this period CD Universe undertook a limited email campaign
with Xoom.com and TalkCity.com with a total expenditure of $50,000. This program
was completed and was not renewed. Case's Ladder spent $3,000 in June, 1999 on
advertising and has no current advertising programs in place. Similarly, Gamer's
Alliance has no advertising programs in place. The Big Network, in the months
preceding its acquisition, spent no cash on advertising but engaged in ad swaps
with a nominal value of approximately $20,000 per month based on the posted rate
card advertising rates.
The Company is planning a public relations and advertising push surrounding
the relaunch of its site in October/November 1999. The Company is in the
process of signing a contract with an Internet consumer public relations company
and is creating new branding and promotional materials to support a media
campaign. That campaign is likely to include a launch event, direct mail, direct
email, online sponsorships, print, and radio. The projected budget for this
campaign has not been finalized.
The Company expects to experience significant fluctuations in future
quarterly and long-term operating results that may be caused by a variety of
factors, many of which are outside the Company's control. Factors that may
affect the Company's quarterly operating results include, without limitation:
- - the Company's ability to retain existing customers, attract new customers at
a steady rate and maintain customer satisfaction,
- - the announcement or introduction of new or enhanced web sites, products and
strategic alliances by the Company and its competitors,
- - the mix of products sold by the Company,
- - seasonality of the recorded music industry (namely, the fact that sales of
recorded music traditionally peak during the Christmas season,
- - seasonality of advertising sales,
- - Company promotions and sales programs,
- - price competition or higher recorded music prices in the industry,
- - the level of use of the Internet and increasing consumer acceptance of the
Internet for the purchase of consumer products such as those offered by the
Company,
- - the Company's ability to upgrade and develop its systems and infrastructure
in a timely
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<PAGE>
and effective manner,
- - the level of traffic on the Company's Web sites,
- - the amount and timing of operating costs and capital expenditures relating to
expansion of the Company's business, operations and infrastructure and the
implementation of marketing programs, key agreements and strategic
partnerships,
- - general economic conditions and economic conditions specific to the Internet,
on-line commerce, and the recorded music and prerecorded videocassette
industries.
The following table summarizes the total revenue contributed by the
Company's products in the last three fiscal years:
Revenue by Category
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
3/31/97 3/31/98 3/31/99
------- ------- -------
<S> <C> <C> <C>
Music $1,675,815 $5,685,211 $8,387,350
Videos - - $ 464,363
---------- ---------- ----------
Total $1,675,815 $5,685,211 $8,851,713
</TABLE>
ORDER FULFILLMENT AND SOURCE OF SUPPLY.
The Company currently accepts orders only over the Internet. Product orders
received by the Company are accepted, verified, batched and electronically sent
on a daily basis to Valley Media, Inc., of Woodland Hills, California ("Valley
Media"), the Company's primary supplier. Shipments from Valley Media and other
suppliers are received at the Company's fulfillment center in Wallingford,
Connecticut. Employees break down bulk shipments into the individual orders to
be sent to customers. This arrangement allows the Company to offer customers a
large number of CD and video titles while maintaining virtually no inventory. It
also reduces product returns by allowing the Company to only order products for
which it has received orders. The Company typically fills over 80% of its orders
by the next business day, and approximately 90% of its orders within one week.
The Company believes that the speed of order fulfillment is an important factor
to its customers, and accordingly has a significant impact on its ability to
increase revenues from retail sales. At the present time, Valley Media supplies
approximately 90% of the music and video products and accessories sold by CD
Universe. There can be no assurance that the Company will maintain that
relationship or that it will be able to find an alternative supplier which will
provide products and services on terms satisfactory to the Company should its
relationship with Valley Media terminate. Therefore, an unanticipated
termination of the Company's relationship with Valley Media, particularly during
the fourth quarter of the calendar year in which a high percentage of recorded
music and video product sales are made, could materially adversely affect the
Company's results of operations for the quarter in which such termination
occurred even if the Company was able to establish a relationship with an
alternative supplier. To date, Valley Media has satisfied the Company's
requirements on a timely basis. However, to the extent that Valley Media is
unable to continue to satisfy the Company's increasing product requirements,
such constraints may have a material adverse effect on the Company's business,
results of operations and financial condition.
COMPETITION.
The online commerce market is new, rapidly evolving and intensely competitive,
and the Company expects that competition will further intensify in the future.
Barriers to entry are minimal, and current and new competitors can launch new
sites at a relatively low cost. With respect to recorded music sales, the
Company currently competes with numerous
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Internet retailers, including music retail chains, record labels, independent
retailers with web sites on the Internet and online stores retailing music and
video titles such as CDnow and Amazon.com. In addition, the Company competes
with traditional music retailers, as well as megastores, mass merchandisers,
consumer electronics stores and music clubs.
The primary competitive factors in providing music, video and other
entertainment products and services via the Internet are name recognition,
variety of value-added services, ease of use, price, quality of service,
availability of customer support and technical expertise. The Company's
prospects for achieving its business objectives will depend heavily upon its
ability to provide high quality, entertaining content, along with user-friendly
web site features and value-added Internet services. Other factors that will
affect the Company's prospects for success include its ability to attract
experienced and qualified personnel, particularly in the areas of management,
sales and marketing, and web site design. If the Company is unable to compete
successfully in its retailing businesses, there will be a material adverse
impact on its business, results of operations and financial condition due to
decrease in revenue. In addition, the competition for advertising revenues, both
on Internet web sites and in more traditional media, is intense. If the Company
fails to attract and retain significant sources of revenue from paid
advertisements and sponsorships on its web sites, the Company's business,
results of operations and financial condition will be materially adversely
affected by such decreased revenue.
Many of the Company's current and potential competitors in the area of online
music, video, and other entertainment retailing, such as CDNow.com and
Amazon.com, have longer operating histories, significantly greater financial,
technical and marketing resources, greater name recognition and larger existing
customer bases than the Company. These competitors may be able to respond more
quickly than the Company to new or emerging technologies and changes in the
economy or the marketplace affecting the products and services that the Company
offers. In addition, some of the Company's competitors can be expected to devote
greater resources, both human and financial, to the development, promotion and
sale of music, video and other entertainment products and services. Accordingly,
there can be no assurance that the Company will be able to compete successfully
and achieve its objectives with respect to growth in revenue and profit.
EMPLOYEES.
In addition to the officers who are referred to in Item 5 of this document,
the Company currently employs 51 full-time associates and up to 16 part-time
staffers. Of the Company's 51 full-time associates, 21 are in marketing, 22 are
in programming and operations, and 8 are in administration. The part-time
staffers work in the packing and customer service areas.
The Company's success depends to a significant extent on the continued
contributions of its executive officers and key technical and marketing
personnel, Brad D. Greenspan, Chairman of the Board of the Company, Leland N.
Silvas, President and Chief Executive Officer, Charles Beilman, Chief Operating
Officer, William R. Wagner, Chief Financial Officer, James Haiduck, Vice
President of Sales, Stephen D. Sellers, Vice President of Business Affairs and
Business Development, and John V. Hanke, Vice President of Marketing and Site
Integration. The Company has employment agreements with Messrs. Silvas, Beilman,
Wagner, Haiduck, Sellers and Hanke. However, such employment agreements do not
assure the services of such employees. Despite employment agreements and
non-competition arrangements with these members of management, the Company's
employees may voluntarily terminate their employment with the Company at any
time. The Company's success also depends on its ability to attract and retain
additional qualified employees. Competition for qualified personnel is intense
and there are a limited number of persons with knowledge of and experience in
commercial application of the Internet and music retailing industries. There can
be no assurance that the Company will be able to attract and retain highly
qualified personnel to fill critical managerial and operational positions. The
loss of one or more key employees could have a material adverse effect on the
Company.
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FACILITIES.
The Company currently leases a 19,500 sq. ft. office, warehouse and order
fulfillment center in Wallingford, Connecticut (the "Wallingford Facility") at a
monthly rent of $9,750. The Company's lease with respect to this facility
expires in March 2002 and the Company has the right and option to extend the
lease for an additional five year term. The Company believes that the
Wallingford Facility will be adequate to meet its office space and order
fulfillment needs for the foreseeable future. The Company leases approximately
500 sq. feet of office space, through its Gamer's Alliance, Inc. subsidiary, on
a month-to-month basis in Bridgeton, Missouri at a monthly rent of $475.
Additionally, the Company leases a 2,300 sq. ft. office space in San
Francisco, California for its technological research and development, business
development and sales and marketing divisions (the "San Francisco Facility").
The terms of the agreement provide for monthly payments of $5,350, $5,500 and
$5,650 until June 30, 2000, 2001 and 2002, respectively. The Company believes
that the San Francisco Facility will be adequate to meet the Company's research
and development, business development and sales and marketing needs.
The following table summarizes the Company's current properties:
<TABLE>
<CAPTION>
LOCATION SIZE (SQ. FT.) MONTHLY RENT
<S> <C> <C>
Wallingford, Connecticut 13,500 $9,750
Bridgeton, Missouri 500 475
San Francisco, California 2,300 5,300
</TABLE>
THE COMPANY'S STRATEGY AND PLANS.
The Company plans to implement the following strategies in its efforts to
become a leading provider of content, commerce and community services on the
Internet:
EXPAND EXISTING ONLINE RETAIL BUSINESS INTO OTHER E-COMMERCE ACTIVITIES.
The Company plans to use its technology and fulfillment expertise and expand
into other e-commerce activities, such as the Company's recent expansion into
games. In addition, the Company plans to use information obtained through
customer tracking technology and user customization of certain services on its
Web sites to provide its customers with targeted complementary e-commerce
offerings.
ACQUIRE COMPLEMENTARY ENTERTAINMENT-RELATED WEB SITES.
The Company plans to acquire music, movie, and interactive entertainment-
related Web sites that are complementary to its existing network. These sites
will have several of the following key characteristics such as: (1) strategic
content, management or technology, (2) product offerings compatible with the
Generation X and Y demographics of the Company's sites and (3) the ability to
leverage the Company's strategic advantages such as order fulfillment, hardware
capacity and general overhead. The Company plans to acquire Web sites with
significant traffic and add its retail capabilities and fulfillment expertise to
sell additional products to the acquired site's audience. The Company believes
that it can leverage its core technology expertise, existing Web site traffic,
management experience, fulfillment, systems and warehousing capabilities to
continue to grow through strategic acquisitions.
PROVIDE ORIGINAL, COMPELLING AND TARGETED SITES.
The Company's Web sites focus on commerce, community and interactivity and
address what the Company believes are among the most popular areas of interest
on the Internet
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<PAGE>
including music, film and interactive entertainment. These entertainment-related
Web sites offer the Company an opportunity to deliver premium advertising and
e-commerce services to an attractive demographic of Generation X and Generation
Y consumers. The Company plans to enhance its online stores by adding additional
editorial content, increasing the time its customers spend on its Web sites as
well as the likelihood and frequency of subsequent visits and purchases.
Examples of the Company's editorial content include reviews, biographies of
entertainers, news, photos and other editorial programming. The Company plans to
license compelling third-party editorial content in addition to its internally
developed content in order to enhance the overall user experience on the
Company's Web sites.
LEVERAGE COMMUNITY-BUILDING TECHNOLOGIES TO EXTEND REACH TO OTHER
ENTERTAINMENT AND RETAIL SITES.
The Company plans to license its LiveSuite community-building software to a
partner network of third-party entertainment and retail Web sites. LiveSuite's
Java-based user interface creates a virtual presence for the Company on user's
desktops when they are visiting a licensee's site. The Company plans to leverage
this network of LiveSuite licensor sites to drive traffic to its network of
music, filmed entertainment and interactive entertainment sites.
DIVERSIFY REVENUE STREAMS ACROSS ADVERTISING, E-COMMERCE AND DIRECT
MARKETING.
The Company plans to leverage its user base to generate revenues from
multiple revenue streams. The Company believes that the traffic flow generated
on its Web sites provides an attractive platform for measurable, targeted,
cost-effective and interactive advertising on the Internet. The Company plans to
use both in-house and third party representatives to sell its advertising
inventory and promotional opportunities. The Company also plans to provide
differentiated solutions to advertisers, helping them exploit the capabilities
of the Internet as an advertising medium. In addition, the Company plans to
expand its e-commerce initiatives through the introduction and promotion of
interactive entertainment software, customized CDs, collectable products and
other entertainment-related merchandise on its retail sites. See
"BUSINESS--Sales and Marketing."
PROVIDE INNOVATIVE AND EASY-TO-USE WEB SITES.
The Company plans to make its customer experience informative, efficient and
intuitive by constantly improving its store format and features. For example,
the Company's CD Universe store incorporates "point and click" options,
supported by technical enhancements including easy-to-use search capabilities
(by artist, album, title, song title or record label), personalized music
suggestions, order tracking and confirmation. The CD Universe store also
promotes music learning and discovery by enabling visitors to create customized
versions of CDs and its Big Bang newsletter. Site visitors are prompted to
register and choose from a checklist of options and musical preferences that
allow the registrant to select the genre or genres he or she is interested in as
well as the content he or she desires to receive (e.g., press releases, charts,
reviews, concert tour information, CD Universe news). These features are
designed to make shopping at the store entertaining and informative, and to
encourage purchases and repeat visits.
INCREASE MARKET PENETRATION THROUGH STRATEGIC PARTNERSHIPS.
The Company intends to increase market penetration through strategic
partnerships that expand awareness of the Company's network of web sites. The
Company plans to develop strategic relationships with traditional media partners
to build awareness of its sites and expand traffic and e-commerce activity on
its network. The combination of fulfillment expertise, visitor-tracking
technology, flexible software and customer preference information make the
Company an attractive partner for Web-based businesses. The Company offers
Internet-based partners the opportunity to establish links from titles and
artists on their Web site to their corresponding area within the CD Universe
site. The Company
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<PAGE>
believes that the combination of its capability in order fulfillment,
visitor-tracking technology, flexible software and customer preference
information makes a partnership with the Company attractive for other
Internet-based businesses. Although the Company's ability to generate additional
revenue from Internet commerce may depend on increased site traffic, purchases
and advertising that the Company expects to generate through such strategic
partnerships, there can also be no assurance that these relationships will be
maintained through their initial terms or that additional third-party
partnerships will be available to the Company on acceptable commercial terms or
at all. The inability to enter into new, and to maintain any one or more of its
existing, strategic partnerships could have a material adverse effect on the
Company's business, results of operations and financial condition. Even if the
Company maintains its strategic partnerships, there can be no assurance that its
infrastructure of hardware and software will be sufficient to handle the
potential increased traffic and sales volume from such alliances.
EXPAND WEB PRESENCE.
The Company has been able to successfully increase site traffic, and thereby
increase sales. The Company has entered into arrangements with other web sites
as part of its partner programs. It will continue to seek cost-effective ways to
increase traffic at its web sites and has discussions underway with potential
strategic partners which may increase traffic at the CD Universe web site. The
Company plans to expand its international presence and CD Universe has recently
introduced a localized version of the CD Universe site for the Japanese market,
marketed directly to Japanese consumers through a revenue sharing partnership
with US-style.com. In addition, the Company continues to develop proprietary
content to attract and retain traffic. The Company plans to offer new products,
services and incentives to attract and retain traffic and to increase the size
of profit margins and online purchases.
Although the Company's growth strategy includes plans for expansion into
international markets, there can be no assurance that the Company will be able
to successfully market, sell and distribute its products in international
markets due to a variety of legal, contractual and practical considerations. In
addition, there are risks inherent in doing business on a global level, such as
unexpected changes in regulatory requirements, export restrictions, tariffs and
other trade barriers, difficulties in staffing and managing foreign operations,
difficulties in protecting intellectual property rights, longer payment cycles,
problems in collecting accounts receivable, political instability, fluctuations
in currency exchange rates and potentially adverse tax consequences which could
adversely impact the Company's prospects for successful international
operations. If such factors have a material adverse impact on the Company's
ability to develop international operations, its business, results of operations
and financial condition may likewise be adversely affected.
The Company's growth and future profitability may depend in part upon its
ability to identify companies that are suitable acquisition candidates, to
acquire those companies upon appropriate terms and to effectively integrate and
expand their operations within its own infrastructure. There can be no assurance
that the Company will be able to identify additional candidates that it deems
suitable for acquisition or that the Company will be able to consummate desired
acquisitions on favorable terms. Acquisitions involve a number of special risks,
including the diversion of management's attention to the assimilation of the
operations and personnel of the acquired companies, adverse short-term effects
on the Company's operating results and the potential inability to integrate
financial and management reporting systems. A significant portion of the
Company's capital resources could be used for these acquisitions. Accordingly,
the Company may require additional debt or equity financing for future
acquisitions, which may not be available on terms favorable to the Company, if
at all. Moreover, the Company may not be able to successfully integrate an
acquired business into the Company's business or to operate an acquired business
profitably. There can be no assurance that the Company will be able to integrate
and expand the operations of acquired companies, without excessive costs, delays
or other adverse developments.
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RECENT ACQUISITIONS.
ACQUISITION OF CASE'S LADDER, INC.
On May 31, 1999, the Company acquired all of the outstanding shares of the
common stock of Case's Ladder, Inc. in exchange for 700,000 shares of restricted
Common Stock of the Company pursuant to a Stock Purchase Agreement (the "Case's
Ladder Agreement"). The other parties to the agreement are Case's Ladder, Inc.
and its shareholders--Frank Westall (Chief Executive Officer and Chairman of
Case's Ladder) and Edward Hilts (Chief Operating Officer and Chief Financial
Officer of Case's Ladder). Frank Westall, Edward Hilts and Jeremy Rusnak
remained employed by Case's Ladder subsequent to the closing, and, in connection
with their employment, they were granted options to purchase 600,000 shares of
the Company's Common Stock, in the aggregate, at a price of $10.00 per share.
The Case's Ladder web site serves primarily as an online game portal,
providing competitive rankings for online gamers in a number of online games and
allowing gamers to compete against one another in a variety of tournaments and
leagues. The Case's Ladder web site currently has over 1.1 million registered
users and receives over 1.1 million unique visitors each month. Approximately
75% of registered users on the Case's Ladder web site are between the ages of 18
and 50 with the majority of those visitors having an annual income of over
$50,000. Case's Ladder currently derives revenue only from membership fees and
advertising. This acquisition of Case's Ladder's registered users base has
enabled the Company to expand its customer base for its existing products, and
to diversify its product offerings into areas such as computer games.
ACQUISITION OF GAMER'S ALLIANCE, INC.
By July 1, 1999, the Company acquired all of the outstanding shares of
Gamer's Alliance, Inc., a Missouri corporation based in Bridgeton, Missouri.
Gamer's Alliance has been online since January 1997, and operates a network of
gaming-related sites on the Internet. On a monthly basis, Gamer's Alliance
receives over 750,000 unique visitors and generates over 10 million banner
impressions. It maintains a network of more than 50 web sites, including
GA-games, GA-Source (a gaming news site which provides game previews, product
reviews and interviews), and GA-Sports (a network of news on computer sports
gaming).
The Company acquired the Gamer's Alliance stock with 78,125 shares of the
Company's common stock. The Company may make a contingent payment to the
sellers of additional shares of the Company's common stock over a period of five
calendar quarters, contingent upon Gamer's Alliance achieving specified
milestones with respect to revenue, the number of unique site visitors, and
other matters. Three (3) members of management of Gamer's Alliance -- Adam
Goldenberg (President), Matthew Rowell, and Anthony Wyss -- are employed by
the Company pursuant to employment agreements.
ACQUISITION OF THE BIG NETWORK, INC.
As of August 31, 1999, the Company acquired 80% of the outstanding capital
stock of The Big Network, Inc. ("BNI"), and will acquire the remaining 20% of
BNI's outstanding shares over the next six months, in exchange for shares of the
Company (collectively, the "Big Network Agreement"). The Big Network site
provides a full suite of classic board and card games, including spades,
checkers, chess, backgammon, reversi and morph, allowing thousands of
simultaneous players to meet, chat and play parlor games in a friendly setting.
The site's gaming system is based on a sophisticated Java client-server
architecture designed to support very large numbers of users. Big Network
currently hosts over 210,000 registered members and generates almost three
million advertising impressions per month. Subsequent to the closing, Stephen
Sellers and John Hanke became Vice Presidents of the Company.
18
<PAGE>
ITEM 2 FINANCIAL INFORMATION
SELECTED FINANCIAL INFORMATION
The following selected financial data are derived from the audited financial
statements of the Company presented as of March 31, 1999 and 1998 and the
Company's unaudited financial information presented as of June 30, 1999. As
indicated in Item 1, the Company completed acquisitions of Entertainment
Universe, Inc., CD Universe, Inc., Case's Ladder, Inc., Gamer's Alliance,
Inc. and The Big Network, Inc. subsequent to March 31, 1999. In our opinion,
these unaudited financial statements have been prepared on the same basis as our
audited financial statements and reflect all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of our results
of operations and financial position for these periods. The historical results
are not necessarily indicative of results to be expected for any future period.
The effect of the merger along with other acquisitions is presented separately
in pro forma statements. The data below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and related notes thereto
included in Item 15.
<TABLE>
<CAPTION>
eUNIVERSE, INC.
Statements of Operations
Three Months Ended Year Ended
-------------------------------- ------------------------------
June 30, June 30, March 31, March 31,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUE ................................... $ 2,034,955 $ 2,118,186 $ 8,851,713 $ 5,685,211
COST OF GOODS SOLD ........................ 1,659,558 1,802,615 7,550,289 4,898,302
------------ ------------ ------------ ------------
GROSS PROFIT .............................. 375,397 315,571 1,301,424 786,909
OPERATING EXPENSES:
Marketing and sales ................. 444,206 244,605 1,182,529 623,382
Product development .................. 168,018 92,066 332,534 147,973
General and administrative ........... 630,149 49,851 189,931 110,965
Merger and acquisition related ....... 62,241 -- -- --
Amortization of goodwill and
other intangibles ................... 307,641 292 1,170 1,170
Stock-based compensation ............. 237,500 -- -- --
------------ ------------ ------------ ------------
TOTAL OPERATING EXPENSES .................. 1,849,755 386,814 1,706,163 883,490
------------ ------------ ------------ ------------
OPERATING LOSS........ (1,474,358) (71,243) (404,740) (96,581)
============ ============ ============ ============
NONOPERATING INCOME (EXPENSE)
Interest and dividend income ........... 7,049 108 -- --
Interest expense ....................... (85,801) -- (2,424) --
Other .................................. -- -- -- (16,231)
Income taxes ........................... -- -- -- --
------------ ------------ ------------ ------------
NET INCOME (LOSS)..... $ (1,553,110) $ (71,135) $ (407,164) $ (112,812)
============ ============ ============ ============
Basic income (loss) per common share ...... $ (0.13) N/A N/A N/A
============ ============ ============ ============
Basic weighted average common shares
outstanding ............................. 12,221,900 N/A N/A N/A
</TABLE>
19
<PAGE>
eUNIVERSE, INC.
Balance Sheet Data
<TABLE>
<CAPTION>
June 30, March 31, March 31,
1999 1999 1998
------------ ------------ ------------
Unaudited
<S> <C> <C> <C>
Cash and cash equivalents......... $ 4,194,109 $ 11,335 $ 267,214
Working capital (deficit)......... 3,550,515 (783,204) (309,864)
Total assets...................... 22,882,213 558,346 533,164
Total shareholders' equity........ 21,775,155 (518,976) (111,812)
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our financial
statements and the accompanying notes which appear elsewhere in this Prospectus.
The following discussion contains forward-looking statements that reflect our
plans, estimates and beliefs. Our actual results could differ materially from
those discussed in the forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
below and elsewhere in this Prospectus, particularly in "Risk Factors."
RESULTS OF OPERATIONS - QUARTER ENDED JUNE 30, 1999 VS. 1998
Net Sales
Net sales include the selling price of music, video, games and other products
sold by the Company, net of returns, as well as outbound shipping and handling
charges. Net sales also include membership revenues and advertising revenues.
For the quarter ended June 30, 1999, revenues declined slightly by 4% as a
result of increased competition in the online music retailing markets and a
shutdown in one of the company's larger partners whose customers had previously
contributed approximately 5% of net sales.
QUARTER ENDED
JUNE 30,
<TABLE>
<CAPTION>
1999 1998 % CHANGE
---- ---- --------
(in Thousands)
<S> <C> <C> <C>
Net sales.............. $2,035 $2,118 (4)%
</TABLE>
Gross Profit
Gross profit is calculated as net sales less the cost of sales, which consists
of the cost of merchandise sold to customers and inbound and outbound shipping
costs. For the quarter ended June 30, 1999, gross profit increased as a
percentage of net sales and in absolute dollars over the same periods in 1998,
reflecting a change in the mix of revenues. Gross margin percentages increased
over the prior period as the company took measures to increase pricing on
standard catalog items to be closer to competitors' prices and as a result of
lower shipping costs.
20
<PAGE>
QUARTER ENDED
JUNE 30,
<TABLE>
<CAPTION>
1999 1998 % CHANGE
(in Thousands)
<S> <C> <C> <C>
Gross Profit........... $ 375 $ 316 19%
Gross Margin........... 18.4% 14.9%
</TABLE>
The Company over time intends to expand its operations by promoting new or
complementary products or sales formats and by expanding the breadth and depth
of its product or service offerings. Gross margins attributable to new business
areas may be lower than those associated with the Company's existing business
activities. However, the Company over time will reflect the full period effect
of its acquisitions of Case's Ladder and Gamer's Alliance that benefit from
higher margins on their sales of advertising.
Sales and Marketing
Marketing and sales expenses consist primarily of fulfillment costs,
advertising, public relations and promotional expenditures, and all related
payroll and related expenses for personnel engaged in marketing, selling and
fulfillment activities. Fulfillment costs include the cost of operating and
staffing the distribution and customer service center.
QUARTER ENDED
JUNE 30,
<TABLE>
<CAPTION>
1999 1998 % CHANGE
(in Thousands)
<S> <C> <C> <C>
Sales and Marketing.......... $ 444 $ 245 81%
Percentage of sales.......... 21.8% 11.5%
</TABLE>
Marketing and sales expenses increased during the quarter ended June 30,
1999 due to several factors including increases in the Company's advertising and
promotional expenditures, increases in payroll and related costs associated with
fulfilling customer demand, costs associated with Case's Ladder, and increases
in credit card merchant fees. The Company intends to increase its branding and
marketing campaigns. Increases in sales will drive increases in fulfillment
costs. As a result, the Company continues to expect marketing and sales expenses
to increase significantly in absolute dollars.
Product Development
Product development expenses consist of payroll and related expenses for
developing and maintaining the Company's Web sites and supporting technology.
QUARTER ENDED
JUNE 30,
<TABLE>
<CAPTION>
1999 1998 % CHANGE
(in Thousands)
<S> <C> <C> <C>
Product development expense $ 168 $ 92 83%
Percentage of sales........ 8.2% 4.3%
</TABLE>
Product development costs increased as a result of increased payroll and
related expense from personnel additions required to begin the integration of
the Company's Web
21
<PAGE>
sites and redesign of the Web sites. The addition of Case's Ladder expenses for
June 1999 also contributed to the increase.
General and Administrative
General and administrative ("G&A") expenses consist of payroll and related
expenses for executive, finance and administrative personnel, recruiting,
professional fees and other general corporate expenses.
QUARTER ENDED
JUNE 30,
<TABLE>
<CAPTION>
1999 1998
---- ----
(in Thousands)
<S> <C> <C>
General and administrative $ 630 $ 50
Percentage of sales 31.1% 2.4%
</TABLE>
Increases in G&A costs are largely attributable to increased payroll-
related and infrastructure costs associated with the Company's expansion
efforts, legal and other professional fees, and recruiting costs. The company
expects G&A costs to continue to increase commensurate with its expansion plans.
Merger, Acquisition and Investment Related Costs, Including Amortization of
Intangibles and Equity in Losses of Affiliates
QUARTER ENDED
JUNE 30,
<TABLE>
<CAPTION>
1999 1998
---- ----
(in Thousands)
<S> <C> <C>
Merger, acquisition and investment
related costs including amortization of
intangibles and equity in losses of
affiliates.................................. $ 370 $ 0
</TABLE>
Merger, acquisition and investment related costs ("M&A Costs") consist of
amortization of goodwill and other purchased intangibles, equity in the losses
of affiliates, and certain merger, acquisition and investment related charges.
The Company expects M&A Costs to increase in the third quarter of 1999, because
the Company will record a full quarter of amortization expense and equity in
losses of affiliates relating to the acquisitions and investments made during
the second quarter. It is likely that the Company will continue to expand its
business through acquisitions and investments, which would cause M&A Costs to
increase.
Stock-Based Compensation
<TABLE>
<CAPTION>
QUARTER ENDED
JUNE 30,
1999 1998
---- ----
(in Thousands)
<S> <C> <C>
Stock-based compensation $ 238 $ -
</TABLE>
22
<PAGE>
Stock-based compensation is comprised of the portion of acquisition related
consideration conditioned on the continued tenure of key employees, which must
be classified as compensation expense under generally accepted accounting
principles.
Interest Income and Expense
QUARTER ENDED
JUNE 30,
<TABLE>
<CAPTION>
1999 1998
---- ----
(in Thousands)
<S> <C> <C>
Interest income...... $ 7 $ -
Interest expense..... (86) ( - )
</TABLE>
Interest income on cash increased due to higher balances resulting from the
Company's financing activities, principally the April 1999 issuance of $6.5
million aggregate principal amount of 6% Convertible Preferred Stock (the
"Preferred Stock"). Interest expense for the quarter ended June 30, 1999
includes accretion of 6% per annum on the Preferred Stock.
Income Taxes
The Company has not generated any taxable income to date and therefore has
not paid any federal income taxes since inception. Utilization of the Company's
net operating loss carryforwards, which begin to expire in 2014, may be subject
to certain limitations under Section 382 of the Internal Revenue Code of 1986,
as amended. Due to uncertainties regarding realizability of the deferred tax
assets, the Company has provided a valuation allowance on the deferred tax asset
in an amount necessary to reduce the net deferred tax asset to zero.
Net Loss
QUARTER ENDED
JUNE 30,
<TABLE>
<CAPTION>
1999 1998
---- ----
(in Thousands)
<S> <C> <C>
Net (Loss) $ (1,553) $ (71)
</TABLE>
Net loss for the quarter increased by almost $1.5 million to ($ 1,553,000) as
a result of increased expenses related to acquisitions and for increased salary
related expenses in establishing an organization for the corporation.
RESULTS OF OPERATIONS - YEAR ENDED MARCH 31, 1999 VS. 1998
Net Sales
Net sales include the selling price of music, video, games and other products
sold by the Company, net of returns, as well as outbound shipping and handling
charges. Net sales also include membership revenues and advertising revenues.
For the year ended March 31, 1999, revenues increased by 56% as a result of
increased purchases of music online and through the Company's increased
marketing with its marketing partners and favorable reviews by third parties.
23
<PAGE>
YEAR ENDED
MARCH 31,
<TABLE>
<CAPTION>
1999 1998 % CHANGE
---- ---- --------
(in Thousands)
<S> <C> <C> <C>
Net sales.......... $8,852 $5,685 56%
</TABLE>
At March 31, 1999 the Company's cumulative customer accounts reached 266
thousand, compared with 128 thousand at March 31, 1998.
Gross Profit
Gross profit is calculated as net sales less the cost of sales, which
consists of the cost of merchandise sold to customers and inbound and outbound
shipping costs. For the year ended March 31, 1999, gross profit increased as a
percentage of net sales and in absolute dollars over the same periods in 1998,
reflecting a change in the mix of revenues. Gross margin percentages increased
over the prior period as the company took measures to increase pricing on
standard catalog items to be closer to competitors' prices and as a result of
lower shipping costs.
YEAR ENDED
MARCH 31,
<TABLE>
<CAPTION>
1999 1998 % CHANGE
---- ---- --------
(in Thousands)
<S> <C> <C> <C>
Gross Profit $1,301 $ 787 65%
Gross Margin 14.7% 13.8%
</TABLE>
The Company over time intends to expand its operations by promoting new or
complementary products or sales formats and by expanding the breadth and depth
of its product or service offerings. Gross margins attributable to new business
areas may be lower than those associated with the Company's existing business
activities. However, the Company over time will reflect the full period effect
of its acquisitions of Case's Ladder and Gamer's Alliance that benefit from
higher margins on their sales of advertising.
Sales and Marketing
Marketing and sales expenses consist primarily of fulfillment costs,
advertising, public relations and promotional expenditures, and all related
payroll and related expenses for personnel engaged in marketing, selling and
fulfillment activities. Fulfillment costs include the cost of operating and
staffing the distribution and customer service center.
YEAR ENDED
MARCH 31,
<TABLE>
<CAPTION>
1999 1998 % CHANGE
---- ---- --------
(in Thousands)
<S> <C> <C> <C>
Sales and Marketing $1,183 $ 623 90%
Percentage of sales 13.3% 10.9%
</TABLE>
Marketing and sales expenses increased during the year ended March 31, 1999
due to several factors including increases in the Company's advertising and
promotional expenditures, increases in payroll and related costs associated with
fulfilling customer demand, costs associated with new product offerings, and
increases in credit card merchant fees resulting from higher sales. The Company
intends to increase its branding and
24
<PAGE>
marketing campaigns. Increases in sales will drive increases in fulfillment
costs. As a result, the Company continues to expect marketing and sales expenses
to increase significantly in absolute dollars.
Product Development
Product development expenses consist of payroll and related expenses for
developing and maintaining the Company's Web sites and supporting technology.
YEAR ENDED
MARCH 31,
<TABLE>
<CAPTION>
1999 1998 % CHANGE
---- ---- --------
(in Thousands)
<S> <C> <C> <C>
Product development expense $ 333 $ 148 125%
Percentage of sales 3.8% 2.6%
</TABLE>
General and Administrative
General and administrative ("G&A") expenses consist of payroll and related
expenses for executive, finance and administrative personnel, recruiting,
professional fees and other general corporate expenses.
<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31,
1999 1998 % CHANGE
---- ---- --------
(in Thousands)
<S> <C> <C> <C>
General and administrative $ 190 $ 111 71%
Percentage of sales 2.1% 2.0%
</TABLE>
Increases in G&A costs are largely attributable to increased payroll-
related and infrastructure costs associated with the Company's expansion
efforts, legal and other professional fees, and recruiting costs. The company
expects G&A costs to continue to increase commensurate with its expansion plans.
Income Taxes
The Company has not generated any taxable income to date and therefore has
not paid any federal income taxes since inception. Utilization of the Company's
net operating loss carryforwards, which begin to expire in 2011, may be subject
to certain limitations under Section 382 of the Internal Revenue Code of 1986,
as amended. Due to uncertainties regarding realizability of the deferred tax
assets, the Company has provided a valuation allowance on the deferred tax asset
in an amount necessary to reduce the net deferred tax asset to zero.
Net Loss
<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31,
1999 1998
---- ----
(in Thousands)
<S> <C> <C>
Net (Loss) $ (407) $ (113)
</TABLE>
25
<PAGE>
Net loss for the year increased by approximately $300,000 to ($ 407,000) as a
result of increased salary related expenses in marketing and increased marketing
and promotional activities that were more than offset the increased margin from
higher sales.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999 the Company's principal sources of liquidity consisted of
$4.0 million of cash compared to $11,000 of cash at March 31, 1999.
Net cash used in operating activities was $1.05 million and $109,000 for the
three-month periods ended June 30, 1999 and 1998, respectively. Net operating
cash flows were primarily attributable to quarterly net losses, decreases in
accounts payable and in increases in prepaid expenses and other, partially
offset by non-cash charges for depreciation and amortization and merger and
acquisition related costs.
Net cash used in investing activities was $2.1 million and $17,400 for the
three-month periods ended June 30, 1999 and 1998, respectively, and consisted of
purchases of fixed assets, and cash paid for acquisitions and cash payments and
receipts to and from officers and employees. At June 30, 1999, amounts
outstanding from employees relate to agreements made in conjunction with the
acquisitions of Cases Ladder and Gamers Alliance. Cash available for investment
purposes increased substantially in 1999 as a result of the issuance of the
Preferred Stock.
Net cash provided by financing activities of $7.3 million for the three-
month period ended June 30, 1999 resulted from proceeds relating to the issuance
of the Preferred Stock, net of financing costs, and proceeds from issuance of
capital stock.
As of June 30, 1999, the Company's principal commitments consisted of
obligations outstanding under its Preferred Stock, obligations in connection
with the acquisition of fixed assets and leases, and commitments for advertising
and promotional arrangements. Failure to achieve favorable financing for asset
acquisitions could negatively impact the Company's cash flows. Geographic
expansion and continued acquisitions and investments will also require future
capital expenditures.
The Company believes that current cash balances will be sufficient to meet
its anticipated cash needs for at least the next 6 months. However, any
projections of future cash needs and cash flows are subject to substantial
uncertainty. If current cash that may be generated from operations are
insufficient to satisfy the Company's liquidity requirements, the Company may
seek to sell additional equity or to obtain a line of credit. The sale of
additional equity or convertible debt securities could result in additional
dilution to the Company's stockholders. In addition, the company will, from time
to time, consider the acquisition of or investment in complementary businesses,
products, services and technologies, which might impact the Company's liquidity
requirements or cause the Company to issue additional equity. There can be no
assurance that financing will be available in amounts or on terms acceptable to
the Company, if at all.
ITEM 3 PROPERTIES
See "Item 1. Business--Facilities" above.
26
<PAGE>
ITEM 4 Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding beneficial
ownership of the Company's common stock by the following individuals or groups:
(i) each person known by the Company to own beneficially more than 5% of the
Company's common stock, (ii) each of the Company's executive officers and
directors and (iii) all directors and executive officers as a group:
<TABLE>
<CAPTION>
Name of Beneficial Owner Shares Beneficially Percentage Beneficially
Owned(1) Owned(2)
<S> <C> <C>
Brad D. Greenspan 7,841,000 45.0%
Charles Beilman 2,425,000 13.9%
Joseph Abrams(3) 1,581,594(3) 9.1%
Leland N. Silvas 425,001(4) 2.4%
William R. Wagner 16,666(5) *
James Haiduck 9,000/(6)/ *
John V. Hanke 242,820 1.4%
Stephen D. Sellers 297,180 1.7%
Gordon E. Landies 108,201/(7)/ *
Directors and Executive 11,460,754 66.1%
Officers as a Group
</TABLE>
- -----------------
* less than 1%
(1) Unless otherwise noted, all of the shares shown are held by individuals or
entities possessing sole voting and investment power with respect to such
shares. Shares not outstanding but deemed beneficially owned by virtue of
the right of a person to acquire them within 60 days, whether by the
exercise of options or warrants or the conversion of shares of Preferred
Stock into shares of Common Stock, are deemed outstanding in determining
the number of shares beneficially owned by such person or group. The
address of each individual or group listed in the table is 101 North
Plains Industrial Road, Wallingford, Connecticut 06492.
(2) The "Percentage Beneficially Owned" is calculated by dividing the "Number
of Shares Beneficially Owned" by the total outstanding shares of Common
Stock including shares beneficially owned by the person with respect to
whom the percentage is calculated.
(3) Includes shares beneficially owned by Mr. Abrams as Trustee under the
following trusts: (i) 881,594 shares held by the Joseph W. & Patricia
G. Abrams Living Trust Under Trust Agreement dated March 16, 1994, (ii)
350,000 shares held by Matthew R. Abrams Irrevocable Trust Under Trust
Agreement dated December 19, 1991, and (iii) 350,000 shares held by
Sarah E. Abrams Irrevocable Trust Under Trust Agreement dated
December 19, 1991.
(4) Includes 225,001 shares represented by options exercisable within 60 days.
(5) Consists entirely of shares represented by options exercisable within
60 days.
(6) Includes 6,000 convertible preferred shares.
(7) Includes 6,000 convertible preferred shares and 102,201 shares of Common
Stock beneficially owned by Mr. Landies as co-trustee under the Barbara
Landies Living Trust 8/27/96.
27
<PAGE>
ITEM 5 DIRECTORS AND EXECUTIVE OFFICERS
The following are the Directors and Executive Officers of the Company:
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Brad D. Greenspan(1) 26 Chairman of the Board of Directors
Leland N. Silvas(1) 44 President, Chief Executive Officer and Director
Charles Beilman 39 Chief Operating Officer, Chief Technical Officer and
Director
William R. Wagner 51 Vice President, Chief Financial Officer and
Secretary
James Haiduck 36 Vice President, Sales
John V. Hanke 32 Vice President, Marketing
Stephen D. Sellers 39 Vice President, Business Affairs
Gordon E. Landies 43 Director
</TABLE>
Brad D. Greenspan, Chairman of the Board of Directors of the Company since
April 1999, at the founding of Entertainment Universe, Inc. Prior thereto, Mr.
Greenspan founded and served as the President of Palisades Capital, Inc., a
private Beverly Hills merchant bank. Mr. Greenspan received a BA degree in
political science/business from UCLA in 1996.
Leland N. Silvas, President and Chief Executive Officer of the company since
April 1999. Mr. Silvas is a principal member of Label-add, LLC. a
Connecticut-based advertising and direct marketing company and was employed
there until being recruited to eUniverse, Inc. in 1999. Mr. Silvas was President
and Chief Operating Officer of McPhersons global housewares division, from
1994-1998. From 1992 to 1994 Mr. Silvas was a board member for Partners In
Computing, a New York City-based software solutions company. He currently sits
on the advisory board to the Adept Group, a computer consulting company based in
New York City and is a board member of ADV MARKETING, a marketing an consulting
company, and 1-800-adagency, an ad agency.
Charles Beilman, Chief Operating Officer and Chief Technical Officer of the
Company since April 1999. Mr. Beilman founded CD Universe, Inc. in April 1997
and was its sole shareholder and Chief Executive Officer until the sale of CD
Universe to the Company in April 1999. Since 1985, Mr. Beilman has served as
President and Director of Trak Systems, Inc., which supplies proprietary
inventory control computer systems to retail music stores throughout the United
States and Canada.
William R. Wagner, Vice President, Chief Financial Officer and Secretary of
the Company since April 1999. Prior to joining the Company, Mr. Wagner was Chief
Financial Officer of Heritage Marketing and Incentives, Inc., a
Massachusetts-based marketing incentives company. From 1995 to 1997, he was
Chief Financial Officer of ServiceSoft Corporation, a Massachusetts Internet
software company, and from 1990 to 1994, he was Chief Financial Officer of
General Scanning, Inc., a pioneer in laser technology and systems.
James Haiduck, Vice President of Sales since August 1999. Prior to joining
eUniverse, Mr. Haiduck was Vice President of OEM Sales for The Learning Company,
a division of Mattel. His 13 years of sales experience in the
technology/software industry covered the OEM, retail, corporate, and direct
channels. Having established relationships with nearly every Tier One OEM
including HP, Compaq, IMB, Canon, and Gateway, Mr. Haiduck was responsible for
more than $200 million in licensing revenue over the last 10 years.
Stephen D. Sellers, Vice President Business Affairs and Business Development
since September 1999. Prior to joining eUniverse with the acquisition of the Big
Network, Mr. Sellers was CEO and co-founder of The Big Network. Previous to
that, he was co-founder and CEO of Archetype Interactive where he assembled a
diverse team of creative talent to create Meridian 59, the first graphical
Internet multiplayer game. After the acquisition of Archetype by the 3DO
Company, he worked as head of Internet Business Development. He
28
<PAGE>
has advised startup businesses in a variety of technology markets. He holds an
MBA from the University of California, Berkley and a BA from Stanford
University.
John V. Hanke, Vice President of Marketing and Site Integration since
September 1999. Prior to joining eUniverse with the acquisition of The Big
Network, Mr. Hanke was co-founder, President and COO of The Big Network. Mr.
Hanke has extensive experience in the design and development of Internet
projects. He was the product manager and producer for Meridian 59 at Archetype
Interactive and served as Director of Internet Marketing at 3DO, after its
acquisition of Archetype, where he supervised Internet product development and
was responsible for innovations in the pricing and marketing of 3DO's Internet
products. He holds an MBA from the University of California, Berkley and a BA
from the University of Texas, Austin.
Gordon Landies, Director since August 1999. Mr. Landies is currently General
Manager of the Home and Entertainment group of Mattel Interactive and has been
in consumer software for 16 years, spending 10 years at Software Toolworks,
Mindscape, and the Learning Company which was acquired by Mattel. Most of Mr.
Landies' career has been in sales and business development where he helped drive
sales growth and build product categories such as National Geographic,
Printshop, and Chessmaster.
BOARD OF DIRECTORS AND BOARD COMMITTEES
Our Board of Directors is comprised of four directors. Our bylaws
provide that we may have up to a maximum of nine directors. Directors are
elected by the stockholders at each annual meeting or at special meetings of
stockholders and serve until their successors are duly elected and qualified.
All executive officers are elected by, and serve at the discretion of, the Board
of Directors.
The Compensation Committee consists of Messrs. Greenspan and Silvas. The
Compensation Committee administers the Company's 1999 Stock Awards Plan and
reviews and recommends to the Board of Directors the compensation and benefits
of the employees of eUniverse.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to establishing the Compensation Committee, the Board of Directors
as a whole performed the functions delegated to the Compensation Committee. No
member of the Board of Directors or the Compensation Committee serves as a
member of the board of directors or compensation committee of any entity that
has one or more executive officers serving as a member of the Company's Board of
Directors or Compensation Committee.
DIRECTOR COMPENSATION
Directors of eUniverse who are also employees or officers of eUniverse
do not receive any compensation specifically related to their activities as
directors, other than reimbursement for expenses incurred in connection with
their attendance at Board of Directors meetings. Other Directors will receive,
upon becoming a Director, options for 75,000 shares of Common Stock, which also
vest over a period of three years, for each year of service as a Director. See
"Item 6. Executive Compensation." For each board meeting they attend, these
other directors will be reimbursed for their expenses incurred in connection
with the meeting.
Agreement Concerning Election of Director
In connection with the purchase by E. P. Opportunity Fund, LLC ("E. P.") of
preferred stock issued by EUI, an agreement dated April 6, 1999 was entered into
between E. P., EUI and Brad D. Greenspan (the "E. P. Letter Agreement") which,
in effect, gave E. P. the right to select one of the Directors of EUI during
such period as it owns shares of EUI preferred stock. On April 16, 1999, in
connection with the Reorganization, the E. P.
29
<PAGE>
Letter Agreement was assigned by EUI to the Company, which assumed the
obligations of EUI thereunder. As a result, as long as it owns Preferred Stock,
E. P. has the right to appoint a member of the Board of Directors of the
Company. E.P. has not exercised this right as of the date hereof.
In connection with the acquisition of The Big Network, Inc. ("Big Network"),
an agreement dated July 30, 1999 was entered into between Brad D. Greenspan,
Charles Beilman, Stephen Sellers and John Hanke which, in effect, gives Messrs.
Sellers and Hanke the right to select one of the Directors of the Company during
the period that either Mr. Sellers or Mr. Hanke or both are employed by the
Company. Messrs. Sellers and Hanke have not exercised this right as of the date
hereof.
ITEM 6 EXECUTIVE COMPENSATION
At the end of its most recent fiscal year, the Company's President and Chief
Executive Officer and other officers had not yet been employed and compensation
had not yet been paid. On April 6, 1999, the Company entered into employment
agreements with Leland Silvas, Chief Executive Officer and President, and
William R. Wagner, Vice President, Chief Financial Officer and Secretary. The
contract with Mr. Silvas is for an initial term expiring April 30, 2000 and
automatically renews for additional one-year periods unless terminated on three
months notice. The Silvas contract stipulates an annual base salary of $200,000
to be reviewed annually with a bonus opportunity of up to 50% of base salary
upon achievement of goals as determined by the Compensation Committee of the
Board of Directors. Mr. Silvas is entitled to options to purchase 825,000 shares
of common stock of the Company at an exercise of $3.00 per share, which options
become exercisable at various times as set forth in the contract.
The contract with Mr. Wagner is for an indefinite term, subject to
termination on three months notice, and stipulates an annual salary of $125,000
and options to purchase 100,000 shares of common stock of the Company at an
exercise price of $3.00 per share. On June 15, 1999 Mr. Wagner was granted
options to purchase 50,000 shares of common stock at an exercise price of $9.50
under the Stock Option Plan.
The Company entered into an employment contract with Mr. Beilman which became
effective April 14, 1999 for an initial period of three years, subject to
termination on ten days notice, and stipulates an annual compensation of
$135,000. On June 15, 1999 Mr. Beilman was granted options to purchase 75,000
shares of common stock at an exercise price of $9.50 under the Stock Option
Plan.
Effective August 1, 1999, the Company entered into a contract with James
Haiduck, Vice President of Sales. The contract with Mr. Haiduck is for an
initial term of one year and stipulates an annual salary of $108,000 and options
to purchase 200,000 shares of common stock at an exercise price of $9.50 per
share.
In conjunction with the acquisition of Big Network, the Company entered into
employment agreements with Mr. Hanke and Mr. Sellers, Vice President of
Marketing and Vice President of Business Development. Both contracts are for an
initial term of 12 months and stipulates annual salaries of $96,000. Each of Mr.
Sellers and Mr. Hanke were granted individual options to purchase 300,000 shares
at an exercise price of $8.25.
30
<PAGE>
The table below summarizes the compensation to be paid pursuant to
agreements for services to be rendered to eUniverse in all capacities for the
fiscal year ending March 31, 2000. These executives are referred to as the Named
Executive Officers elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Annual compensation Long Term compensation
---------------------------------------------------------
Awards Payouts
- -----------------------------------------------------------------------------------------------------------------------------
Name and Principal Fiscal Salary Bonus Other Annual Restricted Securities LTIP All Other
Position Year ($) ($) Compensation Stock Award Underlying Payouts Compen-
($) ($) Options ($) sation
# ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Brad D. Greenspan, 2000 - 50,000 - - - -
Chairman of the
Board
Leland Silvas, 2000 200,000 /(1)/ 6,307/(2)/ - 191,333/(3)/ - -
President, Chief
Executive
Officer and
Director
Charles Beilman, 2000 135,000 /(1)/ - - - - -
Vice President
Special Projects
and Director
1999 77,250 - 91,711 - - - -
William R. Wagner, 2000 125,000 /(1)/ - - 16,666/(3)/ - -
Chief Financial
Officer
James Haiduck, 2000 108,000 /(1)/ - - - - -
Vice President
Sales
Stephen D. Sellers, 2000 96,000 /(1)/ - - - - -
Vice President
Business
Development
John V. Hanke, 2000 96,000 /(1)/ - - - - -
Vice President
Marketing
</TABLE>
Note 1: Incentive compensation awards and payments shall be defined by the Board
of Directors.
Note 2: Mr. Silvas was issued 200,000 shares in conjunction with his employment
with eUniverse. These have been valued at $.315 per share, based upon the
initial capitalization of Entertainment Universe.
Note 3: Option shares are represented as those options that are excercisable
within 60 days.
31
<PAGE>
The following table summarizes the option grants to the Named Executive
Officers in the current fiscal year:
<TABLE>
<CAPTION>
Individual grants Potential realizable value
at assumed annual rates of
stock price appreciation
for option term
- -------------------------------------------------------------------------------------------------------
Name and Principal Number of Percent of Exercise Expiration 5% 10%
Position securities total base price Date
underlying options $/share
options granted to
employees
in fiscal
year
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Brad D. Greenspan, 400,000 14.0% $ 9.50 6/15/09 $ 2,720,000 $ 6,560,000
Chairman of the
Board of
Directors
Leland Silvas, 825,000 28.8% $ 3.00 4/22/09 $10,972,500 $18,892,500
President, Chief
Executive
Officer and
Director
Charles Beilman, 75,000 2.6% $ 9.50 6/15/09 $ 510,000 $ 1,230,000
Vice President
Special Projects,
Chief Technical
Officer and
Director
William R. Wagner, 150,000 5.2% $ 3.00 6/15/09 $ 1,670,000 $ 3,110,000
Vice President, to
Chief Financial $ 9.50
Officer and
Secretary
James Haiduck, 200,000 7.0% $ 9.50 8/01/09 $ 1,360,000 $ 3,280,000
Vice President
Sales
Stephen D. Sellers, 300,000 10.5% $ 8.25 9/01/09 $ 2,415,000 $ 5,295,000
Vice President,
Business Affairs
and Business
Development
John V. Hanke, 300,000 10.5% $ 8.25 9/01/09 $ 2,415,000 $ 5,295,000
Vice President
Marketing and
Site Integration
</TABLE>
32
<PAGE>
ITEM 7 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On April 14, 1999, the Company acquired all of the capital stock of CD
Universe, Inc. for a total consideration of $1,915,000 in cash plus 2,425,000
shares of common stock of the Company. The rights to acquire CD Universe, Inc.
were originally held by Palisades Capital, Inc. ("Palisades"), a private
merchant bank owned and operated by Brad D. Greenspan. On February 11, 1999
Palisades assigned its rights to acquire CD Universe, Inc. to EUI for
consideration of 8,061,000 shares of common stock of EUI which were issued to
Mr. Greenspan. (See Item 4 "Security Ownership of Certain Beneficial Owners and
Management"). The assignment of the right to acquire CD Universe has been
recorded on the books of Entertainment Universe at Palisades' historical cost
pursuant to the accounting treatment for transfers of assets between entities
under common control, as proscribed by APB 16. In connection with the
Reorganization, those shares of EUI common stock were exchanged for an
equivalent number of shares of the Company's common stock.
ITEM 8 LEGAL PROCEEDINGS
The Company is not a party to any pending legal proceedings that in the
opinion of management of the Company would have a material adverse effect on the
Company's results of operations or consolidated financial condition.
ITEM 9 MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
Shareholders and Dividends
As of August 31, 1999, there were 14,823,723 shares of common stock of the
Company outstanding, which were held by 147 shareholders of record.
To date, the Company has paid no cash dividends and has no intention to pay
cash dividends on its common stock in the foreseeable future.
Market Information
The common stock of the Company is traded on the OTC Electronic Bulletin Board
under the symbol EUNI. Prior to April 22, 1999, when the Company changed its
name to eUniverse, Inc., the common stock of the Company was traded under the
symbol MCAM. Between April 14, 1999 and April 22, 1999 the common stock of the
Company was traded under the symbol MCAMD.
The chart below sets forth the range of reported high and low bid quotations
for the common stock of the Company for each full quarterly period from October
31 1, 1997 through June 30, 1999. The source of the quotations is Prophet
Financial Systems. The quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not necessarily represent actual
transactions. The closing price for the common stock of the Company on August
31, 1999 was $6.125.
MONTHLY PERIOD ENDING RANGE OF HIGH AND LOW BID
QUOTATIONS
June 30, 1999 (EUNI) $ 1.875 - 14.00
March 31, 1999 (MCAM) $ 5.00 - 18.00 /1/
December 31, 1998 (MCAM) $ 0.62 - 25.00 /1/
September 30, 1998 (MCAM) $ 5.00 - 4.55 /1/
June 30, 1998 (NBCO) $ 50.00 - 95.00 /1/
March 30, 1998 (NBCO) $ 65.00 - 90.00 /1/
December 31, 1997 (NBCO) $1,300.00 -1,600.00 /2/
/1/ Quotes reflect a 20 for 1 reverse split of the Company's common
stock effective March 31, 1999.
33
<PAGE>
/2/ Quotes reflect a 20 for 1 reverse split of the Company's common
stock effective August 1, 1997.
SHARES AVAILABLE FOR RESALE
On August 31, 1999, approximately 13,806,000 shares of the Common Stock
(approximately 93% of the shares outstanding) are restricted shares that may be
sold only in the event such shares are registered pursuant to the Securities Act
or are sold pursuant to an exemption thereunder, including Rule 144, which
permits the resale of limited amounts of restricted securities after a 12-month
initial holding period. Subject to the volume limitations of Rule 144,
approximately 700,000 shares will become available on May 31, 2000, an
additional 509,000 shares will become available on April 1, 2000, an additional
12,475,000 shares will become available on April 14, 2000, and an additional an
additional 78,125 will become available on June 30, 2000. See "PRINCIPAL
SHAREHOLDER."
There are 1,795,024 shares of Preferred Stock outstanding which, commencing
on October 14, 1999, are convertible into shares of Common Stock at a one-to-one
ratio unless the market price of the Common Stock is less than $3.60 during
certain periods prior to conversion. The Company has granted the holders of
Preferred Stock registration rights so that they may sell their shares of Common
Stock received upon conversion upon conversion of such Preferred Stock. The
shares of Common Stock received upon conversion also may be sold on the market
pursuant to Rule 144 without registration under the Securities Act commencing 12
months after the date of issuance of the converted Preferred Stock and subject
to the volume limitations of Rule 144. See "DESCRIPTION OF CAPITAL STOCK--
Registration Rights."
The Company reserved 5,000,000 shares of Common Stock for future issuance
under our 1999 Stock Awards Plan. The Company has granted options to employees
and one advisor to purchase an aggregate of up to 2,860,000 shares of Common
Stock at exercise prices ranging from $3.00 to $11.40. Options representing
391,667 of such shares are vested and exercisable. Thereafter, the remaining
options vest in equal amounts each calendar quarter over the next two years.
Warrants to purchase an additional 731,865 shares of Common Stock at exercise
prices ranging from $2.75 to $10.00 have been issued to various entities in
exchange for financing and public relations services. Warrants and options
representing 400,000 of such shares are vested and exercisable. Common Stock
issued upon exercise of outstanding vested options or issued under the Company's
1999 Stock Awards Plan, other than Common Stock issued to affiliates of
eUniverse, is available for resale in the open market, during the effectiveness
of an applicable registration statement that the Company will file, and maintain
the effectiveness of, on a Form S-8 covering such shares.
Up to 1,800,000 restricted shares of Common Stock may be issued in
connection with our acquisition of The Big Network, which may be sold only in
the event such shares are registered, or exempted from registration, under the
Securities Act.
RULE 144. In general, under Rule 144 as currently in effect a person who has
beneficially owned shares of our Common Stock for at least one year would be
entitled to sell within any three-month period a number of shares that does not
exceed the greater of:
-1% of the number of shares of Common Stock then outstanding,
or
-the average weekly trading volume of the Common Stock during the four
calendar weeks preceding the filing of a Form 144 with respect to such
sale.
Sales under Rule 144 are also subject to certain manner of sale provisions and
notice requirements and to the availability of current public information about
us.
34
<PAGE>
RULE 144(K). Under Rule 144(k), a person who is not deemed to have been an
affiliate of eUniverse at any time during the three months preceding a sale, and
who has beneficially owned the shares proposed to be sold for at least two years
including the holding period of any prior owner except an affiliate, is entitled
to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.
REGISTRATION RIGHTS.
Under the Registration Rights Agreement of Entertainment Universe Inc. dated
April 1999 which was assigned to and assumed by the Company pursuant to the
Assignment and Assumption Agreement by and between Entertainment Universe, Inc.
and Motorcycle Centers of America, Inc., dated as of April 14, 1999 (the
"Registration Rights Agreement"), we have agreed to use our best efforts to file
a registration statement for Common Stock issued upon conversion of any
Preferred Stock, and to maintain the effectiveness of such registration
statement until all securities covered thereby have been sold.
The Case's Ladder Agreement and the Big Network Agreement provide that the
selling shareholders will have the right to participate in any registered
offering of the Common Stock and to sell their shares of Common Stock in the
Company's offering of its shares to the public to the extent that any of the
Company's directors and/or officers have such registration rights and sale
privileges.
During the effectiveness of any such registration, any shares registered
would become freely tradable without restriction under the Securities Act.
ITEM 10 RECENT SALES OF UNREGISTERED SECURITIES
Since its incorporation in February 1999, eUniverse has issued and sold
unregistered securities in the amounts, at the times, and for the aggregate
amounts of consideration listed as follows:
1. On February 24, 1999, as part of its compensation for acting as exclusive
placement agent for the sale of the EUI Preferred Stock, Gerard Klauer Mattison
& Co., Inc. ("GKM") received warrants to purchase 400,000 shares of Common Stock
at an exercise price of $2.75 per share, which became exercisable on April 14,
1999 and expire April 14, 2004. GKM also received warrants to purchase an
additional 271,835 shares of common stock of the Company at an exercise price of
$2.81 per share, which become exercisable on April 14, 2000 and expire April 14,
2004.
2. On March 3, 1999, the Company issued 250,000 shares of Common Stock for
consideration of $1.00 per share to GKM and certain of its affiliates in a
private offering pursuant to Rule 506 of Regulation D.
3. On March 3, 1999, EUI issued 1,581,594 shares of its common stock to Joseph
Abrams in connection with the Merger Agreement
4. On March 3, 1999, EUI issued 8,061,000 shares of its common stock to Brad D.
Greenspan in connection with the Merger Agreement.
5. On March 3, 1999, eUniverse issued to Leland N. Silvas 200,000 shares of
Common Stock in consideration of his acceptance of employment by the Company as
President and Chief Executive Officer. See "PRICIPAL SHAREHOLDERS."
6. On April 1, 1999, EUI issued 354,000 shares to approximately 10 persons in
consideration of public relations, legal and related services provided to the
Company in connection with various activities, including the Preferred Stock
Offering and Merger with MCA.
35
<PAGE>
7. On April 14, 1999, EUI acquired from Charles Beilman, the sole shareholder of
CD Universe, Inc., one hundred percent of the capital stock of CD Universe, Inc.
for a total consideration of $1,915,000 in cash plus 2,425,000 shares of Common
Stock. Charles Beilman is the Chief Operating Officer, Chief Technical Officer
and a Director of the Company. See "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS."
8. On April 14, 1999, EUI sold 1,795,024 shares of its Series A 6% Convertible
Preferred Stock in a private offering pursuant to Section 4(2) of the Securities
Act and Rule 506 of Regulation D adopted under the Securities Act. The EUI
Preferred Stock was sold to a group of approximately 40 purchasers, including
Lehman Brothers, Eisenberg Partners and principals of Gerard Klauer Mattison &
Co., Inc., all of whom were accredited investors as defined in Rule 501 of
Regulation D. The aggregate offering price for the Preferred Stock was
$6,598,122. In connection with the Reorganization, the holders of the EUI
Preferred Stock exchanged their shares, on a one-to-one basis, for shares of the
Company's Preferred Stock having equivalent rights and preferences, as set forth
in the Designation of Preferred Stock. Proceeds from this sale were used to
acquired CD Universe, Inc. and for general corporate purposes.
9. On April 14, 1999, EUI merged with and into MCA pursuant to an Agreement and
Plan of Reorganization dated April 9, 1999 (the "Merger Agreement"). As
contemplated in the Merger Agreement, all of the outstanding shares of EUI
(12,829,000) were acquired by MCA, and the shareholders of EUI were issued
shares of MCA equal to approximately 92% of the shares of MCA outstanding after
the transaction. In connection with the merger into MCA, each share of EUI
Preferred Stock was exchanged for a share of preferred stock of MCA having
identical rights and preferences, and MCA changed its name to eUniverse, Inc.
Prior to April 14, 1999, MCA issued and sold unregistered securities in the
amounts, at the times, and for the aggregate amounts of consideration listed as
follows:
1. In October and November, 1997, the Company sold 47,500 shares of its common
stock for $9,500 under Rule 504 of Regulation D under the Securities Act.
2. On April 2, 1998 the Company sold 18,750 shares of its common stock for
$3,750 under Rule 504.
3. On March 15, 1999, the Company issued 78,000 shares of its common stock to
various shareholders in exchange for services rendered in anticipation of the
reorganization. The transaction was valued at the cost of the services rendered
of $30,060.
4. On March 31, 1999, the Company issued 2,000,000 shares of its common stock to
an officer in exchange for services. The transaction was valued at the cost of
the services rendered of $40,000.
5. On April 6, 1999, MCA sold 897,835 shares of MCA common stock pursuant to
Rule 504 at a price of $1.00 per share to purchasers of the EUI Preferred Stock.
These shares were exchanged for shares of freely tradable common stock of the
Company as the result of the merger with MCA and name change to eUniverse, Inc.
described above.
Subsequent to the Reorganization, the Company issued and sold
unregistered securities in the amounts, at the times, and for the aggregate
amounts of consideration listed as follows:
1. As of June 1, 1999, the Company purchased of all of the outstanding shares of
the Common Stock of Case's Ladder for a total of 700,000 shares of restricted
Common Stock of the Company. The Case's Ladder Agreement also provides that
three (3) principals of Case's Ladder will be employed by the Company subsequent
to the closing and that they will be granted options to purchase 600,000 shares
of the Company's Common Stock, in the aggregate, at a price of $10 per share.
36
<PAGE>
2. On June 15, 1999, the Company issued 24,830 shares of restricted common stock
to employees of CD Universe under the 1999 Stock Awards Plan. The awards vest on
April 14, 2000, subject to the continued employment of such employees.
3. As of July 1, 1999, eUniverse purchased all the outstanding capital stock of
Gamer's Alliance, Inc. in exchange for 78,125 shares of Common Stock valued at
an aggregate price of $1,000,000.
4. As of August 31, 1999, the Company purchased 80%, and intends to purchase the
remaining 20% over the next six months, of all of the outstanding capital stock
of The Big Network, Inc. in exchange for 1,800,000 shares of Common Stock valued
at an aggregate price of $11,025,000.
Proceeds from the above sales were used for general corporate purposes.
The Company believes that the Rule 504 offers and sales described above
were exempt from registration pursuant to Rule 504 of Regulation D under the
Securities Act because those offers and sales met all the conditions of Rule 504
as then in effect, including the dollar limitation, and the Company was not at
the time of such transactions within any of the categories of issuers prohibited
from using Rule 504.
Except for the Rule 504 offerings described above, the foregoing sales
of Common Stock and Preferred Stock were made in reliance upon the exemptions
from registration set forth in Section 4(2) of the Securities Act of 1933 and/or
Rule 506 of Regulation D promulgated thereunder for transactions not involving a
public offering. No underwriters were engaged in connection with the foregoing
sales of securities. These sales were made without general solicitation or
advertising. Each purchaser was an "accredited investor" or a sophisticated
investor with access to all relevant information necessary to evaluate the
investment who represented to the Registrant that the shares were being acquired
for investment.
ITEM 11 DESCRIPTION OF SECURITIES
We have authorized capital stock consisting of 250,000,000 shares of Common
Stock, $0.001 par value per share, and 50,000,000 shares of preferred stock,
$0.10 par value per share (the "Preferred Stock"). The following description of
eUniverse's capital stock is not intended to be complete. For a complete
description of our capital stock, you should read our Articles of Incorporation,
Amended and Restated Bylaws, and the Registration Rights Agreement that are
included as exhibits to our Form 10 filed with the Securities and Exchange
Commission on June 14, 1999, of which is incorporated by reference in this
Prospectus.
COMMON STOCK
As of August 31, 1999, there were 14,832,723 shares of Common Stock
outstanding, which were held of record by 147 shareholders.
Holders of Common Stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may be
applicable to the holders of outstanding shares of Preferred Stock, if any, the
holders of Common Stock are entitled to receive ratably such dividends, if any,
as may be declared from time to time by the Board of Directors out of funds
legally available therefor. In the event of liquidation, dissolution or winding
up of the Company, and subject to the prior distribution rights of the holders
of outstanding shares of Preferred Stock, if any, the holders of shares of
Common Stock shall be entitled to receive pro rata all of the remaining assets
of the Company available for distribution to its stockholders. The Common Stock
has no preemptive or conversion rights or other subscription rights. There are
no redemption or sinking fund provisions applicable to the Common Stock.
37
<PAGE>
PREFERRED STOCK
On April 14, 1999, EUI sold 1,795,024 shares of its Series A 6% Convertible
Preferred Stock in a private offering pursuant to Section 4(2) of the Securities
Act and Rule 506 of Regulation D adopted under the Securities Act. The EUI
Preferred Stock was sold to a group of approximately 40 purchasers, including
Lehman Brothers, Eisenberg Partners and principals of Gerard Klauer Mattison &
Co., Inc., all of whom were accredited investors as defined in Rule 501 of
Regulation D. The aggregate offering price for the Preferred Stock was
$6,598,122. In connection with the Reorganization, the holders of the EUI
Preferred Stock exchanged their shares, on a one-to-one basis, for shares of the
Company's Preferred Stock having equivalent rights and preferences, as set forth
in the Designation of Preferred Stock of Motorcycle Centers of America, Inc.
dated April 7, 1999 (the "Designation of Preferred Stock").
Holders of the Company's Preferred Stock have the right to convert all or
any portion of such stock into shares of the Company's common stock at any time
after October 15, 1999 until all shares of Preferred Stock have been converted,
at a one-to-one ratio, unless the market price of the Common Stock is below
$3.60 during various periods prior to the date of conversion, as set forth in
the Designation of Preferred Stock, in which case the conversion ratio would be
greater than one-to-one.
The Company does not pay dividends on the Preferred Stock; and the
holders of such stock are not entitled to receive any dividends thereon. In the
event of the liquidation or dissolution of the Company, the holders of the
Preferred Stock will be entitled to receive, prior in preference to any
distribution to the holders of the Common Stock and any other class of stock
which has been designated as junior in rank to the Preferred Stock, an amount
per share equal to the original issue price of the Preferred Stock ($3.60) plus
accretion thereon at a rate of 6% per annum from the date of issuance.
The holders of Preferred Stock are entitled to cast the number of votes per
share on each matter submitted to the Company's holders of Common Stock that
equals the number of votes that could be cast on the shares of Common Stock into
which such Preferred Stock could have been converted immediately prior to the
taking of the vote. Votes of the Preferred Stock holders shall be cast together
with those cast by the holders of common stock and not as a separate class
except as otherwise provided in the Designation of Preferred Stock on matters
directly affecting the rights of the holders of Preferred Stock.
ITEM 12 INDEMNIFICATION OF DIRECTORS AND OFFICERS
Nevada Corporation Law
Sections 78.751 et seq. of the Nevada Revised Statutes allow a company to
indemnify its officers, directors, employees, and agents from any threatened,
pending, or completed action, suit, or proceeding, whether civil, criminal,
administrative, or investigative, except under certain circumstances.
Indemnification may only occur if a determination has been made that the
officer, director, employee, or agent acted in good faith and in a manner which
such person believed to be in the best interests of the company. A determination
may be made by the shareholders, by a majority of the directors who were not
parties to the action, suit, or proceeding confirmed by opinion of independent
legal counsel; or by opinion of independent legal counsel in the event a quorum
of directors who were not a party to such action, suit, or proceeding does not
exist.
Articles of Incorporation
Article Twelfth of the Articles of Incorporation of the Company provide as
follows with respect to indemnification of Directors and Officers:
38
<PAGE>
"TWELFTH. INDEMNIFICATION: The corporation shall indemnify and hold harmless
the Officers and Directors of the Corporation from any and all liabilities or
claims to the fullest extent now, or hereafter from time to time, permitted
pursuant to the general corporation Law of the state of Nevada."
Bylaws
Article XII of the Bylaws of the Company provide as follows with respect to
indemnification of Officers and Directors:
"Section 1. Exculpation. No Director or Officer of the Corporation shall be
liable for the acts, defaults, or omissions of any other Director or Officer, or
for any loss sustained by the Corporation, unless the same has resulted from his
own willful misconduct, willful neglect, or gross negligence.
"Section 2. Indemnification. Each Director and Officer of the Corporation and
each person who shall serve at the Corporation's request as a director or
officer of another corporation in which the Corporation owns shares of capital
stock or of which it is a creditor shall be indemnified by the Corporation to
the fullest extent permitted from time to time by the Nevada Revised Statutes
against all reasonable costs, expenses and liabilities (including reasonable
attorneys' fees) actually and necessarily incurred by or imposed upon him in
connection with, or resulting from any claim, action, suit, proceeding,
investigation, or inquiry of whatever nature in which he may be involved as a
party or otherwise by reason of his being or having been a Director or Officer
of the Corporation or such director or officer of such other corporation,
whether or not he continues to be a Director or Officer of the Corporation or a
director or officer of such other corporation, at the time of the incurring or
imposition of such costs, expenses or liabilities, except in relation to matters
as to which he shall be finally adjudged in such action, suit, proceeding,
investigation, or inquiry to be liable for willful misconduct, willful neglect,
or gross negligence toward or on behalf of the Corporation in the performance of
his duties as such Director or Officer of the Corporation or as such director or
officer of such other corporation. As to whether or not a Director or Officer
was liable by reason of willful misconduct, willful neglect, or gross negligence
toward or on behalf of the Corporation in the performance of his duties as such
Director or Officer of the Corporation or as such director or officer of such
other corporation, in the absence of such final adjudication of the existence of
such liability, the Board of Directors and each Director and Officer may
conclusively rely upon an opinion of independent legal counsel selected by or in
the manner designated by the Board of Directors. The foregoing right to
indemnification shall be in addition to and not in limitation of all other
rights which such person may be entitled as a matter of law, and shall inure to
his legal representatives' benefit.
"Section 3. Liability Insurance. The Corporation may purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the corporation or who is or was serving at the request of the
Corporation as a director, officer, employee, or agent of another corporation,
partnership, joint venture, trust, association, or other enterprise against any
liability asserted against him and incurred by him in any such capacity or
arising out of his status as such, whether or not he is indemnified against such
liability by this article XII."
Provided the terms and conditions of the applicable provisions under Nevada
law, the Company's Articles of Incorporation and Bylaws are met, officers,
directors, employees, and agents of the Company may be indemnified against any
cost, loss, or expense arising out of any liability under the Securities Act.
We have obtained directors' and officers' insurance providing additional
indemnification for our directors and officers for certain liabilities.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers and controlling persons of the Company, the
Company has been advised that in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy and is, therefore,
unenforceable.
39
<PAGE>
ITEM 13 FINANCIAL STATEMENTS
The financial statements of the Company are filed under Item 15, beginning on
page F-1.
ITEM 14 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 15 FINANCIAL STATEMENTS AND EXHIBITS
Financial Statements
40
<PAGE>
PRO FORMA FINANCIAL INFORMATION
Subsequent to June 30, 1999, the latest balance sheet date presented in
this registration statement, the registrant acquired The Big Network, Inc.
Additionally, during the three month period ended June 30, 1999, the registrant
completed the reverse acquisition of Motorcycle Centers of America, Inc. by
Entertainment Universe, Inc., the acquisition of CD Universe, Inc. (the
"Predecessor"), the acquisition of Cases Ladder, Inc. and the acquisition of
Gamer's Alliance, Inc. The details of the acquisitions are presented in the
notes to the June 30, 1999 financial statements presented elsewhere in this
registration statement.
The pro forma balance sheet reflects the historical consolidated
balance sheet of the registrant and the balance sheet of The Big Network, Inc.
as of June 30, 1999. The Company acquired The Big Network as of August 31, 1999.
Pro forma adjustments have been made to give effect to the acquisition of The
Big Network, Inc. as if it had occurred on June 30, 1999.
The pro forma income statement for the three month period ended June
30, 1999 reflects the historical consolidated income statement of the registrant
and the income statement of The Big Network, Inc. Pro forma adjustments have
been made to give effect to the acquisitions as if they had occurred as of the
beginning of the period.
The pro forma income statement for the twelve month period ended March
31, 1999 reflects the historical income statements for CD Universe, Inc.(the
predecessor) for the year ended March 31, 1999 and the historical income
statements for Cases Ladder, Inc., Gamers Alliance, Inc. and The Big Network,
Inc. for the year ended December 31, 1998. There is no significant activity for
Entertainment Universe, Inc., as it came into existence in February, 1999. The
historical income statement of Motorcycle Centers of America, Inc. has not been
presented. Entertainment Universe, Inc. is considered to be the accounting
acquirer in a recapitalization. Motorcycle Centers of America, Inc. is treated
as the legal acquirer and as such, its historical operating results are not
presented with those of the registrant. Pro forma adjustments have been made to
give effect to the above transactions as if they had occurred at the beginning
of the twelve month period presented.
F-1
<PAGE>
eUNIVERSE
PROFORMA BALANCE SHEETS
JUNE 30, 1999
<TABLE>
<CAPTION>
THE BIG PRO FORMA ADJUSTMENTS
CONSOLIDATED NETWORK, INC. TO REFLECT ACQUISITION BALANCE
BALANCE BALANCE OF THE BIG NETWORK, INC SHEET
SHEET SHEET AS OF JUNE 30, 1999 JUNE 30,1999
JUNE 30, 1999 JUNE 30, 1999 DR CR PRO FORMA
--------------- ------------- ---------- --------- --------------
<S> <C> <C> <C> <C> <C>
ASSETS
CASH $ 4,194,109 $ 118,800 $ 4,312,909
RECEIVABLES 193,096 6,900 199,996
INVENTORY 41,451 41,451
DUE FROM EMPLOYEES 153,200 153,200
OTHER CURRENT ASSETS 75,717 514 76,231
--------------- ------------- --------------
TOTAL CURRENT ASSETS 4,657,573 126,214 4,783,787
--------------- ------------- --------------
PROPERTY AND EQUIPMENT, NET 329,346 58,941 388,287
GOODWILL, NET OF AMORTIZATION 17,784,733 1 10,939,104 28,723,837
OTHER INTANGIBLES, NET OF AMORTIZATION 110,561 2,105 112,666
--------------- ------------- --------------
TOTAL OTHER ASSETS 18,224,640 61,046 29,224,790
--------------- ------------- --------------
TOTAL ASSETS $ 22,882,213 $ 187,260 $ 34,008,577
=============== ============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
ACCOUNTS PAYABLE $ 872,284 $ 49,330 $ 921,614
ACCRUED EXPENSES 234,774 27,353 262,127
NOTES PAYABLE - SHAREHOLDERS 13,500 13,500
CAPITAL LEASE PAYABLE 8,585 8,585
--------------- ------------- --------------
TOTAL CURRENT LIABILITIES 1,107,058 98,768 1,205,826
--------------- ------------- --------------
LONG TERM CAPITAL LEASE PAYABLE 2,596 2,596
--------------- ------------- --------------
TOTAL LIABILITIES 1,107,058 101,364 1,208,422
--------------- ------------- --------------
PREFERRED STOCK, $.10 par value; 40,000,000
shares authorized, 1,795,024 shares
issued and outstanding 179,502 360,502 1 360,502 179,502
COMMON STOCK, $.001 par value; 250,000,000
shares authorized, 16,637,723 shares
issued and outstanding (pro forma) 14,838 2,675 1 2,675 1 1,800 16,638
ADDITIONAL PAID IN CAPITAL 23,273,159 721,447 1 721,447 1 11,023,200 34,296,359
ACCUMULATED DEFICIT (1,692,344) (998,728) 1 998,728 (1,692,344)
--------------- ------------- --------------
TOTAL STOCKHOLDERS' EQUITY 21,775,155 85,896 32,800,155
--------------- ------------- --------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 22,882,213 $ 187,260 $ 34,008,577
=============== ============= ==============
</TABLE>
F-2
<PAGE>
<TABLE>
<CAPTION>
eUNIVERSE
PROFORMA STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1999
INCOME STATEMENT INCOME
CONSOLIDATED FOR PRO FORMA ADJUSTMENTS STATEMENT
INCOME STATEMENT THE BIG NETWORK TO REFLECT ACQUISITIONS FOR THE
FOR THE INC FOR THE QUARTER QUARTER ENDED
QUARTER ENDED QUARTER ENDED ENDED JUNE 30, 1999 JUNE 30, 1999
JUNE 30, 1999 JUNE 30, 1999 DR CR PRO FORMA
---------------- ---------------- --------- --------- --------------
<S> <C> <C> <C> <C> <C>
REVENUE $ 2,034,955 $ 8,891 50,148 $ 2,237,458
143,464
COST OF SALES 1,659,558 2,725 3 20,143 1,682,426
---------------- ---------------- ------------
GROSS PROFIT 375,397 6,166 555,032
---------------- ---------------- ------------
MARKETING AND SALES 444,206 7,306 451,512
PRODUCT DEVELOPMENT 168,018 2,000 170,018
GENERAL AND ADMINISTRATIVE 630,149 243,400 2 54,410 1,074,041
3 146,082
MERGER AND ACQUISITION RELATED 62,241 62,241
AMORTIZATION OF GOODWILL AND OTHER 307,641 2 24,660 721,641
3 115,862
4 273,478
STOCK BASED COMPENSATION 237,500 237,500
---------------- ---------------- ------------
TOTAL 1,849,755 252,706 2,716,953
---------------- ---------------- ------------
LOSS FROM OPERATIONS (1,474,358) (246,540) (2,161,921)
INTEREST INCOME AND OTHER 7,049 1,113 8,162
INTEREST EXPENSE (85,801) (3,022) (88,823)
---------------- ---------------- ------------
LOSS BEFORE INCOME TAXES (1,553,110) (248,449) (2,242,582)
INCOME TAX EXPENSE (BENEFIT) -
---------------- ---------------- ------------
NET LOSS $ (1,553,110) $ (248,449) $(2,242,582)
================ ================ ============
Basic Loss Per Share
Historical $ (.18)
Proforma $ (.14)
Weighted Average Shares Outstanding
Historical 12,400,115
Proforma 16,501,535
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
eUNIVERSE
PROFORMA FINANCIAL STATEMENTS
JUNE 30, 1999
THE BIG PRO FORMA ADJUSTMENTS
CONSOLIDATED NETWORK, INC. TO REFLECT ACQUISITION BALANCE
BALANCE BALANCE OF THE BIG NETWORK, INC SHEET
SHEET SHEET AS OF JUNE 30, 1999 JUNE 30, 1999
JUNE 30, 1999 JUNE 30, 1999 DR CR PRO FORMA
------------- ------------- -------------------------- ---------
<S> <C> <C> <C> <C>
ASSETS
CASH $ 4,194,109 $ 118,800 $ 4,312,909
RECEIVABLES 193,096 6,900 199,996
INVENTORY 41,451 41,451
DUE FROM EMPLOYEES 153,200 53,200
OTHER CURRENT ASSETS 75,717 514 76,231
------------ ----------- ----------
TOTAL CURRENT ASSETS 4,657,573 126,214 4,783,787
------------ ----------- ----------
PROPERTY AND EQUIPMENT, NET 329,346 58,941 388,287
GOODWILL, NET OF AMORTIZATION 17,384,180 1 10,939,104 28,323,284
OTHER INTANGIBLES, NET OF AMORTIZATION 164,030 2,105 166,135
------------ ----------- ------------
TOTAL OTHER ASSETS 17,877,556 61,046 28,877,706
-------------- ------------ ------------
TOTAL ASSETS $ 22,535,129 $ 187,260 $ 33,661,493
============== ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
ACCOUNTS PAYABLE $ 872,284 $ 49,330 $ 921,614
ACCRUED EXPENSES 234,774 27,353 262,127
NOTES PAYABLE - SHAREHOLDERS 13,500 13,500
CAPITAL LEASE PAYABLE 8,585 8,585
------------ ----------- -----------
TOTAL CURRENT LIABILITIES 1,107,058 98,768 1,205,826
------------ ----------- -----------
LONG TERM CAPITAL LEASE PAYABLE 2,596 2,596
------------ ----------- -----------
TOTAL LIABILITIES 1,107,058 101,364 1,208,422
------------ ----------- -----------
PREFERRED STOCK, $.10 par value;
40,000,000 shares authorized, 1,795,024
shares issued and outstanding 179,502 360,502 1 360,502 179,502
COMMON STOCK, $.001 par value; 250,000,000
shares authorized, 16,637,723 shares
issued and outstanding (pro forma) 14,838 2,675 1 2,675 1 1,800 16,638
ADDITIONAL PAID IN CAPITAL 22,923,159 721,447 1 721,447 1 11,023,200 3,946,359
ACCUMULATED DEFICIT (1,689,428) (998,728) 1 998,728 (1,689,428)
------------ ----------- -----------
TOTAL STOCKHOLDERS' EQUITY 21,428,071 85,896 32,453,071
------------ ----------- -----------
TOTAL LIABILITIES
AND STOCKHOLDERS' EQUITY $22,535,129 $ 187,260 $33,661,493
============== ============ ============
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
eUNIVERSE
PROFORMA STATEMENTS OF OPERATIONS
FOR 12 MONTHS
CASE'S ENTERTAINMENT THE BIG NETWORK,
CD UNIVERSE LADDER UNIVERSE INC.
(YEAR END (YEAR END (PERIOD END (YEAR END COMBINED
3/31/1999) 12/31/1998) 3/31/1999) 12/31/1998)
---------------- ------------ -------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
REVENUE $ 8,851,713 $ 378,345 $ - $ 83,883 $ 9,313,941
COST OF SALES 8,264,306 33,660 - 56,375 8,354,341
---------------- ----------- -------------- ------------- ------------
GROSS PROFIT 587,407 344,685 - 27,508 959,600
---------------- ----------- -------------- ------------- ------------
GENERAL AND ADMINISTRATIVE 995,584 360,019 90 741,265 2,096,958
EXPENSES AMORTIZATION
---------------- --------- --------------- ------------- -----------
TOTAL 995,584 360,019 90 741,265 2,096,958
---------------- --------- --------------- ------------- -----------
LOSS FROM OPERATIONS (408,177) (15,334) (90) (713,757) (1,137,358)
OTHER INCOME (EXPENSE) 1,013 - - (22,308) (21,295)
---------------- ---------- -------------- ------------ -----------
LOSS BEFORE INCOME TAXES (407,164) (15,334) (90) (736,065) (1,158,653)
INCOME TAX EXPENSE (BENEFIT) - (1,372) - - (1,372)
---------------- ----------- ------------- ------------ -----------
NET LOSS $ (407,164) $ (13,962) $ (90) $ (736,065) $(1,157,281)
============ ============ ============== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
INCOME
PRO FORMA ADJUSTMENTS STATEMENT
TO REFLECT ACQUISITIONS FOR THE YEARS
FOR THE TWELVE MONTHS ENDED WITHIN
ENDED WITHIN MARCH 31, 1999 MARCH 31, 1999
COMBINED DR CR PRO FORMA
--------- ---------- --------- -------------
<S> <C> <C> <C> <C>
REVENUE $ 9,313,941 $ 9,313,941
COST OF SALES 8,354,341 8,354,341
----------- ------------
GROSS PROFIT 959,600 959,600
----------- ------------
GENERAL AND ADMINISTRATIVE EXPENSES 2,096,958 - - 2,096,958
AMORTIZATION 5 2,868,104 2,868,104
------------ ------------
TOTAL 2,096,958 4,965,062
----------- ------------
LOSS FROM OPERATIONS (1,137,358) (4,005,462)
OTHER INCOME (EXPENSE) (21,295) - - (21,295)
------------ ------------
LOSS BEFORE INCOME TAXES (1,158,653) (4,026,757)
INCOME TAX EXPENSE (BENEFIT) (1,372) (1,372)
------------ -------------
NET LOSS $(1,157,281) $ (4,025,385)
============ =============
Basic Loss per Share
Historical $ (57.64)
Proforma $ (0.26)
Weighted Average Share Outstanding
Historical 69,833
Proforma 15,481,563
</TABLE>
F-5
<PAGE>
Notes to pro forma financial statements
Balance Sheet, June 30, 1999
1) To reflect the acquisition of The Big Network, Inc. as if it occurred on June
30, 1999. This acquisition closed as of August 31, 1999. The acquisition,
accounted for as a purchase, was achieved through the issuance of 1,800,000
shares of the Company's common stock in exchange for all of the issued and
outstanding shares of common and preferred stock held by Big Network's
shareholders. Big Network is a wholly owned subsidiary. The total acquisition
price is $11,025,000, resulting in goodwill of $10,939,104, calculated as
follows:
<TABLE>
<S> <C>
Acquisition price $11,025,000
Net assets acquired 85,896
-----------
Goodwill $10,939,104
</TABLE>
Income Statement, Three months ended June 30, 1999
2) To record the activity of Gamers Alliance, Inc for the period from April 1
through June 30, 1999, the date of the acquisition.
3) To record the activity of Cases Ladder, Inc. for the period from April 1
through May 31, 1999, the date of acquisition.
4) To reflect amortization of goodwill for the three month period.
Income Statement, Twelve months ended March 31, 1999
5) To reflect amortization of goodwill as if the acquisitions had been
consummated at the beginning of the twelve month period.
F-6
<PAGE>
<TABLE>
<CAPTION>
eUNIVERSE, INC.
Balance Sheets
ASSETS
June 30, March 31,
1999 1999
----------- ----------
<S> <C> <C>
CURRENT ASSETS
Cash and Cash Equivalents....................................... $ 4,194,109 $ 11,335
Accounts receivable, net of allowances for
doubtful accounts of $19,175 and $0, respectively............ 193,096 92,938
Inventory...................................................... 41,451 22,647
Due from Officers.............................................. - 157,569
Due from employees............................................. 153,200 -
Prepaid expenses and other current assets...................... 75,717 9,629
----------- ----------
Total Current Assets.......................... 4,657,573 294,118
FURNITURE AND EQUIPMENT, less accumulated
depreciation of $109,818 and $83,052, respectively.............. 329,346 225,718
GOODWILL, net of amortization of $307,192 and
$2,000 , respectively............................................ 17,784,733 38,000
OTHER INTANGIBLES, net of amortization of $2,789 and
$340 , respectively.............................................. 110,561 510
----------- ----------
TOTAL ASSETS......................................... $ 22,882,213 $ 558,346
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable................................................ $ 872,284 $ 828,718
Accrued liabilities............................................. 219,494 113,604
Due to affiliates............................................... 15,280 30,000
Due to officer.................................................. - 105,000
----------- ----------
Total Current Liabilities............................ 1,107,058 1,077,322
----------- ----------
SHAREHOLDERS' EQUITY (DEFICIT)
Preferred stock, $ 10 par value; 40,000,000 shares authorized;
1,795,024 and -0- shares issued and outstanding,
respectively.................................................. 179,502 -
Common stock, $ 001 par value; 250,000,000 shares authorized;
14,837,723 and 2,148,098 shares issued and outstanding,
respectively.................................................. 14,838 1,000
Additional paid-in capital...................................... 23,273,159 -
Deferred offering costs......................................... - -
Retained deficit................................................ (1,692,344) (519,976)
----------- ----------
Total Shareholders' Equity........................... 21,775,155 (518,976)
----------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY................. $ 22,882,213 $ 558,346
=========== ==========
See accompanying notes to the financial statements
</TABLE>
F-7
<PAGE>
eUNIVERSE, INC
Statements of Operations
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------
June 30, June 30,
1999 1998
-------------- --------------
<S> <C> <C>
REVENUE...................................................... $ 2,034,955 $2,118,186
COST OF GOODS SOLD........................................... 1,659,558 1,802,615
-------------- --------------
GROSS PROFIT................................................. 375,397 315,571
OPERATING EXPENSES:
Marketing and sales......................................... 444,206 244,605
Product development......................................... 168,018 92,066
General and administrative.................................. 630,149 49,851
Merger and acquisition related.............................. 62,241 -
Amortization of goodwill and other intangibles.............. 307,641 292
Stock-based compensation.................................... 237,500 -
-------------- --------------
TOTAL OPERATING EXPENSES..................................... 1,849,755 386,814
-------------- --------------
OPERATING LOSS............................................... (1,474,358) (71,243)
============== ==============
NONOPERATING INCOME (EXPENSE)
Interest and dividend income................................ 7,049 108
Interest expense............................................ (85,801) -
-------------- --------------
INCOME (LOSS) BEFORE INCOME TAXES............................ (1,553,110) (71,135)
INCOME TAXES................................................. - -
-------------- --------------
NET INCOME (LOSS)............................................ $(1,553,110) $ (71,135)
============== ==============
Basic income (loss) per common share......................... $ (0.13) N/A
============== ==============
Basic weighted average common shares outstanding............. 12,221,900 N/A
============== ==============
See accompanying notes to the financial statements
</TABLE>
F-8
<PAGE>
eUNIVERSE, INC.
Statements of Cash flows
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------
June 30, June 30,
1999 1998
---------------- -----------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $(1,553,110) $ (71,135)
Transactions not requiring cash:
Depreciation 19,354 11,538
Amortization 307,641 292
Common stock issued for services 247,500 -
Changes in current assets (185,050) 7,590
Changes in current liabilities 164,736 (56,925)
---------------- -----------------
NET CASH (USED IN) OPERATING ACTIVITIES (998,929) (108,640)
INVESTING ACTIVITIES
Acquisitions (1,915,000) -
Cash through acquisitions 37,214 -
Purchases of fixed assets (68,118) (17,400)
Repayment of advances from officers (105,000) -
Receipt of advances to officers 157,769 -
Advances made to Employees (153,200) -
---------------- -----------------
NET CASH PROVIDED BY INVESTING ACTIVITIES (2,046,335) (17,400)
---------------- -----------------
FINANCING ACTIVITIES
Proceeds from issuance of preferred stock 5,875,204 -
Proceeds from issuance of common stock 1,402,835 -
Payment to repurchase common stock (20,000) -
Repayment of loan from affiliates (30,000)
---------------- -----------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 7,228,039 -
---------------- -----------------
CHANGE IN CASH AND CASH EQUIVALENTS 4,182,775 (126,041)
Cash and cash equivalents, beginning of period 11,335 267,213
---------------- -----------------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 4,194,109 $ 141,172
================ =================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Noncash investing and financing transactions:
Stock issued in connection with acquisitions:
CD Universe $ 7,329,480 $ -
Cases Ladder 7,350,000
Gamers Alliance 1,000,000
MegaDVD 52,500
</TABLE>
See accompanying notes to the financial statements
F-9
<PAGE>
EUNIVERSE, INC.
Statement of Shareholders' Equity (Deficit)
March 31, 1999 through June 30, 1999
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL DEFERRED
--------------------- ---------------------- PAID-IN OFFERING RETAINED
SHARES PAR VALUE SHARES PAR VALUE CAPITAL COSTS DEFICIT TOTAL
------ --------- ------ --------- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, MARCH 31, 1999 -- -- 2,148,098 2,148 171,796 (5,734) (139,234) 28,976
Repurchase common stock,
subsequently cancelled..... -- -- (1,844,940) (1,845) (18,155) -- -- (20,000)
Common stock subscribed less
offering costs of $5,734... -- -- 897,835 898 891,203 5,734 -- 897,835
Shares issued in acquisition
of Entertainment Universe,
Inc........................ 1,795,022 179,502 12,829,000 12,829 13,939,123 -- -- 14,131,454
Shares issued in acquisition
of MegaDVD................. -- 4,605 5 52,495 52,500
Shares issued in acquisition
of Cases Ladder, Inc....... -- 700,000 700 6,999,300 7,000,000
Shares issued in acquisition
of Gamers Alliance, Inc.... -- 78,125 78 999,922 1,000,000
Shares issued to employees
of CD Universe............. -- 25,000 25 237,475 237,500
Net income for three months
ended June 30, 1999........ -- -- -- -- -- -- (1,553,110) (1,553,110)
--------- -------- ---------- -------- ----------- -------- ----------- -----------
BALANCE, JUNE 30, 1999 1,795,022 $179,502 14,837,723 $ 14,838 $23,273,159 $ -- $(1,692,344) $21,775,155
========= ======== ========== ======== =========== ======== =========== ===========
</TABLE>
*Restated for 1 for 20 reverse splits (Note F)
F-10
<PAGE>
eUniverse, Inc.
Notes to Financial Statements
June 30, 1999
1) Organization and Line of Business
eUniverse, Inc. ("the Company") is a Nevada Corporation engaged in developing,
acquiring, and operating a network of web sites providing entertainment -
oriented products and services. At present the Company is engaged in sales of
audio CDs, videotapes, and digital videodisks ("DVDs") over the Internet, and
providing online computer gaming. The financial statements being presented
include the accounts of eUniverse, Inc. and its wholly owned subsidiaries. These
subsidiaries are Entertainment Universe, Inc. acquired on April 14, 1999, CD
Universe, Inc. acquired on April 14, 1999, Cases Ladder, Inc. acquired May 31,
1999, and Gamer's Alliance, Inc. acquired June 30, 1999. All significant inter
company transactions and balances have been eliminated.
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, liabilities, and contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results could differ
from those estimates.
Revenue Recognition
The Company recognizes revenue upon shipment of its products. The Company
maintains a partner program whereby partners provide links on their web-sites
that bring customers to the CD Universe web-site. Revenue generated from these
linked sites is recognized upon shipment of the CD's. The partner receives a
commission of 5% to 15% of sales of the Company's products that originate from
the site, recognized as an expense concurrent with the sale. Barter transactions
are recorded at the lower of the estimated fair value of advertisements received
or the estimated fair value of the advertisements given. Barter revenue and the
related advertising is recorded based on impressions delivered and received with
the difference recorded as an advance or prepaid.
Business Developments
The Company was founded in February 1999 and incorporated as Entertainment
Universe, Inc. ("EUI"). On April 14, 1999, EUI acquired Motorcycle Centers of
America, Inc. ("MCA"), a publicly traded company through a reverse acquisition.
In connection with that acquisition, EUI shareholders exchanged all of EUI's
common stock for 12,904,000 shares of MCA's $.001 par value restricted common
stock. EUI shareholders also exchanged all of its preferred shares for 1,832,812
shares of MCA's Series A 6% Convertible Preferred Stock. As a result, EUI (the
accounting acquirer) became a wholly owned subsidiary of MCA (the legal
acquirer). The former shareholders of EUI own approximately 91.6 percent of MCA.
Subsequent to this, MCA changed its name to eUniverse, Inc.
Comparative Periods
Since EUI, the accounting acquirer, has no operating history, financial
statements are presented using CD Universe's historical data, as EUI's
predecessor.
2) Business Combinations and Investments
During the quarter ended June 30th 1999, the Company completed three significant
acquisitions: CD Universe, Inc., Cases Ladder, Inc., and Gamers Alliance, Inc.
All three
F-11
<PAGE>
acquisitions were recorded using the purchase method of accounting
under the provisions of APB Opinion No. 16.
On April 14, 1999, the Company completed its acquisition of CD Universe, Inc., a
company engaged primarily in selling compact audio disks, video disks, and video
tapes to retail purchasers over the internet. According to the terms of this
acquisition, the Company acquired all of the capital stock of CD Universe, Inc.
for a total consideration of $1,915,000 in cash plus 2,425,000 shares of common
stock of the company valued at $3.00 per share (market price on acquisition
date). This acquisition was recorded as follows:
<TABLE>
<S> <C>
Cash $1,915,000
Stock 7,275,000
Excess liabilities over assets acquired 518,976
Acquisition related services 54,840
----------
Goodwill recorded $9,763,816
</TABLE>
On May 31, 1999, the Company completed its Acquisition of Cases Ladder, Inc., a
company primarily engaged in providing online computer gaming with competitive
rankings, tournaments and leagues among its more than 1.1 million registered
members. The purchase price of this acquisition was 700,000 shares of the
Company's common stock, valued at $10.00 per share (market price on acquisition
date), issued in exchange for all the issued and outstanding shares of Cases
Ladder, Inc. This acquisition was recorded as follows:
<TABLE>
<S> <C>
Stock $7,000,000
Excess assets over liabilities acquired ( 48,295)
Acquisition related services 350,000
-----------
Goodwill recorded $7,301,705
</TABLE>
On June 30, 1999, the Company completed its purchase of Gamers' Alliance, Inc.
Gamers' Alliance operates and maintains one of the largest networks of computer
gaming related sites on the Internet with more than 50 gaming related wed sites.
The purchase price of this acquisition was 78,125 shares of the Company `s
common stock, valued at $12.80 per share (market price on acquisition date),
issued in exchange for all the issued and outstanding shares of Gamers'
Alliance, Inc. Pursuant to the term of the agreement, the purchase price may
increase to 175,781 shares of common stock based on achievement of earnings
performance targets through June 30, 2000. This acquisition was recorded as
follows:
<TABLE>
<S> <C>
Stock $1,000,000
Excess assets over liabilities acquired ( 13,595)
-----------
Goodwill recorded $ 986,405
</TABLE>
Total goodwill recorded through the acquisitions is $18,051,926 and is being
amortized on a straight-line basis over ten years.
3) Other Non-Cash Financial Activities
In addition to the acquisitions described above (Note 2), the following non-cash
transactions were recorded in the quarter ended 6/30/99:
Acquisition of megaDVD website through issuance of 4,605 shares of common stock
priced at $11.40 per share.
F-12
<PAGE>
Issuance of 339,000 share of common stock valued at $.50 per share for various
consulting services.
Issuance of 25,000 shares of common stock valued at $9.50 per share to key
employees of CD Universe in compensation for their involvement in company
activities.
Issuance of warrants to purchase a total of 671,835 share of common stock of the
company as part compensation to its exclusive placement agent, Gerard Klauer
Mattison & Co., Inc. (GKM"). 400,000 of these warrants have the exercise price
of $2.75 per share and became exercisable on April 14, 1999 and expire on April
14, 2004. The remaining 271,835 have an exercise price of $2.81 per share will
become exercisable on April 14, 2000 and expire on April 14, 2004. These
warrants have been recorded in the financial statement valued at $1,214,567.
4) Due from Employees
Due from employees consists of three 6% interest-bearing notes in the amounts of
$85,000, $25,000, and $40,000 due from two former vice presidents of Cases
Ladder, Inc. and former principal of Green Willow (MegaDVD). All three
individuals are currently employees of eUniverse, Inc.
5) Fixed Assets
Fixed assets, at cost, consist of the
following
<TABLE>
<CAPTION>
June 30, 1999 March 31, 1999
<S> <C> <C>
Furniture and fixture $ 34,097 $ 29,069
Computers and equipment 361,701 238,622
Purchased Software 3,366 1,079
Leasehold Improvements 40,000 40,000
-------------------------------------------
439,164 308,770
Less accumulated depreciation and
amortization 109,818 83,052
Fixed assets, Net $ 329,346 $ 225,718
===========================================
</TABLE>
6) Other Intangibles
Other Intangibles primarily consists of purchase price of web sites acquired:
<TABLE>
<CAPTION>
June 30, 1999 March 31, 1999
<S> <C> <C>
Domain Name-eUniverse.Com $ 60,000 $ -
MegaDVD.com 52,500
Other 850 850
-----------------------------------------
113,350 850
Less accumulated amortization 2,789 340
Other Intangible, Net $ 110,561 $ 510
=========================================
</TABLE>
In addition to the above Web sites (eUniverse.com and MegaDVD.com) which were
purchased from third parties, the company owns and operates a number of Web
sites acquired through
F-13
<PAGE>
acquisition of it subsidiaries and accounts for them as part of its goodwill.
The above Web sites are being amortized on a straight-line basis over the period
of ten years.
7) Stock based compensation plan
Under the Company's 1999 Stock Award Plan, stock options may be granted to
officers, directors, employees and consultants. For the quarter ended June 30,
1999 the plan's activities were as follows:
Stock Options:
<TABLE>
<CAPTION>
Number of Shares Exercise Price
-------------------- -------------------------
<S> <C> <C>
Outstanding at 3-31-1999 - -
Granted 2,860,000 $3.00 - 11.00
Exercised -
Forfeited -
-------------------- -------------------------
Outstanding at 6-30-1999 2,860,000 $3.00 - 11.00
-------------------- -------------------------
Options exercisable at 6-30-1999 191,667 $3.00 - 11.00
-------------------- -------------------------
</TABLE>
<TABLE>
<CAPTION>
Warrants:
Number of Shares Exercise Price
-------------------- -------------------------
<S> <C> <C>
Outstanding at 3-31-1999 - -
Granted 671,865 $2.75 - 2.81
Exercised -
Forfeited -
-------------------- -------------------------
Outstanding at 6-30-1999 671,865 $2.75 - 2.81
-------------------- -------------------------
Options exercisable at 6-30-1999 400,000 $2.75
-------------------- -------------------------
</TABLE>
The Company uses intrinsic value method (APB Opinion 25) to account for its
stock options granted to officers, directors, and employees and non-employees.
Under this method, compensation expense is recorded over the vesting period
based on the difference between the exercise price and quoted market price on
the date the options are granted. Since the company has granted all its stock
options at an exercise price equal to or above the quoted market value on the
measurement date, no compensation expense related to issuance of stock option
has been recorded.
Had the Company chosen the fair value method of accounting for transactions
involving stock option issuance (SFAS No. 123), the Company would have recorded
an additional $263,911 in compensation cost for the quarter ended June 30, 1999
as presented by the pro forma statement below:
F-14
<PAGE>
<TABLE>
<CAPTION>
Quarter Ended
June 30, 1999
<S> <C>
Net loss as reported $(1,553,110)
-----------
Pro forma net loss $(1,817,021)
-----------
Net loss per common share $ (0.13)
-----------
Pro forma loss per share $ (0.15)
------------
</TABLE>
The weighted average of stock options issued during the quarter ended June 30,
1999 was $7.62. The Black-Scholes option-pricing model with a risk free interest
rate of 4.5% and an annualized volatility of 81% was used to estimate the fair
value of the stock options issued.
8) Preferred Stock
On April 14, 1999 EUI sold 1,795,024 shares of its Series A 6% Convertible
Preferred Stock in a private offering pursuant to Regulation D of the Securities
Act of 1933 for the aggregate price of $6,598,122. Holders of the company's have
the right to convert such stocks into shares of the Company's common stock at
any time after October 15, 1999 at a one-to-one ratio unless market price of the
company's common stock is below $3.60, in which case, the conversion ratio would
be adjusted accordingly.
9) Subsequent event
On August 6, 1999, the Company reached definitive agreement to purchase Big
Network, Inc. Big Network is an online entertainment hub with more than 200,000
members. It has created a proprietary, massively scalable interaction engine
that provides multi user games to thousands of simultaneous users. The purchase
price of Big Network is 1,800,000 shares of the Company's common stock in
exchange for all issued and outstanding shares of Big Network, Inc.
F-15
<PAGE>
MOTORCYCLE CENTERS OF AMERICA, INC.
Index to Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent auditors' report....................................................................... F-2
Balance sheets, March 31, 1999 and December 31, 1998 and 1997...................................... F-3
Statements of operations, for the three months ended March 31, 1999, the years
ended December 31, 1998, 1997 and 1996 and the three
months ended March 31, 1998 (unaudited)........................................................ F-4
Statement of shareholders' equity (deficit), for the period from January 1, 1996
through March 31, 1999.......................................................................... F-5
Statements of cash flows, for the three months ended March 31, 1999, the years
ended December 31, 1998, 1997 and 1996 and the three
months ended March 31, 1998 (unaudited)......................................................... F-7
Summary of significant accounting policies.......................................................... F-9
Notes to financial statements...................................................................... F-11
</TABLE>
F-1
<PAGE>
Cordovano and Harvey, P.C. Certified Public Accountants
201 Steele Street
Suite 300
Denver, Colorado 80206
(303) 329-0220 Phone
(303) 316-7493 Fax
To the Board of Directors and Shareholders
Motorcycle Centers of America, Inc.
INDEPENDENT AUDITORS' REPORT
We have audited the balance sheets of Motorcycle Centers of America, Inc. as of
March 31, 1999 and December 31, 1998 and 1997, and the related statements of
operations, shareholders' equity (deficit) and cash flows for the three months
ended March 31, 1999 and for the years ended December 31, 1998, 1997 and 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Motorcycle Centers of America,
Inc. as of March 31, 1999 and December 31, 1998 and 1997, and the results of its
operations and its cash flows for the three months ended March 31, 1999 and for
the years ended December 31, 1998, 1997 and 1996, in conformity with generally
accepted accounting principles.
As discussed to Note J to the financial statements, on April 9, 1999, the
Company entered into an Agreement and Plan of Reorganization with Entertainment
Universe, Inc. (EUI). As a result of the reorganization, EUI became a wholly
owned subsidiary of the Company and the former shareholders of EUI own
approximately 91.6 percent of the Company.
Cordovano and Harvey, P.C.
June 3, 1999
F-2
<PAGE>
<TABLE>
<CAPTION>
MOTORCYCLE CENTERS OF AMERICA, INC.
Balance Sheets
For The Years Ended
March 31, December 31,
------------------------------
1999 1998 1997
-------------- --------------- --------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents......................................... $101,568 $ 887 $ 12,071
Marketable securities (Note C).................................... - 8,000 58,000
-------------- --------------- --------------
TOTAL CURRENT ASSETS 101,568 70,071
8,887
FURNITURE AND EQUIPMENT, less accumulated
depreciation of $2,792, $2,667 and $1,944,
respectively (Note D).................................... 708 833 1,556
-------------- --------------- --------------
$102,276 $ 9,720 $ 71,627
============== =============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable........................................... $ - $ 1,497 $ 918
Accrued liabilities........................................ 7,000 7,000 -
Due to officer (Note B).................................... 66,300 46,437 -
-------------- --------------- --------------
TOTAL CURRENT LIABILITIES 73,300 54,934 918
-------------- --------------- --------------
COMMITMENT AND CONTINGENCY (Note G)............................. - - -
SHAREHOLDERS' EQUITY (DEFICIT) (Note F)
Preferred stock, $.10 par value; 40,000,000 shares authorized;
-0- and -0- shares issued and outstanding, respectively... - - -
Common stock, $.001 par value; 250,000,000 shares authorized;
2,148,098, 70,098 and 52,905 shares issued
and outstanding, respectively.......................... 2,148 70 53
Additional paid-in capital................................ 171,796 103,814 111,127
Deferred offering costs................................... (5,734) (5,734) -
Retained deficit.......................................... (139,234) (143,364) (40,471)
-------------- --------------- --------------
TOTAL SHAREHOLDERS EQUITY (DEFICIT) 28,976 (45,214) 70,709
-------------- --------------- --------------
$102,276 $ 9,720 $ 71,627
============== =============== ==============
</TABLE>
See accompanying summary of significant accounting policies and notes to the
financial statements.
F-3
<PAGE>
MOTORCYCLE CENTERS OF AMERICA, INC.
Statements of Operations
<TABLE>
<CAPTION>
Three Three
Months Months
Ended Years ended December 31, Ended
March 31, ----------------------------------------- March 31,
1999 1998 1997 1996 1998
------------- ------------- ------------- ------------- --------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
COSTS AND EXPENSES
Occupancy.................................... $ 1,398 $ 5,256 $ 7,542 $ 6,275 $ 1,314
Consulting, related parties (Note B)......... 70,060 - - - -
Consulting................................... 2,936 - 9,000 - -
Legal and accounting.......................... - 16,495 5,350 2,500 2,000
Stock transfer fees........................... 50 2,180 1,593 864 -
Brokerage charges............................. 3,721 - 1,213 2,397 15
Office........................................ 2,158 6,991 1,419 3,210 920
Depreciation.................................. 125 722 833 833 181
Earnest money paid in failed merger (Note H).. - 10,000 - - -
Other......................................... 25 3,959 89 1,525 833
------------- ------------- ------------ ------------- --------------
OPERATING LOSS (80,473) (45,603) (27,039) (17,604) (5,263)
------------- ------------- ------------- ------------- --------------
NONOPERATING INCOME (EXPENSE)
Interest and dividend income.................. 530 150 63 1,531 15
Interest expense.............................. - - (87) (904) -
Trading gains and (losses), net (Note C)...... 84,073 (57,440) 19,337 (7,988) (56,845)
------------- ------------- ------------- ------------- --------------
INCOME (LOSS) BEFORE INCOME TAXES 4,130 (102,893) (7,726) (24,965) (62,093)
INCOME TAXES (Note E)............................ - - - - -
------------- ------------- ------------- ------------- --------------
NET INCOME (LOSS) $ 4,130 $ (102,893) $ (7,726) $ (24,965) $ (62,093)
============= ============= ============= ============= ==============
Basic income (loss) per common share.............. $ 0.04 $ (1.47) $ (0.53) $ (3.73) $ (1.05)
============= ============= ============= ============= ==============
Basic weighted average common shares
outstanding.................................... 94,854 69,833 14,607 6,690 59,155
============= ============= ============= ============= ==============
</TABLE>
See accompanying summary of significant accounting policies and notes to the
financial statements.
F-4
<PAGE>
MOTORCYCLE CENTERS OF AMERICA, INC.
STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
January 1, 1996 through March 31, 1999
<TABLE>
<CAPTION>
Preferred Stock Common Stock Treasury Stock Additional Deferred
------------------------------------------------------- Paid-in Offering Retained
Shares Par Value Shares Par Value Shares Amount Capital Costs Deficit Total
------ -------- ------- --------- ------ ------ ----------- -------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
January 1, 1996.......... - $ - 5,405 * $ 5 15 * $(9,750) 106,412 $ (7,780) $ 88,887
Sale of treasury stock
(Note F)................ - - - - (8)* 4,875 (1,500) - 3,375
Purchase of treasury
stock (Note F)........... - - - - 8 * (3,375) - - (3,375)
Sale of treasury
stock (Note F)........... - - - - (13)* 7,125 (875) - 6,250
Net loss................... - - - - - - - (24,965) (24,965)
------ -------- -------- --------- ------ ------ ----------- -------- -------- -------
BALANCE, DECEMBER 31, 1996 - - 5,405 * 5 2 * (1,125) 104,037 - (32,745) 70,172
Treasury stock contributed
by officer (Notes B & F). - - - - 3 * (2,600) - - - (2,600)
Sale of treasury stock
(Note F)................. - - - - (5)* 3,725 (2,362) - - 1,363
Sale of common stock....... - - 47,500 * 48 - - 9,452 - - 9,500
Net loss................... - - - - - - - - (7,726) (7,726)
------ -------- -------- --------- ------ ------ ----------- -------- -------- -------
BALANCE, DECEMBER 31, 1997 - - 52,905 * 53 - - 111,127 - (40,471) 70,709
Sale of common stock....... - - 18,750 * 19 - - 3,731 - - 3,750
Repurchase common stock,
subsequently cancelled... - - (1,557)* (2) - - (11,044) - - (11,046)
Deferred offering costs.... - - - - - - - (5,734) - (5,734)
Net loss................... - - - - - - - - (102,893) (102,893)
------ -------- -------- --------- ------ ------ ----------- -------- -------- -------
BALANCE, DECEMBER 31, 1998 - - 70,098 * 70 - - 103,814 (5,734) (143,364) (45,214)
</TABLE>
* Restated for 1 for 20 reverse splits (Note F)
See accompanying summary of significant accounting policies
and notes to the financial statements.
F-5
<PAGE>
MOTORCYCLE CENTERS OF AMERICA, INC.
STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
January 1, 1996 through March 31, 1999
<TABLE>
<CAPTION>
Preferred Stock Common Stock Treasury Stock Additional Deferred
------------------------------------------------------- Paid-in Offering Retained
Shares Par Value Shares Par Value Shares Amount Capital Costs Deficit Total
------ -------- ------- --------- ------ ------ ----------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Common stock issued for
services, at cost of
services................ - - 78,000 * 78 - - 29,982 - - 30,060
Common stock issued to
former officer for
services, at cost of
services (Note B)....... - - 2,000,000 * 2,000 - - 38,000 - - 40,000
Net income for the
three months ended
March 31, 1999.......... - - - - - - - - 4,130 4,130
------ -------- ---------- --------- ------ ------ ----------- -------- -------- ---------
BALANCE, MARCH 31, 1999 - $ - 2,148,098 $ 2,148 - $ - $171,796 $(5,734) $(139,234) $ 28,976
====== ======== ========== ========= ====== ====== =========== ======== ========== =========
</TABLE>
* Restated for 1 for 20 reverse splits (Note F)
See accompanying summary of significant accounting policies
and notes to the financial statements.
F-6
<PAGE>
MOTORCYCLE CENTERS OF AMERICA, INC.
Statements of Cash flows
<TABLE>
<CAPITON>
Three Three
Months Months
Ended Years ended December 31, Ended
March 31, --------------------------------------- March 31,
1999 1998 1997 1996 1998
------------ ------------- ------------ ------------ -------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)..................... $ 4,131 $(102,893) $ (7,726) $(24,965) $(62,093)
Transactions not requiring cash:
Depreciation....................... 125 723 833 833 181
Common stock issued for services... 70,060 - - - -
Unrealized (gains) losses on
marketable securities, net....... (84,074) 57,440 (5,775) 5,625 56,845
Changes in current assets and current
liabilities:
Purchases of marketable securities.. - (8,000) (31,188) (32,438) -
Proceeds from sale of marketable
securities....................... 92,073 561 32,313 50,163 -
Accounts payable and accrued
expenses........................... (1,497) 7,578 (4,910) 1,971 (918)
------------ ------------- ------------ ------------ -------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 80,818 (44,591) (16,453) 1,189 (5,985)
------------ ------------- ------------ ------------ -------------
INVESTING ACTIVITIES
Repayment of advances to former
officer (Note B)..................... (5,137) (68,563) (23,150) (14,300) (9,000)
Advances from former officer (Note B)... 25,000 115,000 48,080 6,975 -
------------ ------------- ------------ ------------ -------------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES
19,863 46,437 24,930 (7,325) (9,000)
------------ ------------- ------------ ------------ -------------
FINANCING ACTIVITIES
Purchases of treasury stock............ - (11,046) (2,600) (3,375) -
Proceeds from sale of treasury stock... - - 1,363 9,625 -
Payments for deferred offering costs... - (5,734) - - -
Proceeds from issuance of common stock. - 3,750 9,500 - 3,750
Principal payments on notes payable.... - - (5,000) - -
------------ ------------- ------------ ------------ -------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES
- (13,030) 3,263 6,250 3,750
------------ ------------- ------------ ------------ -------------
CHANGE IN CASH AND CASH EQUIVALENTS... 100,681 (11,184) 11,740 114 (11,235)
Cash and cash equivalents, beginning of
period................................... 887 12,071 331 217 12,071
------------ ------------- ------------ ------------ -------------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD....................... $101,568 $ 887 $ 12,071 $ 331 $ 836
============ ============= ============ ============ =============
See accompanying summary of significant accounting policies
and notes to the financial statements.
</TABLE>
F-7
<PAGE>
<TABLE>
<CAPTION>
MOTORCYCLE CENTERS OF AMERICA, INC.
Statements of Cash flows
Three Three
Months Months
Ended Years ended December 31, Ended
March 31, --------------------------------------- March 31,
1999 1998 1997 1996 1998
------------ ------------- ------------ ------------ -------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Interest.................................... $ - $ - $ 874 $ 454 $ -
============ ============= ============ ============ =============
Income taxes............................... $ - $ - $ - $ - $ -
============ ============= ============ ============ =============
Noncash investing and financing transactions:
Receipt of investments as payment for
advances (Note B)........................ $ - $ - $ 46,600 $ - $ -
============ ============= ============ ============ =============
Treasury stock subsequently $ - $ 11,046 $ - $ - $ -
cancelled...................... ============ ============= ============ ============ =============
See accompanying summary of significant accounting policies
and notes to the financial statements.
F-8
<PAGE>
MOTORCYCLE CENTERS OF AMERICA, INC.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
March 31, 1999
Use of estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, and
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 those estimates.
Cash equivalents
For the purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with an original maturity of three
months or less to be cash equivalents.
Marketable securities
Marketable securities consist of various equity securities and are stated at
current market value. All equity securities are considered "trading" securities
under the provisions of Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities". Accordingly,
unrealized gains and losses on equity securities are reflected in the
accompanying statements of operations.
Furniture and equipment
Furniture and equipment are recorded at cost and are depreciated using the
straight-line method over the useful lives of the assets, beginning at the time
the assets are placed into operation. Furniture and equipment are depreciated
over estimated useful lives of five years and three years, respectively.
Upon retirement or disposition of the furniture and equipment, the cost and
accumulated depreciation are removed from the accounts and any resulting gain or
loss is reflected in operations. Repairs and maintenance are charged to expense
as incurred and expenditures for additions and improvements are capitalized.
Income taxes
Income taxes are provided for the tax effects of transactions reported in the
financial statements and consist of taxes currently due plus deferred taxes
related primarily to differences between the recorded book basis and tax basis
of assets and liabilities for financial and income tax reporting. The deferred
tax assets and liabilities represent the future tax return consequences of those
differences, which will either be taxable or deductible when the assets and
liabilities are recovered or settled. Deferred taxes are also recognized for
operating losses that are available to offset future taxable income and tax
credits that are available to offset future federal income taxes.
F-9
<PAGE>
MOTORCYCLE CENTERS OF AMERICA, INC.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
March 31, 1999
Treasury stock
The Company accounts for purchases and reissuances of treasury stock using the
cost method. Under the cost method, each acquisition of treasury stock is
accounted for at cost. Upon the sale or disposition, the treasury stock account
is reduced for an amount equal to the number of shares sold, multiplied by the
cost per share. The difference is treated as paid-in capital.
Fair value of financial instruments
SFAS 107, "Disclosure About Fair Value of Financial Instruments," requires
certain disclosures regarding the fair value of financial instruments. The
Company has determined, based on available market information and appropriate
valuation methodologies, the fair value of its financial instruments
approximates carrying value. The carrying amounts of cash, accounts payable, and
other accrued liabilities approximate fair value due to the short-term maturity
of the instruments.
Earnings per common share
Effective December 31, 1997, SFAS 128 "Earnings per Share" requires a dual
presentation of earnings per share-basic and diluted. Basic earnings per common
share has been computed based on the weighted average number of common shares
outstanding. Diluted earnings per share reflects the increase in weighted
average common shares outstanding that would result from the assumed exercise of
outstanding stock options. Basic and diluted earnings per share were the same
for all prior periods presented due to the Company's simple capital structure.
Earnings per share calculations are reported on a post-split basis for all
periods presented.
New accounting pronouncements
The Company has adopted the following new accounting pronouncements for the year
ended December 31, 1998. There was no effect on the financial statements
presented from the adoption of the new pronouncements. SFAS No. 130, "Reporting
Comprehensive Income," requires the reporting and display of total comprehensive
income and its components in a full set of general-purpose financial statements.
The Company did not have comprehensive income for the periods presented;
therefore, comprehensive income and net income are equal. SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information," is based
on the "management" approach for reporting segments. The management approach
designates the internal organization that is used by management for making
operating decisions and assessing performance as the source of the Company's
reportable segments. SFAS No. 131 also requires disclosure about the Company's
products, the geographic areas in which it earns revenue and holds long-lived
assets, and its major customers. SFAS 131 is not applicable, as the Company had
no revenue-producing operations for the periods presented. SFAS No. 132,
"Employers' Disclosures about Pensions and Other Post-retirement Benefits,"
which requires additional disclosures about pension and other post-retirement
benefit plans, but does not change the measurement or recognition of those
plans.
F-10
<PAGE>
MOTORCYCLE CENTERS OF AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS
March 31, 1999
Note A: Nature of operations
Effective December 19, 1994, Motorcycle Centers of America, Inc. (MCAI)
(formerly NABCO, Inc.) merged with Humanus Corporation (Humanus), which was
incorporated under the laws of Colorado on February 23, 1988. Subsequent to the
merger, Humanus changed its name to NABCO, Inc.
NABCO was originally incorporated for the purpose of manufacturing bagels and
selling them to its subfranchisor and franchisees. In August 1995, NABCO sold
its bagel manufacturing operations, and on August 28, 1995, it officially
terminated operations and became an inactive shell company.
On January 26, 1998, the Company entered into an Agreement and Plan of
Reorganization with Sandale Holdings, Limited, to acquire a motorcycle
manufacturing company in China. The Plan of Reorganization was terminated on
August 14, 1998 (see Note I). In connection with the Plan of Reorganization, the
Company redomiciled in Nevada.
On April 15, 1998, NABCO entered into a merger with MCAI whereby all of the
outstanding shares of common stock in NABCO, amounting to 1,458,807 shares, were
issued to MCAI in exchange for 1,458,807 shares of the $.001 par value common
stock of MCAI. MCAI was the sole surviving corporation. The shares of NABCO were
cancelled following the merger. As a result of the merger, the Company
previously known as NABCO, Inc. became Motorcycle Centers of America, Inc.
On October 4, 1998, the Company entered into an Agreement and Plan of
Reorganization with DDA America, LLC to acquire all of the issued and
outstanding stock of DDA America, LLC. The Plan of Reorganization was terminated
on March 1, 1999 (see Note I).
On April 9, 1999, the Company entered into an Agreement and Plan of
Reorganization with Entertainment Universe, Inc. to acquire all of the issued
and outstanding stock of Entertainment Universe, Inc. (see Note J).
Note B: Related party transactions
Three months ended March 31, 1999
During the three months ended March 31, 1999, an officer advanced the Company
$25,000 for working capital. The Company repaid the officer $5,137 during 1999.
The remaining balance of $66,300 is included in the accompanying financial
statements as due to former officer.
During the three months ended March 31, 1999, the Company issued 2,000,000
shares of its $.001 par value common stock to an officer in exchange for
services (see Notes F and J).
During the three months ended March 31, 1999, the Company issued 78,000 shares
of its $.001 par value common stock to various shareholders in exchange for
services. The transaction was valued at the cost of the services rendered of
$30,060.
F-11
<PAGE>
MOTORCYCLE CENTERS OF AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS
March 31, 1999
Note B: Related party transactions, continued
1998
During the year ended December 31, 1998, an officer advanced the Company
$115,000 for working capital. The Company repaid the officer $68,563 during
1998. The remaining balance of $46,437 is included in the accompanying financial
statements as due to former officer.
1997
At January 1, 1997, an officer owed the Company $71,530 in advances. During
1997, the Company advanced the officer an additional $23,150, and the officer
repaid the total $94,680. The advances were repaid in cash totaling $48,080 and
marketable securities totaling $46,600. The Company recognized $12,938 in
realized gains and $15,000 in unrealized gains from marketable securities
received from the officer in 1997.
1996
At January 1, 1996, an officer owed the Company $60,205 for cash advances.
During 1996, the Company advanced the officer an additional $14,300, of which
the officer repaid $2,975. The balance at December 31, 1996 totaled $71,530.
Note C: Marketable securities
Marketable securities consisted of the following at March 31, 1999 and December
31, 1998 and 1997:
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------
MARCH 31, 1999 1998 1997
------------------- ------------------- -------------------
ESTIMATED ESTIMATED ESTIMATED
MARKET MARKET MARKET
COST VALUE COST VALUE COST VALUE
---- ----- ---- ----- ---- -----
<S> <C> <C> <C> <C> <C> <C>
Equity securities................... $51,000 $-- $59,000 $8,000 $52,225 $7,000
======= ======= ======= ====== ======= ======
</TABLE>
F-12
<PAGE>
MOTORCYCLE CENTERS OF AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS
March 31, 1999
Note C: Marketable securities (concluded)
Following is a summary of investment earnings recognized in income during the
three months ended March 31, 1999 and the years ended December 31, 1998, 1997
and 1996:
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, ---------------------------------
1999 1998 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Trading securities:
Realized gains.................................. $84,073 $ -- $13,562 $ 5,200
Realized losses................................. -- (6,440) -- (7,563)
------- ------- ------- -------
Realized gains (losses), net 84,073 (6,440) 13,562 (2,363)
------- ------- ------- -------
Unrealized gains................................ -- -- 15,000 --
Unrealized losses............................... -- (51,000) (9,225) (5,625)
------- ------- ------- -------
Unrealized gains (losses), net -- (51,000) 5,775 (5,625)
------- ------- ------- -------
GAIN (LOSS) ON TRADING SECURITIES, NET $84,073 $(57,440) $19,337 $(7,988)
======= ======= ======= ========
</TABLE>
Note D: Furniture and equipment
Furniture and equipment consisted of the following at March 31, 1999 and
December 31, 1998 and 1997:
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, ---------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Office furniture............................................ $ 2,500 $ 2,500 $ 2,500
Computer equipment.......................................... 1,000 1,000 1,000
------- ------- -------
3,500 3,500 3,500
Less: accumulated depreciation.............................. (2,792) (2,667) (1,944)
------- ------- -------
$ 708 $ 833 $ 1,556
======= ======= ========
</TABLE>
F-13
<PAGE>
MOTORCYCLE CENTERS OF AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS
March 31, 1999
Note E: Income taxes
A reconciliation of the U.S. statutory federal income tax rate to the effective
tax rate follows for the three months ended March 31, 1999 and the years ended
December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
December 31,
March 31, ------------------------
1999 1998 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
U.S. statutory federal rate................................. 15.00% 20.57% 15.00% 15.00%
State income tax rate, net of federal benefit............... 4.25% 4.15% 4.25% 4.25%
Unrealized gains and losses on marketable securities, net... (0.00%) (2.75%) (8.21%) 5.65%
Net operating loss for which no tax benefit is currently
avaliable.................................................. (19.25%) (21.97%) (11.04%) (24.90%)
------ ------ ------ ------
--% --% --% --%
====== ====== ====== =======
</TABLE>
The current tax benefit (expense) for the three months ended
March 31, 1999 and the years ended December 31, 1998, 1997 and 1996 totaled
$(795), $22,608, $853 and $1,924, respectively, which have been offset by the
valuation allowance. The valuation allowance offsets the net deferred tax asset
for which there is no assurance of recovery. The change in the valuation
allowance for the three months ended March 31, 1999 and the years ended December
31, 1998, 1997 and 1996 totaled $(795), $22,608, $853 and $1,924, respectively.
The net operating loss carryforward expires through the year 2019.
The valuation allowance will be evaluated at the end of each year, considering
positive and negative evidence about whether the deferred tax asset will be
realized. At that time, the allowance will either be increased or reduced;
reduction could result in the complete elimination of the allowance if positive
evidence indicates that the value of the deferred tax assets is no longer
impaired and the allowance is no longer required.
Note F: Shareholders' equity
Preferred stock
The Company is authorized to issue 40,000,000 preferred shares with a
$.10 par value. The Board of Directors has authority to determine the relative
rights and preferences of the preferred shares.
Common stock
The Company is authorized to issue 250,000,000 common shares with a $.001 par
value. Shareholders do not have preemptive rights to purchase additional shares
and cumulative voting of common shares is not permitted.
F-14
<PAGE>
MOTORCYCLE CENTERS OF AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS
March 31, 1999
Note F: Shareholders' equity (continued)
On March 29, 1999, Motorcycle Centers of America, Inc. issued 1,500,000 shares
of its common stock in exchange for consulting and administrative services
provided to the Company during the three months ended March 31, 1999. The
transaction was recorded at the value of the services, $30,000 ($.02 per share).
Effective March 31, 1999, the Company approved a 20 for one reverse split of its
common stock. Therefore, the 1,500,000 common shares were converted to 75,000
common shares following the reverse split.
On March 31, 1999, the Company issued 3,000 post-split shares of its common
stock in exchange for administrative services provided to the Company during the
three months ended March 31, 1999. The transaction was recorded at the value of
the services, $60 ($.02 per share).
On March 31, 1999, the Company also issued 2,000,000 post-split shares of its
common stock to an officer in exchange for consulting services provided to the
Company during the three months ended March 31, 1999. The transaction was
recorded at the value of the services, $40,000 ($.02 per share).
Treasury stock
As of January 1, 1996, the Company held 6,000 shares of treasury stock at a cost
of $9,750. During 1996, the Company purchased an additional 3,000 shares at a
cost of $3,375 and sold 8,000 shares for proceeds of $9,625. As a result, the
Company recorded a $2,375 charge against additional paid-in capital for the
excess of cost over proceeds from the sale.
As of January 1, 1997, the Company held 1,000 shares of treasury stock at a cost
of $1,125. During the year ended December 31, 1997, an officer repaid an advance
to the Company with 1,300 shares of NABCO stock with a value of $2,600; and the
Company sold 2,300 shares of treasury stock for proceeds of $1,363. As a result,
the Company recorded a $2,362 charge against additional paid-in capital for the
excess of cost over proceeds from the sale. As of December 31, 1997, the Company
held no shares of treasury stock.
Reverse common stock splits
Effective March 31, 1999, the Board of Directors approved a 20 for one reverse
split of the Company's common stock for all shares outstanding as of March 31,
1999. Every 20 shares held by a shareholder prior to the split was replaced by
one share as of April 28, 1999.
On August 1, 1997, the Board of Directors approved a 20 for one reverse split of
the Company's common stock for all shares outstanding as of August 1, 1997.
Every 20 shares held by a shareholder prior to the split was replaced by one
share as of August 11, 1997.
The accompanying financial statements have been restated to give effect to these
reverse splits for all periods presented.
F-15
<PAGE>
MOTORCYCLE CENTERS OF AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS
March 31, 1999
Note F: Shareholders' equity (concluded)
Deferred offering costs
The Company incurred legal fees and stock transfer fees of $4,500 and $1,234,
respectively, during the year ended December 31, 1998, which were related to
common shares sold under Rule 504 of Regulation D in April 1999. The total
$5,734 is included in the accompanying financial statements as deferred offering
costs.
Note G: Commitment and contingency
Commitment
The Company entered into an operating lease for office space during 1997, which
commenced December 1, 1997 and terminated on November 30, 1998. The Company
renewed the lease through December 31, 1999. Monthly rent payments during 1998
were $438 and the future minimum lease payments total $5,593 due in 1999.
Contingency
As part of the sale of the Company's bagel manufacturing operations in 1995, the
Company sold a building with a mortgage payable totaling $91,349. Although the
building was sold, the Company remains contingently liable until the note is
satisfied.
Note H: Terminated plans of reorganization
Sandale Holdings, Limited (Sandale)
On January 26, 1998, NABCO (subsequently Motorcycle Centers of America, Inc.)
entered into an Agreement and Plan of Reorganization with Sandale, a Bahamian
corporation. As part of the reorganization, Sandale agreed to exchange all
10,000,000 of its Ordinary A shares and common shares; for 5,000,000 (pre-split)
shares of NABCO's $.001 par value restricted common stock. As a result of the
reorganization, Sandale would have become a wholly owned subsidiary of NABCO and
the former shareholders of Sandale would have owned approximately 77 percent of
NABCO. The Agreement and Plan of Reorganization was terminated on August 14,
1998.
DDA America, LLC (DDA)
On October 4, 1998, the Company entered into an Agreement and Plan of
Reorganization with DDA, a Delaware corporation. As part of the reorganization,
DDA agreed to exchange all of its common shares for 2,700,000 shares of the
Company's $.001 par value restricted common stock. As a result of the
reorganization, DDA would have become a wholly owned subsidiary of the Company
and the former shareholders of DDA would have owned approximately 67.5 percent
of the Company. The Agreement and Plan of Reorganization was terminated on March
1, 1999. Earnest money lost in the failed agreement of $10,000 was charged to
expense in during the year ended December 31, 1998.
F-16
<PAGE>
MOTORCYCLE CENTERS OF AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS
March 31, 1999
Note I: Year 2000 compliance
The Year 2000 issue (Y2K) is the result of computer programs written using two
digits rather than four to define the applicable year. Any of the Company's
computer and telecommunications programs that have date sensitive software may
recognize a date using "00" as the year 1900 instead of 2000. This could result
in system failure or miscalculations causing disruptions in operations,
including the ability to process transactions, send invoices, or engage in
similar normal business activities. The Company has determined that its
equipment is Y2K compliant.
The Company cannot determine the extent to which the Company is vulnerable to
third parties' failure to remediate their own Y2K problems. As a result, there
can be no guarantee that the systems of other companies on which the Company's
business relies will be timely converted, or that failure to convert by another
company, or a conversion that is incompatible with the Company's systems, would
have a material adverse affect on the Company. In view of the foregoing, there
can be no assurance that the Y2K issue will not have a material adverse effect
on the Company's business.
Note J: Subsequent events
Agreement and Plan of Reorganization
On April 9, 1999, the Company entered into an Agreement and Plan of
Reorganization with the shareholders of Entertainment Universe, Inc. (EUI), a
California corporation. EUI agreed to exchange all of its common shares for
12,904,000 shares of the Company's $.001 par value restricted common stock, and
all of its preferred shares for 1,795,024 shares of its Series A six percent
convertible preferred stock. As part of the reorganization, the Company agreed
to a 20 for 1 reverse split of its restricted common stock prior to the exchange
(see Note F). This acquisition will be accounted for as a recapitalization of
EUI, with the Company the legal surviving entity. Since the Company had, prior
to the recapitalization, no operations, the recapitalization has been accounted
for as the sale of 12,904,000 shares of the Company's restricted common stock
and 1,832,810 shares of its Series A six percent convertible preferred stock for
the net assets of EUI. As a result of the reorganization, EUI became a wholly
owned subsidiary of the Company and the former shareholders of EUI own
approximately 91.6 percent of the Company.
Subscription Agreement Securities Offering
The Company conducted an offering of its $.001 par value common stock from April
1, 1999 through April 6, 1999 pursuant to Rule 504 of Regulation D under the
Securities Act of 1933, as amended. A maximum of 900,000 shares was offered
pursuant to a Regulation D Subscription Agreement at a price of $1.00 per share.
Following the offering termination on April 6, 1999, the Company had received
subscriptions for 885,835 shares for a gross amount of $885,835.
Purchase of treasury stock
On April 20, 1999, the Company purchased 1,845,000 shares of its outstanding
common stock from its former officer for $20,000. The shares were cancelled
following the purchase.
F-17
<PAGE>
CD UNIVERSE, INC.
FINANCIAL STATEMENTS
MARCH 31, 1999
<PAGE>
CD UNIVERSE, INC.
FINANCIAL STATEMENTS
MARCH 31, 1999
INDEX
<TABLE>
<S> <C>
Independent Auditor's Report 1
Balance Sheet 2
Statement of Operations 3
Statement of Stockholder's Deficit 4
Statement of Cash Flows 5
Notes to Financial Statement 6 - 11
</TABLE>
<PAGE>
INDEPENDENT AUDITOR'S REPORT
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
CD UNIVERSE, INC.
We have audited the accompanying balance sheet of CD UNIVERSE, INC. as of March
31, 1999 and the related statements of operations, stockholder's deficit, and
cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of CD UNIVERSE, INC. as of March
31, 1999, and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
MERDINGER, FRUCHTER, ROSEN & CORSO, P.C.
Certified Public Accountants
New York, New York
May 14, 1999
<PAGE>
CD UNIVERSE, INC.
BALANCE SHEET
MARCH 31, 1999
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $ 11,335
Accounts Receivable, net of allowance for
doubtful accounts of $0 92,938
Inventory 22,647
Due from Officer 157,569
Prepaid Expenses and Other Current Assets 9,629
----------
Total Current Assets 294,118
Property and Equipment, net of accumulated
depreciation of $83,052 225,718
Organization Costs, net of accumulated
amortization of $340 510
Goodwill, net of accumulated amortization of $2,000 38,000
-----------
TOTAL ASSETS $ 558,346
===========
LIABILITIES AND STOCKHOLDER'S DEFICIT
CURRENT LIABILITIES
Accounts Payable and Accrued Expenses $ 942,322
Notes Payable - Officer 105,000
Due to Affiliates (Note 5) 30,000
-----------
Total Current Liabilities 1,077,322
-----------
Commitments and Contingencies (Note 7) -
STOCKHOLDER'S DEFICIT
Common Stock - no par value; authorized 1,000
shares; 1,000 issued and outstanding 1,000
Accumulated Deficit (519,976)
-----------
Total Stockholder's Deficit (518,976)
-----------
TOTAL LIABILITIES AND STOCKHOLDER'S DEFICIT $ 558,346
===========
The accompanying notes are an integral part of the financial statements.
-2-
</TABLE>
<PAGE>
CD UNIVERSE, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MARCH 31, 1999
<TABLE>
<S> <C>
REVENUE $8,851,713
COST OF GOODS SOLD 7,550,289
----------
GROSS PROFIT 1,301,424
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 1,709,601
----------
LOSS FROM OPERATIONS (408,177)
OTHER INCOME 1,013
----------
NET LOSS $ (407,164)
==========
NET LOSS PER COMMON SHARE
Basic $ (407.16)
==========
Diluted $ (407.16)
==========
The accompanying notes are an integral part of the financial statements.
-3-
</TABLE>
<PAGE>
CD UNIVERSE, INC.
STATEMENT OF STOCKHOLDER'S DEFICIT
FOR THE YEAR ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
Total
Common Stock Accumulated Stockholder's
--------------------------
Shares Amount Deficit Deficit
------------ ----------- ----------- -------------
<S> <C> <C> <C> <C>
Balance at March 31, 1998 1,000 $ $1,000 $ (112,812) $ (111,812)
Net Loss for the Year Ended
March 31, 1999 - - (407,164) (407,164)
------------ ----------- ----------- ------------
Balance at March 31, 1999 1,000 $ 1,000 $ (519,976) $ (518,976)
============ =========== =========== ============
The accompanying notes are an integral part of the financial statements.
-4-
</TABLE>
<PAGE>
CD UNIVERSE, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED MARCH 31, 1999
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $(407,164)
Adjustments to Reconcile Net Loss to Net
Cash Used in Operating Activities
Depreciation and Amortization 47,322
Changes in Certain Assets and Liabilities:
(Increase) in Accounts Receivable (92,938)
Decrease in Inventory 1,230
Decrease in Prepaid Expenses and Other Current Assets 33,402
Increase in Accounts Payable and Accrued Expenses 407,741
----------
Total Cash Used in Operating Activities (10,407)
----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in Property and Equipment (113,508)
----------
Total Cash Used in Investing Activities (113,508)
----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in Notes Payable - Officer 150,000
Repayment of Notes Payable - Officer (45,000)
Loans from Affiliates 30,000
Repayment of Loans from Affiliates (110,395)
Loan to Officer (156,569)
----------
Total Cash Used In Financing Activities (131,964)
----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (255,879)
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 267,214
----------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 11,335
==========
CASH PAID DURING THE YEAR FOR:
Interest Expense $ 286
==========
Income Taxes $ -
==========
The accompanying notes are an integral part of the financial statements.
- 5 -
</TABLE>
<PAGE>
CD UNIVERSE, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) Organization and Line of Business
CD Universe, Inc. was incorporated under the laws of the State of
Connecticut on April 7, 1997. The Company was sold to new management
in April 1999.
The Company sells and distributes compact discs (CD's) and video
recordings to retail purchasers over the internet.
b) 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 disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results
could differ from those estimates.
c) Concentration of Credit Risk
The Company places its cash in what it believes to be credit-worthy
financial institutions. However, cash balances exceeded FDIC insured
levels at various times during the year.
d) Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with
original maturities of three months or less to be cash equivalents
e) Accounts Receivable
Accounts receivable consist primarily of credit card charges by
customers.
f) Inventory
Inventory consists of compact discs, videos and packaging materials.
Inventory is valued at the lower of cost or market using the
first-in, first-out method.
g) Property and Equipment
Property and equipment is stated at cost. Depreciation is computed
using the straight-line method based upon the estimated useful lives
of the assets. Maintenance and repairs are charged to expense as
incurred.
Estimated useful lives are as follows:
Leasehold Improvements 3 years
Computer Equipment 5 years
Telephone Equipment 5 years
Furniture, Fixtures and Other 10 years
- 6 -
<PAGE>
CD UNIVERSE, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
h) Goodwill
Goodwill resulting from the acquisition of assets accounted for as a
purchase is being amortized over 40 years using the straight-line
method.
i) Organization Costs
Organization costs are being amortized over 5 years using the
straight-line method.
j) Income Taxes
Provisions for income taxes are based on taxes payable or refundable
for the current year and deferred taxes on temporary differences
between the amount of taxable income and pretax financial income and
between the tax bases of assets and liabilities and their reported
amounts in the financial statements. Deferred tax assets and
liabilities are included in the financial statements at currently
enacted income tax rates applicable to the period in which the
deferred tax assets and liabilities are expected to be realized or
settled as prescribed by Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes". As changes in tax
laws or rates are enacted, deferred tax assets and liabilities are
adjusted through the provision for income taxes.
k) Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, accounts
receivable, accounts payable and accrued expenses approximates fair
value due to the relatively short maturity of these instruments.
l) Long-Lived Assets
Long-lived assets and certain identifiable intangibles to he held
and used are reviewed for impairment whenever events or changes in
circumstances indicate that the related carrying amount may not be
recoverable. When required, impairment losses on assets to be held
and used are recognized based on the fair value of the assets and
long-lived assets to be disposed of are reported at the lower of
carrying amount or fair value less cost to sell.
m) Stock-Based Compensation
The Company has adopted the intrinsic value method of accounting
for stock-based compensation in accordance with Accounting
Principles Board Opinion ("APB") No. 25, "Accounting for Stock
Issued to Employees" and related interpretations.
n) Revenue Recognition
The Company recognizes revenue upon shipment of its products. The
Company maintains a partner program whereby partners provide links
on their web-sites that bring customers to the CD Universe
web-site. Revenue generated from these linked sites is recognized
upon shipment of the CD's. The partner receives a commission of 5%
to 15% of sales of the Company's products that originate from the
site, recognized as an expense concurrent with the sale.
- 7 -
<PAGE>
CD UNIVERSE, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
o) Earnings Per Share
During 1997, the Company adopted SFAS No. 128, "Earnings Per Share",
which requires presentation of basic earnings per share ("Basic
EPS") and diluted earnings per share ("Diluted EPS").
The computation of basic EPS is computed by dividing income
available to common stockholders by the weighted average number of
outstanding common shares during the period. Diluted EPS gives
effect to all dilutive potential common shares outstanding during
the period. The computation of diluted EPS does not assume
conversion, exercise or contingent exercise of securities that would
have an anti-dilutive effect.
The shares used in the computation for the year ended March 31, 1999
was as follows:
<TABLE>
<S> <C>
Basic 1,000
=====
Diluted 1,000
=====
</TABLE>
p) Comprehensive Income
In June 1997, SFAS No. 130, "Reporting Comprehensive Income", was
issued. This statement establishes standards for the reporting and
display of comprehensive income and its components in the financial
statements. As of March 31, 1999, the Company has no items that
represent other comprehensive income and, therefore, has not
included a schedule of comprehensive income in the financial
statements.
q) Impact of Year 2000 Issue
During the year ended March 31, 1999, the Company conducted an
assessment of issues related to the Year 2000 and determined that it
was necessary to modify or replace portions of its software in order
to ensure that its computer systems will properly utilize dates
beyond December 31, 1999. The Company expects to complete any Year
2000 systems modifications and conversions by the middle of 1999.
Currently, the Company does not expect that costs associated with
becoming Year 2000 compliant to be material. At this time, the
Company cannot determine the impact the Year 2000 will have on its
key customers or suppliers. If the Company's customers or suppliers
do not convert their systems to become Year 2000 compliant, the
Company may be adversely impacted. The Company is addressing these
risks in order to reduce the impact on the Company.
r) Recent Accounting Pronouncements
During 1998, the FASB issued SFAS No. 131, "Disclosure About
Segments of an Enterprise and Related Information", which changes
the way public companies report information about segments. SFAS No.
131, which is based on the selected segment information quarterly
and entity-wide disclosures about products and services, major
customers and the material countries in which the entity holds
assets and reports revenue. This statement is effective for the
Company's fiscal year. The Company is in the process of evaluating
the disclosure requirements under this standard.
- 8 -
<PAGE>
CD UNIVERSE, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
r) Recent Accounting Pronouncements (continued)
Additionally, during 1998, the America Institute of Certified
Accountants' Executive Committee issued Statement of Position Number
98-1 (SOP 98-1), "Accounting for the Cost of Computer Software
Developed or Obtained for Internal Use". SOP 98-1 is effective for
fiscal years beginning after December 15, 1998. Management believes
that the Company is substantially in compliance with this
pronouncement and that its implementation will not have a material
effect on the Company's financial position, results of operations or
cash flows.
NOTE 2 - PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows at March 31, 1999:
<TABLE>
<S> <C>
Leasehold Improvements $ 40,000
Computer Equipment 215,543
Telephone Equipment 24,158
Furniture, Fixtures and Other 29,069
------
308,770
Less: Accumulated Depreciation 83,052
---------
Property and Equipment, net $225,718
=========
</TABLE>
Depreciation expense for the year ended March 31, 1999 was $46,152.
NOTE 3 - INCOME TAXES
The components of the provision for income taxes for the year ended
March 31, 1999 are as follows:
<TABLE>
<S> <C>
Current Tax Expense
U.S. Federal $ -
State and Local -
---------
Total Current -
---------
Deferred Tax Expense
U.S. Federal -
State and Local -
--------
-
Total Deferred -
---------
Total Tax Provision from Continuing Operations $ -
==========
</TABLE>
-9-
<PAGE>
CD UNIVERSE, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1999
NOTE 3 - INCOME TAXES (continued)
The reconciliation of the effective income tax rate to the Federal
statutory rate is as follows:
<TABLE>
<S> <C>
Federal Income Tax Rate (34.0)%
Deferred Tax Charge (Credit) -
Effect on Valuation Allowance 34.0%
State Income Tax, Net of Federal Benefit -
-------
Effective Income Tax Rate 0.0%
=======
</TABLE>
At March 31, 1999, the Company had net carryforward losses of
approximately $520,000 that can be utilized to offset future taxable
income through 2014. Utilization of these net carryforward losses is
subject to the limitations of Internal Revenue Code Section 382. The
full realization of the tax benefit associated with the carryforward
depends predominantly upon the Company's ability to generate taxable
income during the carryforward period. A valuation allowance equal
to the tax benefit for deferred taxes has been established due to
the uncertainty of realizing the benefit of the tax carryforward.
Deferred tax assets and liabilities reflect the net tax effect of
temporary differences between the carrying amount of assets and
liabilities for financial reporting purposes and amounts used for
income tax purposes. Significant components of the Company's
deferred tax assets (liabilities) are as follows:
<TABLE>
<S> <C>
Loss Carryforwards $ 176,800
Less: Valuation Allowance (176,800)
-----------
Net Deferred Tax Assets (Liabilities) $ -
===========
</TABLE>
NOTE 4 - NOTE PAYABLE - OFFICER
The Company is indebted to an officer at March 31, 1999 for
$105,000. The terms indicate interest is payable at 8% with loan
principal and interest payable upon demand.
Subsequent to March 31, 1999, the Note was paid down to $85,000.
This amount will be settled through a purchase price adjustment upon
the acquisition of the Company by Entertainment Universe, Inc.
NOTE 5 - RELATED PARTY TRANSACTIONS
In prior years, certain of the Company's fixed asset acquisitions
and certain expenses were paid for through advances by an entity
controlled by the Company's president. These advances, totaling
$110,395, were repaid during the year ended March 31, 1999.
During the current fiscal year, the Company received advances from
an entity controlled by the Company's chairman. These advances
totaled $30,000 and remain outstanding at March 31, 1999. Terms of
repayment and interest are being negotiated.
-10-
<PAGE>
CD UNIVERSE, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1999
NOTE 6 - MAJOR VENDOR
The Company purchased approximately 90% of its merchandise from one
vendor. At March 31, 1999, the balance due to that vendor was
approximately $600,000 which was paid in April 1999. The Company does
not believe that the loss of this vendor would have a material adverse
effect on the Company.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
The Company leases office space under non-cancelable operating lease
agreements that expire within the next three years. Future minimum
lease payments under these non-cancelable operating leases are as
follows:
<TABLE>
<CAPTION>
March 31,
<S> <C> <C>
2000 $ 117,000
2001 117,000
2002 107,250
---------
Total $ 341,250
=========
</TABLE>
Rent expense under the office lease for the year ending March 31, 1999
was $82,000.
On October 1, 1998, the Company entered into an agreement with Charles
Beilman. The agreement stipulates that Charles Beilman will serve as
Chief Operating Officer and Chief Technical Officer for an annual
compensation of $135,000 and the reimbursement of certain
expenditures, as defined in the related agreement. This agreement
becomes effective when the Company is acquired and its shares are
publicly traded. Mr. Beilman's employment will continue for at least
three years from the date the Company goes public.
NOTE 8 - SUBSEQUENT EVENTS
The Company was acquired by Entertainment Universe, Inc. in April 1999
as a wholly owned subsidiary.
-11-
<PAGE>
CASES LADDER, INC.
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
CONTENTS
Page
----
<S> <C>
Independent Auditors' Report 1
Balance Sheets 2 - 3
Statements of Operations 4
Statement of Stockholders' Equity 5
Statements of Cash Flows 6
Notes to Financial Statements 7 - 12
</TABLE>
<PAGE>
[Letterhead of Jonathon P. Reuben]
Independent Auditors' Report
Board of Directors
Cases Ladder, Inc.
Newbury Park, California
We have audited the accompanying balance sheet of Cases Ladder, Inc. (A
California corporation), December 31, 1998, and the related statements of
operations, stockholders' equity (deficit), and cash flows, for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Cases Ladder, Inc. as of
December 31, 1998, and the results of its operations and its cash flows for the
year ended December 31, 1998, in conformity with generally accepted accounting
principles.
s/s Jonathon P. Reuben CPA
Jonathon P. Reuben,
Certified Public Accountant
April 9, 1999
<PAGE>
CASES LADDER, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
---- ----
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets
Cash and Cash Equivalents $ -- $ 15,045
Accounts Receivable (Net of Allowance for Bad Debts of
$19,175 and $5,675) 65,262 94,724
Deferred Tax Asset 2,172 --
Deposits -- 685
------- --------
Total Current Assets 67,434 110,454
Computer Equipment and Software (Note 2) 21,752 35,150
------- --------
Total Assets $89,186 $145,604
======= =========
</TABLE>
See accompanying notes
2
<PAGE>
CASES LADDER, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
---- ----
(UNAUDITED)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
Current Liabilities
Accounts Payable $19,365 $ 16,185
Accrued Payroll and Payroll Taxes -- 57,472
Accrued Interest --
Income Tax Payable 800 1,600
Customer Deposits 16,667 --
Notes Payable-Affiliate 9,028 8,433
Notes Payable-Shareholders 55,000 61,916
------- --------
Total Current Liabilities 100,860 145,606
Stockholders' (Deficit)
Common Stock, No Par Value, authorized 40,000,000
shares, issued and outstanding 9,437,500 shares at
December 31, 1998, and March 31, 1999 2,750 2,750
Retained Earnings (Deficit) (14,424) (2,752)
------- --------
Total Stockholders' (Deficit) (11,674) (2)
------- --------
Total Liabilities and Stockholders' (Deficit) $89,186 $145,604
======= =========
</TABLE>
See accompanying notes
3
<PAGE>
CASES LADDER, INC.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (DEFICIT)
<TABLE>
<CAPTION>
THREE
MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
1998 1999
---- ----
(UNAUDITED)
<S> <C> <C>
Revenue $ 378,345 $ 309,737
General and Administrative Expenses (394,141) (295,093)
----------- -----------
Net Income (Loss) Before Provision for Corporate Income
Tax (15,796) 14,644
Benefit (Provision) for Corporate Income Tax 1,372 (2,972)
----------- -----------
Net Income (Loss) (14,424) 11,672
=========== ============
Loss Par Share (0.0015) 0.0012
=========== ============
Weighted Average Shares Outstanding 9,404,630 9,437,500
=========== ============
</TABLE>
See accompanying notes
4
<PAGE>
CASES LADDER, INC.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK RETAINED
------------------- EARNINGS
SHARES AMOUNTS (DEFICIT) TOTAL
------ ------- --------- -----
<S> <C> <C> <C> <C>
Balances at January 1, 1998 -- $ -- $ -- $ --
Original Issuance of Common Stock 9,375,000 2,000 -- 2,000
Sale of Common Stock 93,750 750 -- 750
Net Loss -- -- (14,424) (14,424)
--------- ------ ------- -------
Balances at December 31, 1998 9,468,750 2,750 (14,424) (11,674)
Net Income for the Three Months Ended March 31, 1999
(Unaudited) -- -- 11,672 11,672
--------- ------ ------- -------
Balances at March 31, 1999 (Unaudited) 9,468,750 $ 2,750 $(2,752) $ (2)
========= ======= ======= =======
See accompanying notes
5
</TABLE>
<PAGE>
CASES LADDER, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED
1998 MARCH 31, 1999
---- --------------
(UNAUDITED)
<S> <C> <C>
Cash Flows From Operating Activities:
Net Income (Loss) $(14,424) $ 11,672
Adjustments to Reconcile Net Income (Loss) to Net Cash
Provided (Used) by Operations:
Depreciation 280 1,618
Allowance for Bad Debts 5,675 13,500
Income Tax Provision (2,172) 2,172
Changes in Operating Assets and Liabilities:
Decrease (Increase) in Assets:
Accounts Receivable (70,936) (42,962)
Prepaid Items and Deposits - (685)
Increase (Decrease) in Liabilities:
Accounting payable and Accrued Expenses 19,826 55,648
Customer Deposits 16,667 (16,667)
Income Tax Payable 800 800
-------- --------
Net Cash Provided (Used) by Operating Activities (44,284) 25,096
-------- --------
Cash Flows from Investing Activities:
Equipment Acquisitions (22,032) (15,016)
-------- --------
Net Cash Used by Investing Activities (22,032) (15,016)
-------- --------
Cash Flows from Financing Activities:
Issuance of Common Stock 2,750 --
Advances from Shareholders 55,000 5,560
Payments to Affiliates (71,766) (595)
Advances from Affiliates 80,332 --
-------- --------
Net Cash Provided by Financing Activities 66,316 4,965
-------- --------
Net Increase (Decrease) in Cash and Cash
Equivalents -- 15,045
Cash and Cash Equivalents -- Beginning of Year -- --
-------- --------
Cash and Cash Equivalents -- End of Year $ -- $ 15,045
======== ========
</TABLE>
<PAGE>
Note 1 - Nature of Business
Cases Ladder, Inc. (the "Company") was incorporated under California
State law on August 19, 1998. The Company conducts business in the
Internet software and services industry. Prior to incorporating, the
Company operated as a partnership.
Prior to incorporating, the Company deposited its receipts and
disbursed its funds through a checking accounting under the name
Strategic Alliance Partners, Inc. d.b.a. Cases Ladder. Strategic
Alliance is an affiliate of the Company but operates a distinct and
separate business from that of the Company. Strategic Alliance filed
a fictitious business name statement (the "Statement") with the
County of Los Angeles on March 2, 1998, indicating that Strategic
would be doing business as Cases Ladder. Management does not know
the individual who signed and filed the fictitious business name
statement. This individual was not authorized to perform such an act
on behalf of the Company. Management maintains that this bank account
was opened by the bank in the wrong name.
Note 2 - Summary of Significant Accounting Policies
a) Cash
The Company maintains all of its cash deposits at one bank. The
Company's balance with this bank is insured up to $100,000 as provided
by the FDIC.
b) Computer Equipment and Software
The cost of Computer Equipment and Software is depreciated over the
estimated useful lives of the related assets. Depreciation is computed
on the straight-line method for both financial and tax reporting
purposes. The useful life of the computer equipment and related
software is five years.
c) Pervasiveness of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.
d) Revenue Recognition
Revenue from the licensing of the Company's software products is
recognized when the respective royalties are earned. Revenue from
product sales and services are recognized at the time the product is
shipped or the services are preformed. Customer advance payments are
deferred and are recognized as revenue when the underlying income is
earned.
e) Earnings Per Share
Effective December 31, 1997, SFAS 128 "Earnings Per Share" requires a
dual presentation of earnings per share-basic and dilutive. Basic
earnings per common share has been computed based upon the weighted
average number of common shares outstanding. Diluted earnings per
share reflects the increase in weighted average common shares
outstanding that would result from the assumed exercise of outstanding
stock options. The computation of diluted earnings per share shall
not assume conversion, exercise, or contingent issuance of securities
that would have an anti-dilutive effect on earnings per share.
The Company reflects only basic loss per share for both periods
presented as the assumed exercise of the outstanding options would
be anti-dilutive.
f) Statement of Comprehensive Income
The Company has adopted SFAS 130 "Comprehensive Income - Financial
Statement Presentation". However, as there is no difference between
net loss as reported on the statement of operations and comprehensive
loss, the Statement of Comprehensive Loss has not been provided.
Note 3 - Computer Equipment and Software
<PAGE>
The following is a summary of computer equipment and software as of
December 31, 1998:
Computer Equipment $ 21,237
Computer Softer 795
-------
22,032
Less Accumulated Depreciation (280)
-------
$ 21,752
========
Depreciation expense charged to operations for year ended December
31, 1998, was $280.
Note 4 - Income Taxes
Income taxes are provided based on earnings reported for financial
statement purposes pursuant to the provisions of Statement of
Financial Accounting Standards No. 109 ("FASB 109").
FASB 109 uses the asset and liability method to account for income
taxes which requires the recognition of deferred tax liabilities and
assets for the expected future tax consequences of temporary
differences between tax basis and financial reporting basis of assets
and liabilities.
<PAGE>
The Components of the (benefit) provision for income taxes for 1998
is as follows:
<TABLE>
<S> <C>
Federal $(2,172)
State 800
-------
(Benefit) Provision for
income taxes $(1,372)
========
</TABLE>
Amounts of deferred tax assets and liabilities for the year ended
December 31, 1998, are as follows:
<TABLE>
<S> <C>
Deferred Tax Liability $ --
Deferred Tax Asset $ 2,172
</TABLE>
Deferred tax assets have not been reduced by any valuation allowances.
The deferred tax asset results primarily from the 1998 net operating loss of
$15,334 which is available to be carried forward to offset future federal and
state taxable income. The loss expires in 2018.
The component of the deferred tax asset consists of the following:
<TABLE>
<S> <C>
Net operating loss $ 2,172
</TABLE>
Note 5 - Notes Payable
Notes payable as of December 31,1998 consist of the following:
<TABLE>
<S> <C>
Affiliate $ 9,028
Officers 55,000
--------
$ 64,028
=========
</TABLE>
Notes payable to affiliates and officers bear interest at 12% and 10%
per annum, respectively. All notes payable are unsecured, and are due
upon demand. Interest charged to operations totaled $4,828.
<PAGE>
Note 6 - Stock Option Plan
The Company has a performance-based stock option plan. Under the
plan, the Company may grant options for up to 1.5 million shares of
common stock for which no vesting contingencies exist, other than
being an employee The exercise price of each option is set at the
discretion of the Board of Directors at the time of each issuance.
Management believes that the exercise price of each option is equal
to or greater then the market value of the respective shares granted.
The Company applies APB Opinion 25 in accounting for its
performance-based stock option plan. Accordingly, no compensation
expense has been recognized for the plan in 1998. Had compensation
costs been determined on the basis of fair value pursuant to FASB
Statement No. 123, net loss and loss per share would have increased
as follows:
<TABLE>
<S> <C>
Net Loss
As reported $ (13,962)
===============
Proforma $ (15,090)
===============
Basic Loss Per Share
As reported $ (0.0015)
===============
Proforma $ (0.0016)
===============
</TABLE>
For proforma purposes, the Company valued the options using the
Black-Sholes option pricing model using the following assumptions:
risk-free interest rate of 5.5%, dividend yield of 0%, volatility
factor of the expected market price of the Company's common stock
of 5% and the expected life of the options of 12 months.
<PAGE>
Following is a summary of the status of the plan during the year
ended December 31,1998:
<TABLE>
<CAPTION>
Weighted
Average
Number of Exercise
Shares Price
<S> <C> <C> <C>
Outstanding at 1-1-98 - $ -
Granted 160,000 0.125
Exercised - -
Forfeited - -
---------- ----------
Outstanding at 12-31-98 160,000 $ 0.125
========= ==========
Options exercisable at 12-31-98 160,000 $ 0.125
========= ==========
</TABLE>
The weighted average fair value at date of grant was $.0705 per
share.
Note 7 - Supplemental Cash Flow Information
For the purpose of the statements of cash flows, all highly liquid
investments with a maturity of three months or less are considered
to be cash equivalents.
During the year ended December 31, 1998, the Company paid interest
totaling $4,828.
The Company did not pay any income taxes during 1998.
Note 8 - Sales to Major Customers
Sales to three major customers amounted to 38.9%, 16.1% and 14.5% of
total sales for the year ended December 31, 1998
<PAGE>
Note 9 - Concentrations of Credit Risk
The Company extends credit to its customers, all of which are
companies in the Internet software and services industry.
Note 10 - Subsequent Events
On April 1, 1999, the Board of Directors authorized a 5 for 4 stock
split of common stock to stockholders of record on March 14, 1999.
The accompanying financial statements have been restated to give
effect to the indicated stock split for the periods presented.
In April 1999, the Company received $55,000 in exchange for the
issuance of 220,000 shares of its common stock.
In June 1999, the Company issued 645,996 to a consultant who assisted
in the sale of all of the outstanding stock of the Company to
eUniverse, Inc. Prior to the transaction with eUniverse, the Company
issued 501,645 shares of its Common Stock through the exercise of all
of the outstanding options. In determining the number of shares
issued, the Company used a formula that took into account the
exercise price of the respective option and the price per share
offered by eUniverse. The Shareholders of the Company exchanged
10,616,311 shares of the Company's stock for 700,000 restricted
shares of eUniverse' common stock.
Note 11 - Unaudited Information
In the opinion of the Company's management, the accompanying
unaudited financial statements contain all adjustments (consisting
of normal recurring accruals) necessary to present fairly the
financial position of the Company as of March 31, 1999 and the
results of operations and cash flows for the three-month period
then ended. The operating results of the Company on a quarterly
basis may not be indicative of operating results for the full year.
<PAGE>
THE BIG NETWORK, INC.
FINANCIAL STATEMENTS
DECEMBER 31, 1998
<PAGE>
THE BIG NETWORK, INC.
FINANCIAL STATEMENTS
DECEMBER 31, 1998
INDEX
<TABLE>
<S> <C>
INDEPENDENT AUDITOR'S REPORT 1
BALANCE SHEET 2
STATEMENT OF OPERATIONS 3
STATEMENT OF STOCKHOLDERS' DEFICIENCY 4
STATEMENT OF CASH FLOWS 5
NOTES TO FINANCIAL STATEMENTS 6 - 13
</TABLE>
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Stockholders
The Big Network, Inc.
We have audited the accompanying balance sheet of The Big Network, Inc. as of
December 31, 1998 and the related statements of operations, stockholders'
deficiency and cash flows for the initial period January 30, 1998 to December
31, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Big Network, Inc. as of
December 31, 1998, and the results of its operations and its cash flows for the
initial period then ended, in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming The Big
Network, Inc. will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company had a net loss for the initial period January
30, 1998 to December 31, 1998, had no significant source of revenue and had a
stockholders' deficiency as of December 31, 1998. This raises substantial doubt
about its ability to continue as a going concern. Management's plans in regards
to these matters are also described in Note 1. These financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
MERDINGER, FRUCHTER, ROSEN & CORSO, P.C.
Certified Public Accountants
Los Angeles, California
July 23, 1999, except as for
Note 8(d) as to which the
date is September 15, 1999
<PAGE>
THE BIG NETWORK, INC.
BALANCE SHEET
DECEMBER 31, 1998
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $ 3,554
Accounts Receivable 21,451
Other Current Assets 144
----------
25,149
Equipment, net 80,649
Other Assets 2,266
----------
TOTAL ASSETS $ 108,064
==========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Accounts Payable and Accrued Expenses $ 73,555
Advances from Stockholders 16,500
Capital Lease Obligation - Current Portion 14,785
----------
104,840
CAPITAL LEASE OBLIGATION, LESS CURRENT PORTION 3,771
COMMITMENTS AND CONTINGENCIES -
----------
Total Liabilities 108,611
STOCKHOLDERS' DEFICIENCY
Preferred Stock - Series A, par value $.001,
5,000,000 shares authorized and 529,449
shares issued and outstanding 530
Common Stock, par value $.001, 15,000,000
shares authorized and 2,675,385 shares issued
and outstanding 2,676
Additional Paid-in Capital 732,312
Accumulated Deficit ( 736,065)
----------
Total Stockholders' Deficiency ( 547)
----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 108,064
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
- 2 -
<PAGE>
THE BIG NETWORK, INC.
STATEMENT OF OPERATIONS
FOR THE ELEVEN MONTHS ENDED DECEMBER 31, 1998
<TABLE>
<S> <C>
REVENUE $ 83,883
COST OF REVENUE 56,375
----------
27,508
----------
DEVELOPMENT COST 609,416
GENERAL AND ADMINISTRATIVE EXPENSES 131,849
----------
TOTAL EXPENSES 741,265
----------
LOSS FROM OPERATIONS ( 713,757)
----------
OTHER INCOME (EXPENSE)
Investment Income 4,136
Interest Expense ( 2,279)
Write-Off of Purchase Price Over Estimated Fair Value of
Net Assets Acquired ( 24,165)
----------
Total Other Income (Expenses) ( 22,308)
----------
NET LOSS $( 736,065)
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
- 3 -
<PAGE>
THE BIG NETWORK, INC.
STATEMENT OF STOCKHOLDERS' DEFICIENCY
FOR THE ELEVEN MONTHS ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
------------------ ---------------------- Paid-in Accumulated
Shares Amount Shares Amount Capital Deficit Total
------ ------ ------ ------ ------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 30, 1998 - $ - - $ - $ - $ - $ -
Issuance of Preferred Stock -
Series A for:
Cash 401,184 401 - - 340,892 - 341,293
Conversion of Note Payable 120,482 121 - - 99,879 - 100,000
Compensation for Services Rendered 7,783 8 - - 6,452 - 6,460
Issuance of Common Stock for:
Cash - - 127,500 128 15,122 - 15,250
Compensation for Services Rendered - - 55,385 55 5,484 - 5,539
Acquisition of Assets - - 2,492,500 2,493 264,483 - 266,976
Net Loss - - - - - (736,065) ( 736,065)
------- ------- --------- -------- --------- --------- -----------
Balance at December 31, 1998 529,449 $ 530 2,675,385 $ 2,676 $ 732,312 $(736,065) $( 547)
======= ======= ========= ======== ========= ========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
- 4 -
<PAGE>
THE BIG NETWORK, INC.
STATEMENT OF CASH FLOWS
FOR THE ELEVEN MONTHS ENDED DECEMBER 31, 1998
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $( 736,065)
Adjustments to Reconcile Net Loss to Net Cash
Used in Operating Activities:
Depreciation 25,905
Write-Off of Purchase Price Over the Estimated
Fair Value of Net Assets Acquired 24,165
Issuance of Equity Securities for Services Rendered 11,999
Write-Off of Organizational Costs 103,431
Loss on Sale of Securities 4,752
Change in Assets and Liabilities
(Increase) Decrease:
Accounts Receivable ( 8,673)
Other Current Assets ( 144)
Other Assets ( 2,266)
Increase (Decrease):
Accounts Payable and Accrued Expenses 53,732
----------
Net Cash Used in Operating Activities ( 523,164)
----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of Equipment ( 2,632)
Sale of Securities 78,262
Acquisition of Dream Zero, net of cash acquired 238
----------
Net Cash Provided by Investing Activities 75,868
----------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments for Capital Lease Obligations ( 22,193)
Advances from Stockholders 16,500
Proceeds from Issuances of Note 100,000
Issuance of Common Stock 15,250
Issuance of Preferred Stock - Series A 341,293
----------
Net Cash Provided by Financing Activities 450,850
----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 3,554
CASH AND CASH EQUIVALENTS - JANUARY 30, 1998 -
----------
CASH AND CASH EQUIVALENTS - DECEMBER 31, 1998 $ 3,554
==========
</TABLE>
SUPPLEMENTAL CASH FLOW INFORMATION:
For the eleven months ended December 31, 1998, the Company paid no income taxes
and paid interest of $2,279.
NON-CASH INVESTING AND FINANCING ACTIVITIES:
See Notes 3, 4 & 7
The accompanying notes are an integral part of these financial statements.
- 5 -
<PAGE>
THE BIG NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
The Big Network, Inc. ("The Company") (http://www.bignetwork.com)
offers a network of technology and community-driven Web site focused
on people interaction through games and communications. The Company
was incorporated on December 4, 1997. However, the Company was
capitalized and began operations on January 30, 1998.
Basis of Presentation
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. The Company had a net
loss for the eleven months ended December 31, 1998 and a stockholders'
deficiency at December 31, 1998. These factors raise substantial doubt
about the Company's ability to continue as a going concern.
Management's plans in regard to this matter are as follows:
The Company is in negotiation to be acquired by a publicly held
company.
The Company is working to raise additional capital and debt
financing to fund operations, increase revenues, and reduce
operating costs.
Use of Estimates
The preparation of financial statements in conformity with general
accepted accounting principals 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 reported period. Actual results could
differ from those estimates.
Fair Value of Financial Instruments
For certain of the Company's financial instruments cash and cash
equivalents, receivables, accounts payable and accrued expense and
advances from stockholders the carrying amounts approximate fair value
due to their short maturities. The amounts shown for capital lease
obligations also approximate fair value because interest rates and
terms offered to the Company for similar debt are substantially the
same.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
- 6 -
<PAGE>
THE BIG NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (continued)
Concentration of Credit Risk
The Company places its cash in what it believes to be credit-worthy
financial institutions. However, cash balances exceeded the FDIC
insured levels at various times during the year. Also, the Company
performs ongoing credit evaluations of its customers' financial
conditions and generally does not require collateral on accounts
receivable. The Company maintains allowances for credit losses when
required.
Equipment
Equipment is stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of 3 to 7 years.
Revenue Recognition
The Company derives its revenue from the sale of advertisements on
short-term contracts. Advertising revenues are recognized ratably over
the period in which the advertisements are displayed. Barter
transactions are recorded at the lower of the estimated fair value of
advertisements received or the estimated fair value of the
advertisements given. Barter revenue and the related advertising is
recorded based on impressions delivered and received with the
difference recorded as an advance or prepaid. Barter revenue was
immaterial for the years ending December 31, 1998.
Advertising and Marketing Expense
The Company expenses costs associated with advertising and marketing
as they are incurred.
Income Taxes
Income taxes are provided for based on the liability method of
accounting pursuant to Statement of Financial Accounting Standards
("SFAS") No. 109 "Accounting for Income Taxes." The liability
method requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences for temporary differences
between the reported amount of assets and liabilities and their tax
basis.
Comprehensive Income
SFAS No. 130, "Reporting Comprehensive Income", establishes
standards for the reporting and displaying of comprehensive income and
its components in the financial statements. As of December 31, 1998,
the Company has no items that represent other comprehensive income
and, therefore, has not included a schedule of comprehensive income in
the financial statements.
- 7 -
<PAGE>
THE BIG NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (continued)
Impact of the Year 2000 Issue During the year ended December 31, 1998,
the Company conducted an assessment of issues related to the year 2000
and determined that no issues existed which would cause its computer
systems not to properly utilize dates beyond December 31, 1999.
NOTE 2 - EQUIPMENT
As of December 31, 1998, equipment consisted of the following:
<TABLE>
<S> <C>
Computer Equipment $ 54,900
Computer Software 50,836
Office Equipment 818
-----------
106,554
Less: Accumulated Depreciation 25,905
-----------
Equipment, net $ 80,649
===========
</TABLE>
Equipment purchased under capital lease obligations consisted of the
following as of December 31, 1998:
<TABLE>
<S> <C>
Computer Equipment $ 40,749
Less: accumulated depreciation 6,180
-----------
$ 34,569
===========
</TABLE>
Depreciation expense for the eleven months ended December 31, 1998 was
$25,905.
NOTE 3 - COMMITMENTS AND CONTINGENCIES
Leases
In 1998, the Company was provided office space at no charge. In July
1999, the Company entered into a non-cancelable lease for office
space. Also, the Company has capital lease obligations for computer
equipment, which expire starting in 1999. The future minimum payments
under the non-cancelable lease and capital lease obligations are as
follows:
- 8 -
<PAGE>
THE BIG NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 3 - COMMITMENTS AND CONTINGENCIES (continued)
<TABLE>
<CAPTION>
Capital Operating
Year Ended December 31, Leases Leases
----------- -----------
<S> <C> <C>
1999 $ 16,271 $ 29,425
2000 3,805 65,100
2001 - 66,900
2002 - 33,900
----------- -----------
Net Minimum Lease Payments 20,076 $ 195,325
Less: Amounts Representing Interest 1,520 ===========
-----------
Present Value of Net Minimum Lease Payments 18,556
Less: Current Portion 14,785
-----------
Long-Term $ 3,771
===========
</TABLE>
The Company had no rent expense for the eleven months ended December
31, 1998.
Revenue Sharing Agreements
The Company has entered into several agreements to share revenues with
individuals independent of the Company. These individuals have
provided the Company with computer games, which the Company has
operating on its web-site. The individuals have granted the Company
usage of the computer games for up to 25% royalty of advertising
revenue generated from the usage of the game on the Company's
web-site. For the eleven months ended December 31, 1998, the Company
had no liabilities due under the agreement.
NOTE 4 - STOCKHOLDERS' EQUITY
Classes of Shares
The Company's Articles of Incorporation enable the Company to issue up
to 20,000,000 shares, consisting of 5,000,000 shares of Preferred
Stock, which have a par value of $0.001 per share and 15,000,000
shares of Common Stock, which have a par value of $0.001 per share.
Preferred Stock
Preferred stock, of any series, shall have the powers, preferences,
rights, qualifications, limitations, and restrictions as fixed by the
Company's Board of Directors in its sole discretion.
In 1998, the Company's Board of Directors established 1,300,000 shares
of Preferred Stock-Series A and issued 529,449 shares for $447,753.
- 9 -
<PAGE>
THE BIG NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 4 - STOCKHOLDERS' EQUITY (continued)
The Series A shares have the following significant rights, preferences
and restrictions:
Entitled to receive dividends prior and in preference to any
declaration or payment of any dividend on the Common Stock, at
a rate of $.06 per share per annum, payable quarterly when, as,
and if declared by the Board of Directors. Such dividends shall
not be cumulative.
Each share of Series A shall be convertible, at the option of the
holder, at any time after issuance, into such number of fully paid
common stock as is determined by dividing $0.83 by the conversion
price of $0.83, (which is adjustable under certain criteria).
Each share of Series A has an automatic conversion upon the
Company's sale of its common stock in a firm commitment for a
public offering pursuant to a registration statement under the
Securities Act of 1933 and the public offering price not less than
$4.00 per share, which would result in aggregate cash proceeds to
the Company of $15,000,000, or the date specified by written
consent, or agreement, of the holders of a majority of the then
outstanding shares of the Series A.
Common Stock
In 1998, the Company had the following significant issuances of Common
Stock:
In January 1998, the Company issued 673,900, 553,000 and 618,100
shares of its common stock to the three principal stockholders.
The consideration for the shares was 30,000, 6,000 and 2,500
shares, respectively, of a publicly traded company with an
aggregate market value of $83,014 on the date of contribution,
software with a cost basis of $15,781 and a business plan with a
cost basis of $103,431. The aggregate fair market value of the
contributed assets was $202,226.
The Company issued 127,500 shares of its common stock for proceeds
of $15,250.
On January 30, 1998, the Company acquired all the assets and
assumed certain liabilities of Dream Zero, LLC (''Dream Zero'')
and Play4Prizes (an individual doing business as, ''DBA'') for
435,000 and 212,500 shares, respectively, of the Company's
common stock with an aggregate fair market value of $64,750. The
acquisition agreements grants the Company the right to
repurchase all of the shares of its common stock issued in
conjunction with these acquisitions. (See Note 7).
- 10 -
<PAGE>
THE BIG NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS DECEMBER 31,
1998
NOTE 5 - SALES
During the eleven months ended December 31, 1998, the Company had four
major customers which accounted for approximately 28%, 18%, 12% and
11% of total sales, respectively. At December 31, 1998, the amounts
due from two of these customers was approximately $13,600 and $5,000.
NOTE 6 - INCOME TAXES
The reconciliation of the effective income tax rate to the Federal
statutory rate is as follows:
<TABLE>
<S> <C>
Federal Income Tax Rate 34.0%
Effect of Valuation Allowance ( 34.0)%
-------
Effective Income Tax Rate 0.0%
=======
</TABLE>
At December 31, 1998, the Company had net carryforward losses of
approximately $730,000. Because of the current uncertainty of
realizing the benefits of the tax carryforward, valuation allowances
equal to the tax benefits for deferred taxes have been established.
The full realization of the tax benefit associated with the
carryforward depends predominantly upon the Company's ability to
generate taxable income during the carryforward period.
Deferred tax assets and liabilities reflect the net tax effect of
temporary differences between the carrying amount of assets and
liabilities for financial reporting purposes and amounts used for
income tax purposes. Significant components of the Company's deferred
tax assets and liabilities are as follows:
<TABLE>
<S> <C>
Deferred Tax Assets
Loss Carryforwards $ 297,000
Valuation Allowance ( 297,000)
---------
Net Deferred Tax Assets $ -
=========
</TABLE>
Net operating loss carryforwards expire in 2013.
NOTE 7 - ACQUISITIONS
Asset Acquisition In January 1998, the Company issued 673,900, 553,000
and 618,100 shares of its common stock to the three principal
stockholders. The consideration for the shares was 30,000, 6,000 and
2,500 shares, respectively, of a publicly traded company with an
aggregate market value of $83,014 on the date of contribution,
software with a cost basis of $15,781 and a business plan with a cost
basis of $103,431. The aggregate fair market value of the contributed
assets was $202,226.
- 11 -
<PAGE>
THE BIG NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 7 - ACQUISITIONS (continued)
Dream Zero
On January 30, 1998, the Company acquired all of the assets and
assumed certain liabilities of Dream Zero, LLC, which began its
operations in 1997, in exchange for 435,000 shares of the Company's
Common Stock valued at $43,500. The acquisition was accounted for by
the purchase method of accounting; accordingly, the purchase price has
been allocated to the assets acquired and liabilities assumed based on
the estimated fair values at the date of acquisition. The excess of
the purchase price over estimated fair value of net assets acquired of
$24,165 has been expensed, because the Company determined that it had
no future value at the date of acquisition.
Play4Prizes
On January 30, 1998, the Company acquired all of the assets and
assumed certain liabilities of Play4Prizes, a DBA, which began
operations in 1997, in exchange for 212,500 shares of the Company's
Common Stock valued at $21,250. The acquisition was accounted for by
the purchase method of accounting; accordingly, the purchase price has
been allocated to the assets acquired and liabilities assumed based on
the estimated fair values at the date of acquisition.
The estimated fair value of assets acquired and liabilities assumed is
summarized as follows:
<TABLE>
<CAPTION>
Assets Dream Zero Play4Prizes
------ ---------- -----------
<S> <C> <C>
Cash $ - $ 238 $ -
Accounts Receivable - - 12,778
Equipment - 7,786 6,000
Software 15,781 16,300 17,306
Other Assets 103,431 24,165 -
Securities 83,014 - -
Liabilities - ( 4,989) ( 14,834)
---------- --------- ---------
Purchase Price $ 202,226 $ 43,500 $ 21,250
========== ========= =========
</TABLE>
NOTE 8 - SUBSEQUENT EVENTS
a) Issuance of Series A Preferred Stock
During the first quarter of 1999, the Company issued
453,633 shares of its Preferred Stock-Series A for $376,515, and
issued warrants to purchase up to 216,867 shares of the Company's
Preferred Stock-Series A at $0.83 per share.
b) Stock Options
The Company has issued, for services rendered under contracts,
stock options to purchase 280,000 shares of the Company's common
stock at $0.10 per share.
- 12 -
<PAGE>
THE BIG NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 8 - SUBSEQUENT EVENTS (continued)
c) Repurchase of Common Stock
In 1999, the Company repurchased 108,750 shares of its
common stock at a value of $10,875, which were issued for
the acquisition of the assets from Dream Zero. The
consideration of $10,875 was satisfied by the Company's
return of its rights to certain computer programs acquired
in the acquisition.
d) Sale of Company
On September 15, 1999, the stockholders of the Company
consummated an agreement exchanging all of the issued and
outstanding shares of the Company's common stock for
1,800,000 shares of a publicly held corporation's
common stock.
- 13 -
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
eUniverse, Inc.
Date: September 29, 1999 By: /s/ Brad Greenspan
----------------------------
Chairman of the Board
<PAGE>
<TABLE>
<CAPTION>
Exhibits
Exhibit No. Description
- ----------- -----------
<S> <C>
3.01 Articles of Incorporation of the Company./(1)/
3.02 Amended Articles of Incorporation of the Company
regarding change of name./(1)/
3.03 Certificate of Amendment of Articles of Incorporation
regarding issuance of Preferred Stock./(1)/
3.04 Bylaws of the Company./(1)/
3.05 Amendment to Bylaws.
3.06 Designation of Preferred Stock of Motorcycle Centers of
America, Inc. dated April 7, 1999, as filed with the
Secretary of the State of Nevada, which defines the
rights and preferences of the Preferred Stock of the
Company./(1)/
10.01 Stock Purchase Agreement by and between Palisades
Capital, Inc. and Charles Beilman, dated as of October
1, 1998 (the "Stock Purchase Agreement")./(1)/
10.02 Amendment to Stock Purchase Agreement, dated
December 29, 1998./(1)/
10.03 Amendment No. 2 to Stock Purchase Agreement, dated
February 11, 1999./(1)/
10.04 Amendment No. 3 to Stock Purchase Agreement, dated as of
March ___, 1999./(1)/
10.05 Amendment Number 4 to Stock Purchase Agreement, dated as
of June 9, 1999./(1)/
10.06 Agreement and Plan of Reorganization by and among
Motorcycle Centers of America, Inc., Entertainment
Universe, Inc. and the principal officers of
Entertainment Universe, Inc., dated April 9, 1999./(1)/
10.07 Entertainment Universe, Inc. Regulation D Subscription
Agreement, dated as of April ___, 1999./(1)/
10.08 Entertainment Universe, Inc. Registration Rights
Agreement, dated as of April 1999./(1)/
10.09 Assignment and Assumption Agreement by and between
Entertainment Universe, Inc. and Motorcycle Centers of
America, Inc., dated as of April 14, 1999./(1)/
</TABLE>
<PAGE>
<TABLE>
<S> <C>
10.10 Stock Purchase Agreement by and among Motorcycle Centers
of America, Inc. and the shareholders of Case's Ladder,
Inc., dated as of April 21, 1999./(1)/
10.11 Contract of Employment by and between Entertainment
Universe, Inc. and William R. Wagner, dated March 25,
1999./(1)/
10.12 Employment Agreement by and between eUniverse, Inc. and
Leland N. Silvas, dated as of April 14, 1999./(1)/
10.13 Letter agreement between Entertainment Universe, Inc.
and E.P. Opportunity Fund, L.L.C. regarding appointment
of a director of Entertainment Universe, Inc., dated
April 6, 1999./(1)/
10.14 Modification and Restatement of Lease by and between
Vincenzo Verna Trustee d/b/a Harvest Associates and CD
Universe, Inc. for the Company's office space in
Wallingford, Connecticut, dated as of February 1, 1999./(1)/
10.15 Agreement and Plan of Reorganization by and among
eUniverse, Inc., Gamer's Alliance, Inc., and Larry N.
Pevnick and Robin T. Pevnick, Ten Ent., residents of St.
Louis County, Missouri, and Stan Goldenberg and Andrea
R. Goldenberg, Ten Ent., residents of St. Louis County,
Missouri, dated as of the 1st day of July, 1999./(2)/
10.16 Agreement and Plan of Reorganization by and among
eUniverse, Inc., The Big Network, Inc., Stephen D.
Sellers, John V. Hanke and Michael Sellers, dated July
30, 1999 (effective as of August 31, 1999)./(2)/
10.17 Letter Agreement by and among Brad D. Greenspan, Charles
Beilman, Stephen D. Sellers and John V. Hanke regarding
appointment of a director of eUniverse, Inc., dated as
of August 31, 1999./(2)/
10.18 Employment Agreement by and between eUniverse, Inc. and
John Haiduck, dated as of June 17, 999./(2)/
10.19 Employment Agreement by and between eUniverse, Inc. and
Stephen D. Sellers, dated as of August 31, 1999./(2)/
10.20 Employment Agreement by and between eUniverse, Inc. and
John V. Hanke, dated as of August 31, 1999./(2)/
10.21 eUniverse, Inc. Registration Rights Agreement dated
July 30, 1999./(2)/
10.22 Office Sublease by and between Golden Gate University
and The Big Network, Inc., dated July 9, 1999./(2)/
</TABLE>
<PAGE>
<TABLE>
<S> <C>
10.23 Engagement Letter by and among Gerard Klauer Mattison &
Co., Inc. by Entertainment Universe, Inc. and Brad
Greenspan, dated February 24, 1999./(2)/
10.24 Indemnification Agreement by Entertainment Universe,
Inc. and Brad Greenspan in favor of Gerard Klauer
Mattison & Co., Inc., dated February 24, 1999./(2)/
10.25 eUniverse, Inc. 1999 Stock Awards Plan./(2)/
21.01 Subsidiaries of eUniverse, Inc.
23.01 Consent of Jonathan P. Reuben, CPA
23.02 Consent of Cordovano & Harvey, PC
23.03 Consent of Merdinger, Fruchter, Rosen & Corso, PC
23.04 Consent of Merdinger, Fruchter, Rosen & Corso, PC
27.01 Financial Data Schedule
</TABLE>
/(1)/Incorporated by reference to the Company's Form 10 filed on June 14, 1999
(Registration File No. 0-26355).
/(2)/Incorporated by reference to the Company's Form SB-2 filed on September 13,
1999 (Registration File No. 333-86959).
<PAGE>
EXHIBIT 3.05
FIRST AMENDMENT TO THE BYLAWS
OF
eUNIVERSE, INC.
F/K/A MOTORCYCLE CENTERS OF AMERICA, INC.
as of June 15, 1999
The by-laws of eUniverse, Inc. f/k/a Motorcycle Centers of America,
Inc., a Nevada corporation (the "Corporation"), are hereby amended as follows:
ARTICLE I
Article IV is amended by striking the first sentence in Section 2 and
inserting in lieu thereof:
"The Board of Directors shall consist of at least one (1) member, and
not more than nine (9) members, as shall be designated by the Board of Directors
from time to time, and in the absence of such designation, the Board of
Directors shall consist of one (1) member."
ARTICLE II
Article IV is amended by inserting the following after Section 7:
Section 8. Compensation Committee. There shall be a Compensation
Committee of the Board of Directors consisting of two (2) or more Directors,
appointed by the Board of Directors each to serve until the annual meeting of
shareholders next following his appointment and until his successor is appointed
and has qualified, or until his death, resignation or removal, or until he shall
cease to be a Director.
The Compensation Committee shall have the authority and power to: (1)
review and recommend to the Board of Directors of the Corporation, or determine,
the annual salary, bonus, stock options, and other benefits, direct and
indirect, of the employees of the Corporation, whose annual compensation is in
excess of $100,000.00; (2) administer the stock awards plans and other
compensation programs of the Corporation and grant awards thereunder; (3)
establish and periodically review policies for the administration of the
compensation and benefit programs of the Corporation and take steps to modify
any compensation programs that yield payments and benefits that are not
reasonably related to individual performance; and (4) review and recommend to
the Board of Directors the adoption of new compensation and benefit programs;
<PAGE>
The Compensation Committee shall meet from time to time on call of the
Chairman of the Corporation or of any two (2) or more members of the
Compensation Committee. Meetings of the Compensation Committee may be held at
such place or places as the Compensation Committee shall determine or as may be
specified or fixed in the respective notices or waivers of notice of each
meeting. The Compensation Committee may fix its own rules of procedure,
including provision for notice of its meetings. It shall keep a record of its
proceedings and shall report these proceedings to the Board of Directors at the
meeting thereof held next after they have been taken, and all such proceedings
shall be subject to revision or alteration by the Board of Directors except to
the extent that action shall have been taken pursuant to or in reliance upon
such proceedings prior to any such revision or alternation.
At any meeting of the Compensation Committee, a majority of its members
shall constitute a quorum, and action shall be taken by majority vote of the
members present and voting."
ARTICLE III
Article VI is amended by inserting the following after the last
sentence in Section 6:
"The Chairman shall have the authority to obligate or bind the Corporation with
respect to any matter or transaction on behalf of the Corporation; provided,
however, that such authority shall not extend to any matter or transaction which
the Board of Directors shall reserve to itself."
<PAGE>
EXHIBIT 21.01
SUBSIDIARIES OF eUNIVERSE, INC.
Entertainment Universe, Inc.
Jurisdiction of Formation: California
CD Universe, Inc.
Jurisdiction of Formation: Connecticut
Cases Ladder, Inc.
Jurisdiction of Formation: California
Gamer's Alliance, Inc.
Jurisdiction of Formation: Missouri
The Big Network, Inc.
Jurisdiction of Formation: Delaware
<PAGE>
Independent Auditors' Consent
We consent to the use in this Registration Statement of eUniverse, Inc. on Form
10/A, Amendment No. 1 of our report dated April 9, 1999 and to the reference to
us under the headings "Experts."
Jonathon P. Reuben, C.P.A.
An Accountancy Corporation
Torrance, CA 90505
September 29, 1999
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of eUniverse, Inc. on Form
10/A, Amendment No. 1 of our report dated June 3, 1999, and to the reference to
us under the headings "Experts.
Cordovano and Harvey, P.C.
Denver, Colorado
September 29, 1999
<PAGE>
INDEPENDENT AUDITOR'S CONSENT
We hereby consent to the use in this Registration Statement of eUniverse, Inc.
on Form 10 of our report dated May 14, 1999 relating to the financial statements
of CD Universe, Inc., and to the reference to our Firm under the caption
"Experts" in such registration.
MERDINGER, FRUCHTER, ROSEN & CORSO, P.C.
Certified Public Accountants
New York, New York
September 29, 1999
<PAGE>
INDEPENDENT AUDITOR'S CONSENT
We hereby consent to the use in this Registration Statement of eUniverse, Inc.
on Form 10 of our report dated July 23, 1999, except as for Note 8(d) as to
which the date is September 15, 1999, relating to the financial statements of
The Big Network, Inc., and to the reference to our Firm under the caption
"Experts" in such registration.
MERDINGER, FRUCHTER, ROSEN & CORSO, P.C.
Certified Public Accountants
New York, New York
September 29, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS YEAR
<FISCAL-YEAR-END> MAR-31-2000 MAR-31-1999
<PERIOD-START> APR-01-1999 APR-01-1998
<PERIOD-END> JUN-30-1999 MAR-31-1999
<CASH> 4,194,109 11,335
<SECURITIES> 0 0
<RECEIVABLES> 212,271 92,938
<ALLOWANCES> 19,175 0
<INVENTORY> 41,451 22,647
<CURRENT-ASSETS> 4,657,573 294,118
<PP&E> 439,164 308,770
<DEPRECIATION> 109,818 83,052
<TOTAL-ASSETS> 22,882,213 558,346
<CURRENT-LIABILITIES> 1,107,058 1,077,322
<BONDS> 0 0
<COMMON> 14,838 1,000
0 0
179,502 0
<OTHER-SE> 21,580,815 (519,976)
<TOTAL-LIABILITY-AND-EQUITY> 22,882,213 558,346
<SALES> 2,034,955 5,851,713
<TOTAL-REVENUES> 2,034,955 5,851,713
<CGS> 1,659,558 7,550,289
<TOTAL-COSTS> 1,659,558 7,550,289
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 85,801 0
<INCOME-PRETAX> (1,553,110) (408,177)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (1,553,110) (408,177)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,553,110) (408,177)
<EPS-BASIC> (0.13) (0.03)
<EPS-DILUTED> (0.13) (0.03)
</TABLE>
